Look at your total portfolio
to gauge investment success
Do you find that a loss in one of your investments drives you crazy, while a gain gives you only momentary satisfaction? If so, you're not alone. This is one of the recent findings from the field of "behavioural finance." In other words, the gratification provided by a 10% investment return is not as great as the disappointment caused by a 10% investment loss.
Media coverage of the markets tends to reinforce this view. For instance, most of us are aware that stock markets have experienced considerable turbulence during the past few years. But not everyone knows that, during this period, bond markets have performed quite well. Investors who maintained properly diversified portfolios may have done better than they realize.
This shows why it's important to build a diversified portfolio. It also shows that, in order to get a better picture of where you stand, you need to view your portfolio's total performance. To find out how to get your whole portfolio working for you, click through the links below:
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Get the asset mix right |
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Coordinate your efforts |
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Choose quality |
Get the asset mix right
Asset allocation refers to how you combine the three main asset classes - cash, fixed-income, and equity-based investments - in your portfolio. You want to create an asset mix that fits with your longer-term goals and your comfort level. (For a snapshot of the role of each investment class, link to our October article, "Ready to invest? Find the right amount of risk first.")
Having some exposure to all the asset classes helps to ensure that you are taking advantage of the top-performing class, while limiting exposure to poorer performing investments. The market volatility of the past couple of years - particularly in the technology sector - shows the dangers of over-concentration.
This is the idea behind diversification - that a sound mix of investments can help to reduce market volatility and boost potential returns. In fact, some studies suggest that asset allocation, rather than the choice of individual investments, accounts for more than 90% of a portfolio's return.
Did you know: Most financial institutions and financial planners have tools that can help you determine an asset allocation mix that's right for your personal goals.
Coordinate your efforts
If you hold non-registered investments as well as an RSP, it's important to look at both plans to ensure that together they are helping you meet your goals.
There are many reasons we build non-registered portfolios. When choosing investments to hold outside of your RSP, consider the following:
Your objectives. If you are saving for a car, a vacation, or a down payment on a home, your money should be held in secure, liquid investments, such as money market funds, high interest savings accounts, or short-term Guaranteed Investment Certificates (GICs).
If you are building your non-registered holdings to complement your registered savings, it's a good idea to ensure that both work together to achieve adequate diversification. This means choosing investments that fit with your goals and risk tolerance, and avoiding duplication.
For instance, let's say that you have $100,000 in your RSP, and have targeted an asset mix of 70% equity-based investments and 30% cash and bonds. If your $25,000 non-registered portfolio is made up entirely of equities, you may be holding more growth investment than you are comfortable with, skewing your desired asset mix.
Taxes. Outside of a registered plan, equity-based investments are taxed most favourably, while interest-bearing investments are taxed at your highest marginal tax rate.
Although tax considerations are important, the quality of the investment, and its place in your overall portfolio, should always be your first consideration.
Choose quality
Once you have decided on the asset allocation that fits your goals, the next step is to look at the investments that make up your portfolio.
There is always a "flavour of the month" being hyped in the financial media, and it is only natural to want to take advantage of opportunities. But before you buy, do some research or talk to your financial advisor - you want to be sure that you are investing in high-quality holdings.
An established stock or well-diversified mutual fund may not be as glamorous as the latest fad, but over time quality investments have a way of providing less volatile returns. Choosing investments with a proven track record can help you focus on long-term success. When you hold quality, you'll be less tempted to make hasty decisions.
Tip: Mutual fund investors can take advantage of rating systems to help narrow the field of quality funds. Speak to your financial advisor for more information.
Want help determining the investment mix that's right for you? The Scotia Investment Selector® is an easy-to-use online investment tool that will help you allocate your assets across the three asset classes - and provide you with some suggested investment products for your portfolio.
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