My Investment Philosophy

Everyone invests for a variety of reasons:  retirement savings, educations savings, to leave something behind for their family or charity, to make a major purchase, to go on a vacation, to make even more money etc..  However, when you invest there is always the possibility that what you invest in will not do as well as you wished – and may even go down in value.  To help protect against potential losses or declines in value, my focus is on diversification.

Diversification is one of the most important principles of successful investing.  It is the financial equivalent of not putting all your eggs in one basket.  You spread your risk by investing in several different investments, therefore reducing the impact of one poor performer in your portfolio.

How do you know how much risk you can tolerate?  The usual method most financial advisors follow is to ask their clients to do a risk profile questionnaire and then use some software program to determine how much risk they can tolerate.  The advisor then uses the software to choose which type of funds to invest in and in what proportion.  This works with some clients.   However, there is a problem with this method.  Clients are always quick to throw this method out the door when the economy is doing well and they hear their friends talk about how well they are “supposedly” doing.  Most clients have a high risk tolerance when the economy is doing well and a low risk tolerance when the economy is not doing so well.  I call this “gamblers mentality”.  Using software programs to track a client’s risk tolerance means putting them through questionnaires over and over again which no one likes.  Second, how do you deal with age and time?  Risk profile questionnaires deal with your risk tolerance today, but they don’t tell you if you will be able to save the amount you want by retirement or whether you will have enough to live to age 90 or 100.

My focus is to go beyond trying to measure your risk tolerance.  I believe we all have a common element associated with risk tolerance – we all hate to lose money!!  My focus is on trying to reduce your risk of losing while dealing with the challenges that age and time bring to your life.

Diversification helps deal with these challenges.  When a portfolio is well diversified, it is less risky because there are so many more baskets to spread your eggs around.  This allows you to focus on reaching your goals without having to worry about losing all those eggs.  At the same time, diversification allows you put some of your money in the so-called “next big thing” while reducing the worry about potential long-term negative effects.  My philosophy of investing for clients is built around diversification with two additional factors – age and time – taken into consideration.  It’s that simple.

If diversification is the key to protecting against massive losses and reaching your goals, the question becomes how do you diversify?

One of the most effective ways to diversify is to invest among the three main asset classes: fixed income, equity (for long-term growth potential), and balanced funds.  Because investment markets tend to move independently of one another, positive performance in one asset class can help offset negative performance in another, thereby reducing volatility over the long term.  Getting the right combination of these asset classes and the right funds is partially what clients rely on me for.

Another important way to diversify your portfolio is by investing in different regions around the world. Often, certain areas of the global economy are performing better than others, and by spreading your investments throughout the world, you limit your risk, while at the same time increasing your long-term growth potential.

Canada makes up about 3% of the total world market capitalization of developed markets. That means if you limit your investments to Canada alone, you can miss out on many opportunities within global markets.  Global investments provide currency diversification, access to sectors that are not broadly available in Canada, and the potential to earn a greater return through investments in foreign stocks and bonds.  A combination of global and domestic investments can increase potential return while reducing risk.

My system of wealth management fully incorporates diversification among asset classes and regions while taking into account age and time.

The system varies slightly by client.  However, it is based on helping you achieve the maximum available for retirement and then having enough to last the remainder of your lifetime.  At the same time, because of the diversification among and within the different asset classes, risk of severe declines in value are minimized if one area of the investment portfolio does not do well.

In addition, this system has been built to address any age, level of wealth, or time period.

My challenge to you is to look through financial websites and publications and see what financial experts say about the importance of diversification and how to do it.  What you will find is what I am implementing – this is the cutting edge solution to deal with age old problems.