You know the old saying, “Opinions are like belly buttons. Everyone has one”? Well, this is especially true when it comes to money. People – be it your friends, family or financial advisor – will tell you that they have a foolproof investment plan that will make you a ton of money. But how do you know if it’s true? What investment warning signs should tip you off to a shady money strategy?
Investments are Personal
Your investment strategy shouldn’t be about your friends and family – it should be about you. After all, it’s your money and your future. If you want to choose the best investment for you, you need to ask yourself a few questions first. In fact, just about every investment decision you make will come back to these three considerations.
1. How quickly and easily do you want to withdraw your money?
This is referred to as ‘liquidity,’ a word that refers to how quickly and how easily you can access your money. A liquid investment is one where you can withdraw your money quickly, but not all liquidity rates are the same. While some mature in as little as one year, others can take up to 10 years to mature. If you’re choosing to lock your money into a GIC for example, consider whether you’ll ever need to access it before the term ends. If you choose to collect before this date, know that you will likely face a hefty penalty and therefore reduce your overall return.
2. How risky is the investment? How much risk can you afford to take?
In general, riskier investments promise higher rates of return and vice versa. The investment you choose, therefore, shouldn’t just be about how much it will return. It should also be about how much risk you can comfortably afford to take.
3. What are the potential returns from your investment?
Any potential returns you hope to gain from your investment – interest, dividends or capital gains – won’t happen right away; they take time. Each type of investment works differently and you’ll want to choose the one that works best for you. For investments that pay out on interest earned there will be a set time when interest accumulates. Dividends, on the other hand, are payments received from a portion of the profits – profits that are distributed amongst company shareholders. Finally, capital gains – or losses – are the difference between the original cost of the investment and the amount it sells for later.
Last year, financial writer Rob Carrick wrote an article citing 12 examples of untruths told by investment advisors in order to make a sale. Of the 12 examples, six could have been completely avoided by applying the above three considerations. Let’s have a look.
Don’t Trust in Government Programs?
As Carrick mentions, CPP has been actuarially certified as sound, and therefore, safe. If you’re worried about consideration two (risk), then government programs are certainly better than no program at all.
It’s An Unstable Market
According to Carrick, investors can make money even during a time of market instability – if they choose the right investments. This refers back to consideration number two on risk assessment. If you’re not prepared to lose money, don’t make risky investments.
Fees Are a Necessary Evil
As an investor, there is one thing you can control: how much you pay in fees. It’s simple: the more you pay in fees the less you make in returns (see consideration # 3). Don’t blindly buy in to fees if they can be avoided.
Diversified Wrap Products Outperform Individual Stocks
While it might seem tempting, diversified wrap products have proven to be inconsistent, plus the fees are too high. If you’re worried about risk (consideration #2) and returns (consideration #3), a diversified wrap product is not the answer.
Leveraging is Foolproof
Yes, leveraging can build your wealth. Leveraging, which means taking out a loan to buy mutual funds, is a good way to grow your money, but it too can be risky, and sometimes the stress of borrowing products whose value could take a dive just isn’t worth it. Remember considerations # 2 and 3.
Test Out a New Product
As Carrick wisely points out, no good financial advisor would ask you to test out a new product, especially in uncertain financial times. Again, this comes down to consideration # 2.
If you’re new to investments, safe is always best. As you learn more and become more comfortable with what you are doing, you can always switch things up. Remember; investments are personal and should be tailored to your needs, particularly when it comes to risks and returns.