Key Points from Canada’s 2024 Federal Budget and Strategies for our clients. Click Here.

Be successful at managing your family assets

Be successful at managing your family assets

March 7, 2013

If you could predict the future this would be unnecessary; however, that is not possible, so spreading the risk around is needed.
If you could predict the future this would be unnecessary; however, that is not possible, so spreading the risk around is needed.

Managing your wealth is challenging where your success will influence your ability to achieve your long-term objectives. Today’s column will review the critical foundation to being a successful manager of your family assets.

Investing is all about risk. You take one type of risk in order to avoid other risks. There is a delicate tradeoff between taking investment risk now in order to grow your assets so you can avoid the risk of running out of money during retirement.

The key is not to take any more risk than needed. The starting point in any portfolio is to diversify across a wide range of different asset classes.

If you could predict the future this would be unnecessary; however, that is not possible, so spreading the risk around is needed. Many investors fail to do this.

It is not uncommon for investors to own several Canadian stocks and to feel confident they are adequately diversified. A better approach is to spread the dollars you have invested in equities around other parts of the world.

All areas of the world have risk and the strategy is to minimize those risks by limiting your exposure of too few stocks in too few world markets.

The preferred way to invest is to attempt to capture the market returns. Some years that will mean you will have a low or negative return, but over time the markets have rewarded patient and disciplined investors.

Try and avoid the temptation to do better than the market. That attempt is what motivates some investors to time the market or concentrate on specific security selection. Great in theory, but it does not work on a consistent basis.

Academic research over the past four decades has shown that stock picking and market timing of active portfolio management has a high likelihood of a lesser result.

Harvard Business School professor Michael Jensen published a significant study of active managers in 1968 and concluded that they did not have the ability to beat the market. His research included tracking the investment performance of all U.S. mutual funds from 1945 to 1964.

Studies since then have repeated his conclusion and many of those studies have been covered in this column. There is less risk investing in broad markets than by selecting individual securities.

Discipline is needed. That means forgoing the temptation of altering a long-term strategy as a result of short-term events.

The reality of investing is that you most often do not earn the desired annual investment returns. If your target return is, say, six percent you should expect your actual annual returns to range plus or minus 10 percent or greater in any specific year.

You might achieve the six percent target over a long period but there will likely not be many years that your return was actually six percent. That is just the way it works so variable returns should be expected.

Try and manage your costs as best as possible. This includes all expenses associated with owning securities and mutual funds as well as tax costs. Regular trading outside of your registered account can result in higher tax costs than on a buy and hold strategy.

The final suggestion is to invest with a purpose and hopefully that purpose, along with the investment approach, is written in an Investment Policy Statement and referred to on a regular basis. The purpose is the reason you are saving and investing.

Whether the financial objective is to save for your children’s education or for your own retirement, investing is done for a reason. That reason determines how you invest.

Building your investment and wealth management process on a structurally sound base will increase the likelihood that you will be successful.