6 things to consider when investing

When it comes to coaching our clients about investing, there are 6 things we think all clients should consider in their investment plan. BUT most are unaware of them! So here is an overview...

Dollar-Cost averaging:

Have you ever heard of the ups and downs in the markets? Did you know there's a way to "smooth it out"? It's called Dollar-Cost Averaging. This strategy is simple, invest on a regular basis or a portion of the full value you want to invest at different intervals. When investing in mutual funds or segregated funds, you buy units, and units have a different value every day. Sometimes they are worth more, sometimes less. So, when you buy these units on different dates, you end up buying them at different prices. This then gives your portfolio an overall average of all the different prices you paid for.

Let's say today you invest $100 at $10 a unit = you now have 10 units. One week from now you invest another $100, but the units are now worth $15 each = you just bought 6.666 units. So, in total, you now have 16.666 units. Another week passes, and now the units are worth $13 each. So, 16.666 units at $13 each mean your $200 investment is now worth $216.658. Keep going like that over several years and you will see how it was all worth it!

Investors risk vs. reward profiles:

For me, the type of investor you are goes back to the basic pie charts:

• Conservative (70% income / 30% equity)
• Moderate (60% income / 40% equity)
• Balanced (40% income / 60% equity)
• Advanced (20% income / 80% equity)
• Aggressive (100% equity)
   

For those of you who have never invested, you're like "What does that mean???" These are literally part of the first discussion I have with my clients when they want to know more about investing. And as a reference, I always review with them "The Big Picture Chart" that shows the historical return of different types of investments since 1934. To sum up, real fast, income is low risk, a low reward which in term usually bring a low return and low volatility. While equities are high risk, high volatility, which usually provides a higher rate of return over the long term. Did you notice I said long-term return?? I don't believe in the overnight "make me rich" possibility unless you win the lottery!

When it comes to investing, you have to determine your risk tolerance and time horizon. The longer the time horizon, the higher risk you can take on. But that is, of course, if you are comfortable with the bigger ups and downs your portfolio will have over the years. If you see a drop of 10% overnight, will you panic? Or will you just be nonchalant waiting for it to bounce back? Do you have sufficient time to let it bounce back? What if you need the money in 2 months...what will you do? Will it have had the time to bounce back? Or will you have to withdraw the money with a loss? If you are not risk-averse and have a shorter time horizon, you might want to consider a conservative approach. If you want long-term growth, have a long time horizon and are absolutely not worried about the short-term drops, you might be comfortable with an advanced or aggressive approach. But, that does not mean each investment account has to be the same. You might have different goals and time horizon for each investment account. Time to sit down with your advisor to discuss further and find what works for you!

Diversification, Portfolio design and Management style

Some use the analogy ''I don't want my money all in the same basket''. Did you know if you invest in a Balanced fund, at any institution, the underlying assets are usually quite the same? The top 10 holdings are usually the same too. So if you invest with different institutions, but if it all in a Balanced fund, without realizing it, you are "all in the same basket". Might want to consider working with one advisor that will help you diversify your portfolio. Mix it up with different funds that do not have the same top holdings, and mix it up with funds that have different management styles too! Boom!! You have a portfolio that will work together to achieve a better diversification and a better portfolio design. While one fund might go down, the other one with different assets and different manager might react differently.

Which brings me to management style. A certain manager might be using the strategy ''buy and hold" while the other manager might use the strategy of making investment choices based on industry, sector and geographic allocation based on markets overview. This is also a way to diversify your portfolio! 

Tax efficiency

There are ways to build an investment plan with tax efficiency. It's a more advanced approach, and not every investor or investment representative are comfortable with it. However, it's well explained and structured and can definitely be worth it for keeping money in your pocket. Different types of returns have different tax consequences, and so do different investment accounts.

Let's start with different investment holding vs. type of return they bring...

For example, Bonds and GIC generate interest. Interest is then considered 100% taxable on your income tax return. So if you make $2,500 of interest in a year, $2,500 will be added to the full amount of taxable income for that year on your income tax report. Simply put, let's say you're tax rate is 40%, you just lost $1,000 of your gain to taxes.

Canadian dividends, on the other hand, have a gross-up calculation, and a dividend tax credit when declared on your income tax report. So instead of losing your return to 40% in taxes, you might lose 15% as an example.

The next thing to consider is also the account type. TFSA growth is tax-sheltered and is tax-free at the time of redemption, while RRSP growth is tax-sheltered but redemptions are tax at redemption. But remember RRSP gets you a contribution receipt at the time of contribution, so you have a tax break on that amount at the time of the contribution. Non-registered investments are partially taxed on growth each year and the rest is taxed at the time of redemption. 

So to have a tax-efficient investment plan, you might want to own more of bonds in your RRSP, and more dividends in your Non-Reg. In a situation like this though, the client has to be comfortable that his overall investment plan matches his overall investor's risk profile, not each individual investment. Meaning if you are a balanced investor, your might have an aggressive non-registered, Moderate TFSA and a Conservative RRSP. This is just an example to explain what I mean. Each investment would need to be designed specifically for you, explained, and documented properly.

Investment cost and fees

Investments usually have a Management Expense Ratio, or an investment management fee or a trading fee, etc. It's important for your advisor to discuss this with you. The discussion should include the overall fee you are charged, and their direct portion if that is the case. Usually, as your portfolio grows over time, that fee can be negotiated or is automatically reduced. Overall, the lower the fee, the more return you will get directly into your pocket. 

For example, if a fund has an MER of 2.5%, and has a return that year of 6%, this means your net return would be 3.5%. If on the other hand, the MER was 2%, your net return would have been 4%. So over the long term, it can definitely be worth it! 

The other aspect to consider though when it comes to your investment cost is the value of advice. Have a low fee investment with no advice and support from a financial advisor, might cost you more in the long run... But if you pay high fees and still get no service, time to shop around for an advisor. See how I said an Advisor and not ''shop around for a better cost''? Although the fee might be higher with a certain advisor if that advisor teaches you on Tax efficiency, a good asset allocation works with your accountant and lawyer to make sure all your affairs are handled properly, and that saves you money in other matters than on fees, or you feel at ease knowing all is taken care of, wouldn't you feel happy to pay higher fees for this quality of service. Definitely food for thought. I've always been willing to pay higher for great quality, how about you?

Marie-Helene Lanoix-Verreault, CFP®
Financial Security Advisor
Sigouin Financial Group Inc.
Investment Representative
Quadrus Investment Services Ltd.