Retirement Mistake No.5: Not Managing Money Systematically
Posted In: Retirement Planning for Entrepreneurs

The new buzzword in the investment industry is “program.” It seems several well-known investment companies have developed their own programs. Each company has unique names and features for its programs. Examining the differences of programs can be as confusing as picking next year’s hot fund. What you need to find out is whether these investment plans are suitable for you.

Of what benefit is it to go into a plan or program with your money? There are several concerns you should have when looking at investing into these types of investment plans; but first let me explain that these are processes of managing money, not specific investments. If you want to invest into a mutual fund, the process is to examine your risk and determine your needs, such as growth or income, then choose suitable investments.

The newest way to invest is into company programs. The process can be as simple as picking a particular portfolio, or it can be tailored to your specific needs (such as tax minimization, income planning, capital preservation, or a combination of needs.) While the industry looks to gain back the confidence of investors, programs vary dramatically in costs, rebalancing, sophistication, and true benefits to you, the investor. Be careful not to just buy into a program without asking some key questions like: How does this program stack up against other programs? What types of reports will I receive? How does it measure up against benchmarks such as indexes or GICs? Who is involved in the process? How do they accommodate my specific investment needs? What are the minimums to invest? (Some companies have minimums of $25,000 to $250,000 or more.) Finally, be aware that there are several programs available in Canada today, and a one-size-fits-all solution may not accommodate your changing lifestyle or investment needs. Maybe you need two programs to make the right fit or the appropriate diversification. Examine what is important to you about money; then find out whether a program, or two, is right for you. Remember to manage your money like a system, or hire people who have a system that inspires in your confidence that your money will work as hard for you as you do for it.

Meeting Your Needs Through Diversification

Every day I am asked the same question: “Why do I need to be more diversified?” I usually respond along the following lines.

Because my crystal ball is broken and I do not know what the future holds. I did not predict oil and gas going from $10 to $140 a barrel, and I sure did not predict that the Government would announce a tax on income trusts. However, this is what I know for sure. Highly diversified portfolios tend to have less volatility and less dramatic ups and downs than non-diversified portfolios. They contain as many as fifteen asset classes and are managed like pension plans, but unlike pension plans, managed asset programs are designed to match your specific goals and objectives, allowing for dynamic security selection, regular rebalancing reviews, comprehensive tax record-keeping, and client-friendly, easy-to-understand information. The process is very detailed but easy for retired investors to grasp and feel comfortable with. The multiple asset classes reduce the risk of loss due to poor performance in any given segment of the financial markets, while providing the opportunity to profit in additional areas that may be overlooked. Examples of some of these asset classes would include mid-sized global companies, global bonds, and real estate.

The bottom line is to ask your financial professional how you are diversified and how many asset classes you own. If your investments are all in Canadian stocks and you hold three balanced funds that all invest in Canadian stocks, you may consider diversifying to minimize the risk of concentration in one area.

Another question to ask is whether your investments are rebalanced on an ongoing basis to manage risk and, if so, how they are rebalanced. Ask for an example. You should receive comfort in the knowledge that your money is being rebalanced to take advantage of opportunities and to prevent over- or under-weighting in specific asset classes, which could lead to undesirable volatility or fluctuations of your money or risk. This may answer your question about how you are diversified.

Every generation laughs at the old fashions, but religiously follows the new. – Henry David Thoreau

Nothing can bring you peace but yourself. – Ralph Waldo Emerson


Published with permission from Grant Hicks