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A few ideas for portfolio diversificationSep 07 '00 (Updated Nov 08 '00) Write an essay on this topic.Before I go on, I have to first say that this is in no way a recommendation of any portfolio allocation as every individual is different. Every investor should consult a qualified investment professional regarding their investment options as each individual may have different needs, expectations, and risk levels. This category is poorly constructed as the 30 to 60 years is such a broad category. Some people may have young children and may need to save for their children's education, while others have children who have left school and on their own. Some may even not have children and are single and may need to save to pay off their mortgage. So, it's quite hard to come up with a portfolio mix for this broad category. Thus, it's always a good idea to consult an professional investment advisor. Check out his credentials as almost most State and provincial laws do not require any credentials for someone to set up shop and call themselves a financial advisor. In Canada, the advisor must have the basic Canadian Securities Course and must be licensed (RR) to operate in the province. If they are to provide advice to clients outside their province, they must have authorization to do so. A few of Canadian investment designations are: CIM (Canadian Investment Manager), FMA (Financial Management Advisor), and FCSI (Fellow of the Canadian Securities Institute) the highest mark of distinction for Canadian financial professionals. You should take the time to research the designation because if it's not recognized in the investment community, then it's not really worth much. Hiring an investment professional may cost some money, but a lot of them provide a free, first consultation in hopes of convincing you to invest with them. Make sure you bring all relevant documents with you such as the previous year's tax return, a list of your assets and liabilities, latest investment statements, etc. so that the professional has a good idea of your net worth. Also, think about your investment objectives: safety, income, growth. These three are the basic objectives every investment professional must know. And you also need to have an idea of how much risk you are willing to take for your investment return. Okay, for people who are not familiar with the stock market but would like to accept some risk for a better return than cash equivalent instruments such as GICs (CDs) could start investing in mutual funds. They are very much like stocks as they move up and down in price like stocks. Here is a simple explanation of mutual funds. Mutual funds contain a basket of stocks or other investment instruments (depending on the type of fund). They are basically formed by a group of people who invest money into a "fund". Using money from the fund, they hire an investment professional who will use the money to invest in a basket of investment instruments and monitor and maintain the portfolio of investment instruments by buying or selling the investments from time to time. And, hopefully, the porfolio will increase in size. Periodically, the gains from the portfolio will be distributed to each investor according to portion of the "fund" they hold. I would suggest that these investors should start with a small portion of their portolio (20%) invested in mutual funds, so that they can get a good idea of how it works, and compare it with the returns of their GICs (CDs). They can build up their mutual fund portion slowly. They should probably start with a balanced fund (those that contain a balance of stocks, bonds, and cash equivalent instruments). Once they are comfortable with it, they could start investing in bond funds and equity funds, index equity funds, and index stocks like SPDRs, Diamonds, S&P60. What are these? These are much like index equity funds except you buy them via your broker and they trade like stocks. The main difference that investors need to know between the equity index funds and these index stocks is that you only pay for the commission to buy and sell the index stock much like stocks, whereas you pay an annual management expense (MER) for the index fund for as long as you hold the index fund. That may translate into a lot of money over time. But, for those that do not hold a brokerage account and don't want to do any stock trading, they shouldn't open up a brokerage account just to save some money. In general, people who are in the 30 - 40s should be able to accept a moderate amount of investment risk as they have a longer investment horizon before they retire. They can hold from 50%- 80% of their portfolio in growth instruments such as equity funds, equity index funds, and stocks. Thus, if they can buy and hold for the long term, they can buy equity funds which historically does better than most other investment instruments. Or, if they are getting more adventurous, they can buy individual stocks. One note about investing in stocks, always start with the blue chip companies so that the risk is a lot less than penny stocks. And, always invest only the amount you are willing to risk. Consider the money as gone once you invest it because it may happen! Even with "blue chips". Remember what happened to the blue chip stock "Bre-X"? It was about C$400 at one time and it was worthless once it was discovered that the operation was a fraud. Some good blue chips stocks to hold are those of the Dow Jones industrial average as well as the following: Microsoft, Nortel Networks, Sun Microsystems, Intel, Dell, Nokia. These are technology stocks and may be more risky than those of the Dow Jones. As always, it's better to be safe than sorry. Investing can be addictive! If you start investing in penny stocks and got some lucky breaks and tripled or quadripled your money, you'll start thinking that you're so good and it only takes one bad play and you've lost all your money. Stocks don't go up indefinately. They will go up, then pull back, maybe stay stagnant for a while, and then go up. Buy and hold is probably the best strategy. Buy low, and sell high. Set your target on a stock to buy at, and then set a target to sell your stock at (10%, 20%, etc) and go through with it. Do not be tempted to buy when the stock goes up (and doesn't look like it will come down). And if you do buy a stock and it goes down, don't panic. Unless you have a crystal ball, you won't be able to buy it at its lows. Maybe take advantage of this and buy even more. Think of it as the stock being on sale. Unless things change with the company or it has dropped too much for you to be comfortable, don't sell it. Be patient and most times you'll be rewarded. And, if it doesn't come down, then pick another stock to buy. Look at the long term chart of the stock, read news on the stock, and all those other research stuff. Educate yourself about the stock market. Read the business section of newspaper. Watch business television stations such as CNBC, CNNfn. After a few hours of watching, you'll learn a lot more about stocks and investments. These are just my ideas. People in the 50 - 60s category should start to be a little more conservative and take less risk as the investment horizon is shorter. And, they should be careful as this is the age in which firms are more likely to force "early retirement" and people are more prone to be disabled at work. Thus, these investors should always keep a portion of their money in cash equivalent instrument for emergencies. Depending on the risk tolerance of the investor, they may allocate from 30% - 60% of their portfolio in cash equivalent instruments such as GICs (CDs), money market funds, or into income instruments such as bonds or bond funds. But, they can still invest in equity funds, stocks or other growth instruments but keep them from between 30% - 50% of their portfolio. Thus, they still have the potential for portfolio growth but still maintain some safety and income. Please note that the above should not be taken as investment advice as every individual is different. Please also note that the idea of a portfolio is diversification. You diversify your holdings in a basket of investment instruments in hopes that the overall portfolio will generate gains. No one investment will go up forever. At any one time, some of the investments will be down while other investments (hopefully) will gain enough to cover for the (paper) losses and still keep the portfolio in the black. So, be patient and invest with care.  |
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