What is your number one investment priority? Beating the market averages? Finding the next “hot” stock? Making huge profits you can brag about at cocktail parties? Or, more modestly, making 10 per cent a year on your money?
If you found yourself nodding in agreement at any of those suggestions, you need to find a quiet corner and rethink your whole approach to money management. The number one goal of every investor should actually be to sleep comfortably at night.
Simplistic? Sure! But if you adopt it as your basic credo and judge all your investment decisions on how well they meet this down-to-earth test, both your health and your wealth will benefit. It is easy to do. Whenever you are faced with an investment decision ask yourself whether “this is likely to cause any serious anxiety down the road?” If the answer is “yes” or even “possibly”, do not buy the investment. There are lots of other places for your money.
Many of us have bought stocks that we knew little about on the basis of a tip from a friend or a persuasive broker because, we were assured, it was about to “take off.” In most cases, “crash land” would have been a more accurate prediction. Using the “sleep well” test before making the purchase would have saved us worry and money.
Instead of asking “how much money will I make?” our fundamental financial question should be “how much can I afford to lose?”
If you want to sleep nights secure in the knowledge that you will achieve your savings goals, you must invest enough money to make your goals a reality. If you try to reach your goals by saving less and expecting the stock market to do the heavy lifting, you may not get there at all.
Personally, I remain convinced that a portion of every long-term portfolio can include some percentage of equities. I also think far too much investment advice assumes the average worker secretly harbours an ambition to be a Wall Street trader, cashing in on the next hot stock.
I do not know many people who work hard for their living, volunteer in their community, and spend time with family and friends who also enjoy staying up late at night poring over a stock prospectus.
Diversification of investment portfolios into equities, bonds and cash is the most important shield against risk and thus the key to sleeping well. Because some investments rise in value while others fall, diversification smoothes out much of the volatility of the overall return from a portfolio. Diversification sacrifices some of the upside potential, but this should be more than offset by the benefits of a lower level of risk.
The point is: Do not put all of your eggs in one basket! Only by diversifying you will be able to realize your average return objective with lower risk.
The right level of diversification for you at a given time depends on a variety of factors, including where you are financially, what your goals are, and how much time you have to achieve your goals.
If all this seems rather dull, it is.
There are times when boring is good and haven’t you noticed how much easier sleep comes when you are bored?
Rick Turgeon, BBA, CA, CFP is president of the RRSP, investment, life insurance and estate planning firm of Turgeon Financial Inc. Comments or questions can be emailed c/o firstname.lastname@example.org