September 2003 - Nr. 9
Financial Advice
Eduard Pohlmann
is a professional financial consultant with Investors Group, an industry
leader providing comprehensive financial planning and services. He is a
frequent speaker and commentator on financial planning and investments.
How to get your portfolio back on track!
September 2003.
WHEN IT COMES TO INVESTING, it's an unfortunate reality that what goes up sometimes comes down. Many of us were reminded of that when high-flying technology stocks came crashing down in the third quarter of 2000. Investors who had built up considerable gains through technology holdings suddenly found their portfolios worth significantly less.
Although the technology sector decline was not a pleasant experience, it reinforced a valuable and time-honoured investment principle: A diversified portfolio is the best protection against financial market fluctuations. By investing in a variety of asset types, and by diversifying equity market holdings among different equity classes, you lessen the chance that a decline in any one type of investment will have a dramatic impact on your overall portfolio. You also give your portfolio more wealth-building opportunities.
If your portfolio has become too focused on one sector of the market, now is the time to get back on track.
Review your holdings
The best way to get your investments back on track is to take a quick overview and ensure that your portfolio is diversified. Studies have demonstrated that asset allocation is the single largest determinant of overall investment performance-not necessarily the individual investments you choose.
Mutual funds offer an excellent opportunity to diversify. Through mutual funds you can invest in just about any type of financial asset-stocks, bonds, money market instruments and more. You can also diversify geographically through funds that specialize in specific areas of the world. Or you can choose funds that invest in particular market sectors-for example, natural resources. What's more, your holdings are automatically diversified because each fund could hold dozens or even hundreds of individual securities.
In Canada, equity mutual funds are also subject to government regulations that prevent them from becoming too highly concentrated. Most equity funds are prevented from making purchases that would cause any one stock to comprise more than 10 per cent of the assets of the fund. This provided a measure of protection during the technology slump, when the Canadian equity market was led downward by a relatively small group of companies.
Your mix
There are three main asset classes-equities, fixed-income securities and cash (or cash equivalent investments such as money market mutual funds). What's the correct mix for your portfolio? It will depend on a number of factors.
Your financial goals, investment time horizon and risk tolerance are among the key factors in determining your mix. For example, if your goal is to retire in 25 years, and your investment objective is long-term growth, a large proportion of equity investments is appropriate. But, if you need a steady stream of income, bond investments may be more suitable for you.
If you think your portfolio is in need of a diversification checkup, consult your financial advisor. With the help of a professional, you can put together a portfolio that should weather volatility and can better provide the long-term returns you seek.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitations, investment, financial, legal, accounting or tax advice.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact Eduard Pohlmann .
