As we move forward into the New Year, many of us are in the
process of reviewing our financial plans. During this process we are often
faced with new concepts and terms that some of us may not be familiar with. As
your financial advisors here at Continuum II, we have compiled a list of
concepts that we feel are essential to understand when building and effective
financial plan.
Diversification: In financial terms,
diversification means that you invest in a variety of assets to reduce risk, in
other words diversification promotes not putting all of your eggs in one
basket. One may even compare it to the following; remember the Atkins diet, high in protein and
low in carbohydrates? It promises fast weight loss, but stick to it too long
and you may end up with high cholesterol and kidney problems. Basically, too
much of a good thing can be bad for you! Now compare that to the Weight Watchers diet
by eating from diversified food groups in moderation you will reach your weight
goals, be healthier and the results will last. So to better reach your
financial goal, keep your investments diversified to include Cash, Fixed
Income, Canadian Equities, and U.S Equities and for a little spice some Global
Equities. Your financial planner at Continuum II can help you select the right
mix to meet your individual goals.
Chasing Returns: Chasing returns is the act of
switching from a poorly performing investment, to one that has recent return
success. It is comparable to waiting
until after Lance Armstrong has won all 7 Tour de France titles to place a bet
on his winning the next one. However, much like Lance, buying into last year’s
top fund(s) is never a guarantee and it is unlikely to stay on top. In respect
to your finances, it is better to choose a fund with at least a 5-year history
of stability and decent returns. Added tip, if it looks too good to be true, it
probably is.
The concept of Buy low and Sell high: Think back to grade
5 math. You buy a bushel of tomatoes
from your local farmer in August. The bushel weighs 65lbs and costs $10.00. In
December you go to Whole Foods and buy 1 pound of tomatoes at $2.99 a pound. How
much would a bushel cost? (65x $2.99 = $194.35). Based on these figures, the time
to buy tomatoes is in August. The time to sell tomatoes is in December. The
same type of formula applies to your investments. It is all about figuring out
when the time is right, and when you will receive the biggest, or best
possible, return. This is what your fund manager does, so you don’t have to.
Dollar Cost Averaging: Dollar cost
averaging is an important concept for everyone to understand. The idea behind
dollar cost averaging is that by averaging costs over a specific period, it may
lessen the risk of investing a large amount in a single investment at the wrong
time. Stocks aside, dollar cost averaging is a concept that can be applied in
your day-to-day lives. For example: Take the mundane investment of filling your
car up with gas. Every week, on Monday you buy $50 of gas for your car. Some
weeks you fill your tank, other weeks it’s a little less than full. With the
cost of gas constantly fluctuating it makes it hard to decide on how much you
want to invest (put into your car) at any given time. So what should you
do? Why buy gas every Monday of course! Think
about it like this. In January you have no idea what the price of gas will be
during the year and you cannot buy a years worth of gas all at once. By buying
gas every week, the average price of gas for the year is $1.24. Treat your
savings the same way, invest regularly and your average cost will lower, you
will surely avoid buying a years worth of investments at the years high.
Compound Interest: Compound interest is the idea
that any added interest that you may accumulate produces such benefits that it
to may also collect interest going forward. Think of it like this. You buy a
plant from your local garden center. The plant begins to blossom beautiful
flowers-these flowers are what can be considered the interest on your
investment. Eventually, those flowers begin to spread seeds, and before you
know it you have a garden full of flowers. In other words, your original
investment provided you with interest, which then spread to provide even more
interest. When working with your investment advisor look for stocks that have
the potential to snowball and get the most out of your money. Happy investing!
Credentials are important: When choosing a family Doctor it is reasonable to look for
and expect to see MD after their name. When choosing a financial planner it
only makes sense to look for, and expect, your financial planner to have the Certified
Financial Planner (CFP) designation after their name. The CFP designation is
one of the most rigorous and well-respected designations, signifying competence
and high ethics. Insist on it!
If you have any further questions regarding any of these concepts, or others, contact your financial advisor at Continuum II today.
