Introduction
There are lots of things you could consider in managing your investments. Yet pretty much all investment pies should be mostly stock. The management decisions are remarkably simple and rarely need revisiting.
Investor success all boils down to just three factors: time, diversification and self-regulation.
Investors who manage without the support of a Professional Advisor often do not succeed in profiting as well as the market as a whole – in fact, on average, the investment returns enjoyed by DIY investors is below inflation so: net negative.
Why? Because our instincts work against us when it comes to managing investment portfolios.
Which is why self-regulation is the greatest key to success – and the support of a Financial Planner or Investment Manager can make all the difference.
With self-regulation you can easily realize the other two keys: time and diversification.
Together, time and diversification overcome all of the risks in investing.
You do need a bit of faith that tools that we rely on as a species will continue to serve us well:
Investing in public stock and bond markets means all kinds of regulations protect you as an investor, and industries of professionals making the most of all the required disclosures and their relevant economic contexts.
Sure market values buck like broncos over the course of a day or a year, as investors decide what they’re willing to spend or sell for in reaction to their personal and their understanding of the broader economic context.
But companies are so much more than the price of their stock or value of their bonds in a given moment. They are people collaborating to provide a product or service other people value. They’re getting you what you buy. They have the power to reprice their offerings to remain profitable even when their costs go up. Add to that the pursuit of profit, and you see why stock values outpace inflation, given time.
Taken as a whole, public stock and bond markets make investors money. That bucking up and down can net you a loss in the short-run if your expectation of remaining invested is thwarted, but it averages up, in pretty short order.
Investors profit.
Historically, even the unluckiest investor (buying high and selling low), profited if they stay invested for seven years. That’s the worst case scenario. And it is why professionals start adding bonds to investment pies as your sell-date gets to be seven years out or sooner. Because once you don’t have to time to average up out of a market down, you can risk the lower profits of bonds to benefit from their short-term price stability.
Because stock markets (ownership of a company) always profit over time even once you subtract from those profits the rising cost of things (inflation). Bond markets (lending to a company or government) vary less in price but do not so reliably profit once you account for inflation. Which is to say: it is riskier to remain in bonds beyond seven years, than it is to invest in stocks – riskier to your profits as an Investor.
Since Canadians need to invest for the forty or so years they are working, then ensure those investments last as long as their subsequent retirement – we’re all investing for more than seven years pretty much always. It might be through a pension or just the CPP – but we’re all long-term investors.
Yet we call stocks risky & aggressive and bonds safe & conservative. My theory is that this is because those bucking market values can all too easily trigger sales at market-lows, realizing an investment loss despite the certainty of profit if you ride it out.
Seven years is forever to a frightened mind, and money is emotional. Money can make us fearful no matter what the cold-hard math of it.
Which brings me back to self-regulation. it is hard to do without skilled support – no matter how well you grasp these basics. This is not just a plug for my profession – it is a proven fact.
Now let’s not forget the third key: diversification.
Time ensures investments profit: so long as those investments are about as diversified as the markets as a whole.
Concentration in a sector or too few companies excludes you from that security. Because a narrow focus on a few companies or sectors risks the long-term wane or failure of the few.
So keep your investments diversified. Managed diversified ETFs and Mutual Funds make it easy!
And there you have it – as easy as 1, 2, 3: self-regulation, time and diversification makes profitable investing easy.
But working with Heather McLeod Wealth to support your decision making on all three fronts makes this the easiest part of your Financial Planning success. So easy you won’t think about it beyond a comfortable twice annual review – freeing you up to make the most of the real secrets to your Financial Planning success. The ones only a skilled Financial Planner can provide you!
