Building your Financial
Success
With Alain Aube
Financial Investments
About (nest) eggs and baskets and maximizing long-term investment
returns
It's a common saying, 'Don't put all your
eggs in one basket' - and, as experienced investors know, it's also an
uncommonly important strategy when it comes to assembling and
maintaining your investment portfolio.
Here's a simple example: If you commit
all your investment 'nest eggs' to a single basket - a hot stock, for
example - your 'egg-value' may grow, but you may also lose the total
value of all your 'nest-eggs' if your investment fails. However, when
you selectively place your investment 'nest-eggs' in a number of
baskets, representing a mix of investments that react differently to
market conditions, inflation and interest rate changes, you can reduce
the impact of losing 'nest-egg' value in any single basket while
maximizing your potential for overall 'nest-egg' growth in the long
term.
In financial circles, the 'eggs and
baskets' strategy is known as asset allocation - or how your investments
are divided among the different asset classes (the three principal asset
classes are stocks, bonds and cash) and within each asset class to
obtain the best risk/return ratio for your situation and financial
goals.
Here are some essential rules for achieving the most advantageous asset
allocation strategy:
1. Think and act long term. Markets do
move up and down, sometimes rapidly, but the historic trend is up - so
stick with your long-term investment plan, remain focused on your goals
and be confident that if your plan is well designed, it will still be
right for your goals. Remember that 'chasing the market' by constantly
moving investment dollars around trying to 'catch' fast-rising stocks or
hot mutual funds is a "mugs" game. Study after study (and the
unfortunate experiences of too many everyday investors) have proven that
staying true to a long-term investment strategy usually delivers far
higher returns than jumping in and out of the market.
2. Invest regularly. This is important because investing even small
amounts regularly will generally accumulate large sums over time. Figure
out a personal investment schedule that fits your budget and stick to it
- you'll be strongly rewarded later for a bit of financial discipline
now.
3. Select an optimal asset mix. The optimal asset mix for you will
usually include a combination of equity and fixed-income investments
tailored to your financial means, goals and tolerance for risk. Your
'mix' should maintain a volatility level you're comfortable with, while
allowing you to benefit from whatever asset class the market is
favouring.
4. Diversify at home and abroad. Your portfolio should be
well-diversified to take advantage of both Canadian and international
investing opportunities.
Any investment plan shouldn't be written
and then forgotten. You should revisit it at least once a year to ensure
that it continues to be right for you as your life, finances and
objectives evolve. A professional financial planner can help you craft
the optimum asset allocation strategy for you and keep it on track as
time goes on.
