How to Approach the Investment Process

Being a successful investor is a challenge and there is no single recipe or fount of advice to guarantee success. This is true whether you are a seasoned investor or a complete beginner and regardless of whether you manage your own investment plan or work with an investment advice professional. Whatever your financial situation, and whether you are seeking growth, a reliable retirement income plan, tax efficiency or some other financial outcome, there are a number of issues you are likely to face when steering your portfolio towards your investment goals.

To help you invest, we have developed a list of investment tips designed to educate you in the process of identifying, starting and sticking to your investment plan.

Investment Tip 1: Understand Why You’re Investing

Many investors fail to identify their investment goals at the outset. However, without knowing what you want to achieve and why you should invest, you could be prone to making short-term, spur of the moment moves, particularly in times of financial, political or market volatility. For example, during a bear market investors can easily become spooked and shy away from negative volatility because they fear loss, not realising that every bear market in history has been followed by a bull market, and it may be right to hold onto their investments in spite of volatility.

When you seek expert advice about your investment plan, your adviser should assist you in establishing what it is you need your money and assets to do for you, how much risk you are prepared to tolerate, which types of assets, and whether any products, funds or savings accounts may be suited to your financial planning.

Not having a plan may increase your risks and make you more reliant on luck in order to get to the place you want to go. Instead, you should carefully consider what you want to achieve when you invest. Once you decide, you can determine your strategy and begin the process of moving towards your goals.

Investment Tip 2: Don’t Underestimate Your Investment Time Horizon

When creating a plan to meet your goals, it is important to understand your time horizon (i.e. how long your funds need to last to reach your goals). This is because running out of money is the single biggest risk in retirement investors face.

If your investment goals are simply to attain income for the rest of your life, your investment time horizon may mean the duration of your lifetime. Just keep in mind: in general, life expectancies over the last century have been increasing. However, if your goals include leaving money behind after you pass, you should consider not just your own lifespan but that of your spouse and other beneficiaries— for example, children or grandchildren. Whatever the case, your portfolio investments may need to offer growth for longer than you previously expected.

Investment Tip 3: Don’t Underestimate the Impact of Inflation

Unfortunately, the purchasing power of your money is likely to diminish over time. Many central banks around the world target 2-3% inflation per year. If it is 3%, a person who currently needs funds of $50,000 to pay all annual living expenses would need $120,000 in 30 years' time simply to maintain the same purchasing power.

Over time inflation erodes the value of savings and investment portfolio returns, so returns must exceed inflation to increase purchasing power. You should be sure that the real return expectations (net of inflation) of your asset allocation exceed your projected cash flow needs. This is essential to maintaining purchasing power over the long-term.

Investment Tip 4: Don’t Focus Only on the Small Details

We believe that the single biggest factor influencing your portfolio’s returns is your asset allocation—the types of asset classes in your portfolio—rather than the individual identities of specific shares, investment funds and other portfolio investments. In other words, whether you own equity or cash it will impact your returns over time more dramatically than whether you own one particular share or another. In practice, this means you need to make sure your broader asset allocation aligns with your financial goals—this is paramount to determining your level of success.

We also believe your category choices (for example, sector and country decisions within equities) are more important than individual security choices. For instance, whether you own Canadian Utility shares or US Technology shares will affect your performance more than whether you own one particular company or another.

This forms the backbone of our 70/20/10 approach to portfolio asset allocation. We believe 70% of portfolio returns can be explained by asset allocation, 20% by category decisions, and 10% by specific security selection.

Investment Tip 5: Be Sure to Diversify

One of the most effective ways to minimise risk when building an investment portfolio is to spread investments across many parts of the market. This means not only choosing investments across a range of sectors but also diversifying across regions and countries.

We believe that diversification across multiple countries is important to achieving your long-term objectives. This is because no one country or region will outperform other countries and regions all of the time. If you remain invested in only one geographical area, you might miss out on potential returns in other locations when they outperform the rest of the market.

Avoid potentially making the mistake of only investing in equities that are close to home or in those that have recently performed well. A well-managed, diversified portfolio will offer dividend yields across a number of markets and may ultimately be a lower-risk approach.

Investment Tip 6: Remember your Goals and Stay Disciplined

Humans are sometimes emotional beings and we have a tendency to let our hearts control our brains. This can adversely affect being a successful equity investor. You should remove emotion as much as possible from decision making when it comes to your investment plan regardless of how much risk you currently perceive in the market, whether equities are in a bull market or during a period of financial crisis and political or economic turmoil.

We believe you should also avoid buying shares for sentimental reasons, such as working for a company or having some other familial or personal association. Removing sentiment from decisions also means remaining disciplined in the face of market changes and, in many cases, listening to the investment advice of your financial adviser in order to avoid a potentially harmful response to sudden market volatility or unexpected price changes.

Similarly, a disciplined approach to your investment plan also means not falling prey to the common mistake of “chasing heat”—i.e. pursuing share tips or equities which seem to be performing particularly well at any given time. We need not look far back into history for examples of the pitfalls of this: tech equities in the late 1990s and, more recently, the Bitcoin and cryptocurrency boom.

Buying and selling equities and selecting investment accounts should be about adopting a strategy to meet your goals. And always remember: just because the price of a particular security has risen or fallen, this has no bearing on whether it will continue to go up or down.

Fisher Investments Canada—Trusted Investment and Portfolio Advice

There are many important factors to keep in mind before placing money in funds, savings accounts, fixed-interest bonds and other investment options available. It can often be in the investor’s best interest to seek out professional investment advice to help them through the process of identifying goals and investment time horizon, and for the development of a portfolio strategy. An experienced investment adviser can help you remain disciplined throughout the process over the long-term and can offer advice on investing that is suited to your particular requirements.

Contact Fisher Investments Canada today to learn more about how we could help you with globally-focused investment advice. Our organisation acts as an investment manager and adviser. We foster strong client-adviser relationships which offer mutual benefit and balance.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.