I recently received an comment from a Donna who had read my Easter blog “Easter Eggs and Nest Eggs” and asked what advice I would give to a newly retired couple who would love to get “double digit” returns but are not willing to take on the risk associated with those potential returns. It happens that I have heard this comment before and the following is how I describe the dilemma.
“The more certain something is, the less likely it is to be profitable.”.
~Jim Rogers (co-founder of the Quantum Fund)
There is no such thing as a “risk free” investment. The challenge is to decide what level of risk you are willing to assume and to understand the implications of that choice. An investor may get double digit returns occasionally, however it is unrealistic to think that those returns can be repeated year after year. There is a natural order to the basic asset classes: CASH – the least risky with the lowest returns; DEBT – moderately risky with moderate returns; EQUITIES – the most risky but offering the greatest long term payoff. I believe that it is usually better to focus on “risk” rather than “returns” since setting the upper limit on the amount of risk you are willing to assume automatically puts a ceiling on the rate of return you can realistically expect to earn.
Because investing is not an exact science, it’s better to be approximately right than precisely wrong. So now the question becomes, “How can I be approximately right?”. By meeting with your advisor and discussing different asset allocation models should give you some direction. The economic uncertainty generated since 2007 has also given rise not only to “asset allocation” but also “product allocation” in a person’s portfolio. These models go beyond simple diversification of assets and don’t try to outguess the markets, but rather works with them. By combining assets with different performance characteristics into a single portfolio, it is possible to increase returns while reducing risk. There may be times when a minor adjustment might be necessary along the way so regular reviews with your advisor would be prudent.
I do realize that this is a rather generic approach since the tolerance for volatility is so individual and varies significantly from one person to the next. What is good for your spouse, brother, sister, co-worker, or Uncle Max may not be appropriate for you. I also believe that mutual funds are probably the best investment vehicle over time for the average Canadian. The fund managers are very good “stock pickers” and are able to purchase in large volumes. They also have access to research data to which we as individual investors do not.
Make sure that your portfolio is “appropriate” for your goals and risk tolerance rather than just “comfortable” because someone else is doing it.
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