Some investors try to manage their investment portfolios themselves, which is a rather complex undertaking these days. An uncertain economic environment, a volatile stock market and very low interest rates make this task difficult. The result? They often end up making decisions that run counter to their interests, as many studies have shown.
It is here that the role of a financial advisor takes on special importance. An advisor can help you steer clear of the following three traps.
Pitfall no. 1: Playing it by ear without a specific financial plan
Saving on a regular basis is an excellent habit. But we have to avoid underestimating the amount we need to achieve our objectives, whatever they may be. A financial plan enables you to estimate this amount and set out the measures to reach it.
A financial advisor will design, with you, a financial plan adapted to your situation, regardless of your age or your assets. The plan will take into account your objectives, their costs and the time needed to achieve them, as well as your income, your expenses and your net worth. For example, an advisor will help you select the type of account that is best suited to your needs and objectives, because each account has tax consequences. An advisor will also help you select the appropriate investment products.
Selecting the account type is of the utmost importance
Source: FÉRIQUE Fund Management
(1) Monthly contributions of $458.33 during 35 years in a fund generating an hypothetical annual average compound return of 5% (2% income, 3% capital gain).
(2) Presumed tax rate of 40% on the non-TFSA account.
In addition, if you receive a sum of money or are faced with an unforeseen event, such as an inheritance, a job loss or an illness, the advisor will review your plan with you to adjust it accordingly.
Unfortunately, for some people who are carrying personal debt, this approach may seem utopian. But a financial advisor can help you optimize your financial situation and in that way enable you to save more. Advisors also have the training and experience to reconcile your expectations with your situation.
Pitfall no. 2: Relying on a single security or type of asset
Who has never dreamt of finding the next Microsoft, Apple or Google? Unfortunately, the likelihood that you will bet on the wrong security is high! The returns on various securities and investment categories are unforeseeable and quite variable over short periods. If you put all your eggs into one basket, you’ll run a considerable risk that your portfolio will be very volatile and your assets fairly illiquid.
In practice, the key to a successful portfolio isn’t one security in particular, but diversification. But don’t be deceived; diversification doesn’t mean allocating your investments among various institutions, because such investments could very well be concentrated in the same sectors or asset classes. For example, an individual could hold three investment accounts consisting solely of energy sector securities or Canadian equities.
A financial advisor can help you diversify your portfolio with a wide selection of securities and asset types associated with different economic sectors and geographic regions, in accordance with your investor profile. In this way, the return on your portfolio should be more stable because it won’t depend on a single asset class or sector. Mutual funds offer all the flexibility you need to achieve this. Some turnkey solutions, such as the FÉRIQUE Balanced Funds, are designed specifically to offer considerable diversification with a single investment.
Pitfall no. 3: Trying to time the markets
Market timing means trying to predict the ups and downs of the stock market in order to invest at exactly the right time. This type of portfolio management takes place over the very short term, with no overall vision. But be careful! It’s an approach that involves a large number of transactions and the risk of buying when the markets peak and selling when they bottom, which is contrary to investment logic. In short, this type of portfolio management is costly and ineffective.
There is no indicator that can be used to determine when a security, an asset class or the broad market will be up or down. The best strategy we know of is still to construct an investment portfolio that is well diversified and corresponds to your situation, your investor profile and your objectives. To that end, a financial advisor is a precious asset; he or she can help optimize your portfolio’s risk-return ratio based on your investor profile. Such a portfolio will enable you to stay invested in the stock market at all times.
The following chart shows the impact of missing out on the best month of each year on the stock market:
Another important advantage is that an advisor will encourage you to keep emotion out of the equation during periods of high volatility so that you can avoid impulse trades and stick to your plan.
Lastly, to ensure your portfolio always corresponds to your investor profile over time, an advisor can help you rebalance the asset classes in it. You can also obtain turnkey solutions designed with different investor profiles in mind, such as the FÉRIQUE Balanced Funds, which are automatically rebalanced on a regular basis.
To obtain wise advice, regardless of your situation, don’t hesitate to contact our Advisory Services. Our team of mutual fund representatives has all the tools to help you build a solid financial plan and a well-diversified portfolio. They can also help optimize your financial situation and help you save.
1-800-291-0337 (toll-free outside Montreal)
Monday to Friday, from 8:00 a.m. to 8:00 p.m.