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Gordon Pape
Gordon Pape

Why Invest?

The most important thing is to have a clear investment goal

October 05, 2015

Why do you invest? If you can’t answer that question in a few words, then you will probably never be successful at it. Put your money in a savings account and forget it.

Every investment decision, from asset allocation to the specific securities you choose, revolves around that critical question. If you do not have a clear purpose in mind, you will never develop the focus and discipline you need to build a winning portfolio that is appropriate for your needs.

There is no single security that is suitable for every investor, no one-size-fits-all portfolio. It all turns on what you are trying to achieve. That’s why we cover a wide range of investment possibilities in this newsletter. They won’t all be right for everyone, of course. Each person has to decide which recommendations fit with his or her personal objectives and which are not suitable.

Here are the five most common reasons to invest, with some suggested strategies to employ in each case.

Long-term growth: The aim is to increase the value of your portfolio over the long term, with an acceptable degree of risk. The money may be used eventually for retirement, education, estate planning, or some other future need. The time horizon may be as long as 50-60 years.

Strategy. The asset mix should favor equities over fixed income, although the latter should not be ignored. A simple approach would be to create a small portfolio of conservatively managed mutual funds from low-cost companies like Beutel Goodman, Mawer and Steadyhand, combined with some bond ETFs. If you want to build a stock portfolio, focus on industry leaders and ensure you have good diversification. As we saw in the collapse of energy stocks after the oil price drop, it’s a bad idea to concentrate too high a percentage of your assets in one sector, no matter how good it may look at the time. Keep trading at a minimum; commissions can eat up profits at an alarming rate.

Short-term growth: In this case the goal is to achieve a decent return but within a relatively short time frame, say five years. The ultimate objective may be a major purchase such as a home, a car, etc.

Strategy. You have to balance the desire for growth with the risk factor. If you’re saving for a down payment for a home, for example, you don’t want to see your money go down the drain in a market crash. Balanced mutual funds are a good choice here. Balanced ETFs would be even better because they are less expensive, but there are only a few available.

Capital gains: Here the objective is to score big profits. Of course, everyone would like to achieve nice gains, but most are unwilling to accept the accompanying risk. Those who declare this to be their primary goal have a get-rich-quick mentality, not dissimilar from that of the folks who buy lottery tickets. It’s the greed side of the investing equation

Strategy. Unless the circumstances are highly unusual, such as the sky-high interest rates of the early 1980s, bonds are not a part of this mentality. They’re too dull and don’t have the fast growth potential these people want. Mutual funds and ETFs don’t fit, either; their growth is usually too slow. The key focus here is the stock market, often on highly speculative equities like penny mines or through day trading. It’s possible to make money that way but only the very smart or the very lucky can manage it.

There’s a better and less risky way. Buy cyclical stocks when they are out of favor and trading at deep discounts. Then wait. In the stock market, what goes around comes around. It never fails. Stocks that are dogs today will be stars tomorrow and vice versa. For example, no one wants mining stocks right now. You can buy shares in Teck Resources on the TSX for around $6. Less than three years ago, the same stock was trading in the mid-$30s, and it will eventually be back there again. It’s just a matter of time and cycles.

Income: The fact our population is aging made headlines last week with the Statistics Canada report that there are now more seniors (65+) than there are children (15-) in this country. But there’s nothing really new about that. The trend has been evident for years; all we did was cross a demographic threshold. More seniors means more people whose main interest is to generate income from their investments. The problem is that with rates so low, that’s not easy to achieve.

Strategy: With GICs and bonds offering such low returns, the temptation is to seek out high-yield securities in order to obtain the desired cash flow. But that adds risk at a time in life when most people can’t afford large losses. The asset allocation should reflect that, with greater emphasis on cash and fixed income securities, even though returns are lower.

Income-oriented mutual funds and ETFs are useful securities in this context. Just be sure the distributions are not at a level that consistently erodes the net asset value (NAV). If that happens, you are basically being paid with your own money. If you want to add dividend-paying equities, look at banks, utilities and REITs but don’t lose sight of the risk.

Asset preservation: All some people really care about is preserving what they have. They aren’t interested in big profits or even in cash flow. They just don’t want to lose money.

Strategy: It’s really very simple. Avoid risk. Keep most of the money in cash and spread it around among various financial institutions to ensure full deposit insurance coverage (CDIC provide protection up to $100,000 per participating institution).

Remember, the most important thing is to have a clear investment goal. “To make money” isn’t good enough. Think it through carefully and then adopt a strategy that fits with the desired end result.

About the author:

Gordon Pape
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

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