Stock Smarts: Why Invest?
Here, five reasons to invest and smart strategies for building a winning portfolio.
Why invest? If you can answer the question with a few words, you’ll probably never be successful. Put your money in a savings account and forget it.
Every investment decision, from asset allocation to the specific securities you choose, revolves around that critical question. If you do not have a clear purpose in mind, you will never develop the focus and discipline you need to build a winning portfolio that is appropriate for your needs.
There is no single security that is suitable for every investor, no one-size-fits-all portfolio. It all turns on what you are trying to achieve.
Here are the five most common reasons to invest, with suggested strategies to employ in each case.
Short-term growth. In this case the goal is to achieve a decent return but within a relatively short time frame, say five years. The ultimate objective may be a major purchase such as a home, a car, etc.
Strategy. You have to balance off the desire for growth with the risk factor. If you’re saving for a down payment for a home, for example, you don’t want to see your money go down the drain in a market crash. Balanced mutual funds are a good choice here. Balanced ETFs would be even better because they are less expensive but there are only a few available.
Capital gains. Here the objective is to score big profits. Of course, everyone would like to achieve nice gains but most are unwilling to accept the accompanying risk. Those who declare this to be their primary goal have a get-rich-quick mentality, not dissimilar from that of the folks who buy lottery tickets. It’s the greed side of the investing equation
Income. The fact our population is aging made headlines last week with the Statistics Canada report that there are now more seniors (65+) than there are children (15-) in this country. But there’s nothing really new about that. The trend has been evident for years; all we did was cross a demographic threshold. More seniors means more people whose main interest is to generate income from their investments. The problem is that with rates so low, that’s not easy to achieve.
Strategy. With GICs and bonds offering such low returns, the temptation is to seek out high-yield securities in order to obtain the desired cash flow. But that adds risk at a time in life when most people can’t afford large losses. The asset allocation should reflect that, with greater emphasis on cash and fixed income securities, even though returns are lower.
Income oriented mutual funds and ETFs are useful securities in this context. Just be sure the distributions are not at a level that consistently erodes the net asset value (NAV). If that happens, you are basically being paid with your own money. If you want to add dividend-paying equities, look at banks, utilities, and REITs but don’t lose sight of the risk.
Asset preservation. All some people really care about is preserving what they have. They aren’t interested in big profits or even in cash flow. They just don’t want to lose money.
Strategy. It’s really very simple. Avoid risk. Keep most of the money in cash and spread it around among various financial institutions to ensure full deposit insurance coverage (CDIC provide protection up to $100,000 per participating institution).