Where You Should Be Investing Your Money!

by Kristina on November 1, 2011 · 4 comments

finger pointGood Morning DINKS, I hope that all is well today in your neck of the woods, suburban home, or metropolitan concrete jungle.

As market fluctuations are still a part our daily lives and changes in the value of our Investment Portfolios are still inevitable, investors are looking for alternative Investment options.  But the truth is that the market is what it is, and no one is going to invent a new type of investment. Investment options will always be Cash, Fixed Income, and Equities.  The asset allocation that we choose in our Investment Portfolio is the most important aspect, not the individual investment options that we choose.

We have to keep our long term strategy in mind when we experience market fluctuations in the short time.  We have to see the low stock prices as an opportunity to buy, not as a constant thorn in our side.  Now is not the time to make changes in our investment portfolios if they are currently at a loss because then we will realize this loss.  For now the loss is just on paper and just leave it right where it is!  If your short term investments have also taken a loss in recent years then I am sorry to say but you received bad advice.

As a basic (and very generic) rule of thumb Investments with a time horizon of less than a year should always be invested in cash, a medium term time horizon of 2-5 years should be invested in fixed income assets such as Bonds, Mortgage Backed Securities, and Real Estate Trusts, and a long term investment time horizon of 5 years and more should invest in Equities both Domestic and Foreign.  However this is of course a general guideline.

This past week I had a client come into my office and ask for the Best Investment that gives s security, flexibility (meaning access to the money at any time), and a good rate of return. I explained to him that no such type of investment exists.  He would have to pick two of the three criteria and we can explore his options from there.

Which two criteria are the most important for your personal investments?

If you want Security and Flexibility: The best investment option for you may be a High Interest Savings Account or a Money Market Mutual Fund.  Both of these investments pay interest on a monthly basis.  Savings Accounts are a no risk investment option, and Money Market Mutual Funds are a very low risk investment option but they are never guaranteed.  Both of these accounts give us access to our money at any time.  However, there may be up to a 3 day delay in selling our Mutual Funds, while we have instant access to the money in our Savings Account.

If you want Flexibility and a Good Rate of Return: Invest in Fixed Income Mutual Funds such as a Real Return Bond Fund, a Monthly Income Fund, or a Mortgage Fund.  Mutual Funds offer us the flexibility of accessing our money at any time with the potential of a higher rate of return than a basic Savings Account.  If the uncertainty of your rate of return is unsettling then I suggest you invest in a Flexible Long Term Guaranteed Investment Certificate (GIC or Term Deposit).  The Long Term GIC option will give you a higher interest rate and the flexibility will give you the option to cash it out (fully or partially) once a year (usually on the anniversary date).

If you want Security and a Good Rate of Return: If you don’t need access to your money then you may want to invest in Market Linked GICs.  These are Guaranteed Investment Certificates that offer security of your capital investment along with the potential higher rates of return based on the performance of a Stock Market Index.

(Photo by Purpleslog)

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{ 3 comments… read them below or add one }

1 crashdamage1957 November 3, 2011 at 10:49 am

“The asset allocation that we choose in our Investment Portfolio is the most important aspect, not the individual investment options that we choose.”

Bingo.You said it all right there in a nutshell. I bet when you say that to your clients tho, their eyes glaze over, because what they really wanted to hear from you is about some magic super safe investment with an incredibly high guaranteed rate of return.

In my mind, every investor should set up an asset allocation plan of equities, bonds , and some liquid cash ( money market funds or CDs ) along the lines of the asset classes that you described above, as soon as they get their first job, and then just tweak the percentages as one ages. So maybe something like 80/15/5 in your 20’s, and gradually shift to be something like 50/30/20 when in the later retirement years. Oh, and living within your means the entire time. But also, not worrying about money to much. Set up a sensible allocation plan, stop worrying, and enjoy this precious time that we have.

Spoken like a true old fart, eh? :)

2 Kristina November 3, 2011 at 6:04 pm

@crashdamage1957 – I love that you said “eh”. Does this mean that you are one of my fellow Canadians? Yes, clients always think that I have some magical investment wand up my sleve. They think that I will whip it out and their investments will magically earn 15% on their investments. I have to always remind them that asset allocation is the best investment strategy, not the investment choices. Thanks for reading.

3 crashdamage1957 November 3, 2011 at 11:55 pm

And thank you Kristina. No, I’m not Canadian myself, but my late step dad hailed from Toronto, and a few of his expressions and colloquialisms have managed to take root in my upstate New York manner of speech. And, I can almost see Canada from my house!!

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