Are you the type of person who likes to learn new things? The type who finds pleasure in understanding something that is totally foreign? The type who would try anything once? Bungee jumping, sky diving, or shark cage diving! If these activities sound a bit extreme, then you might be open to something more passive than any of these.
Deepening your understanding of
investing might be the difference between life and death. Now this
sounds like a harsh statement but maybe not if it means you can afford to put food
on your table to prevent you from starving.
At the latest CIFPs Professional
Development Day, the discussion was about people who do not want to take risks
with their money so they choose the perfectly safe route and put their money into
GICs (Guaranteed Investment Certificates). This type of strategy raises a
perplexing question, “Are they not putting themselves at risk if they run out
of money?”
Advisors are always taught to
understand their clients’ objectives and risk tolerances. If safety is what clients want, then safety
is what they are given. However, financial
advisors and financial planners also have an obligation to educate their clients. Their clients need to fully understand that
holding only safe investments could be dangerous. Settling for 1% GIC investments returns may
not be in their best interests if this means running out of money in their
retirement years. Living destitute would
not be “pleasant”. Dreams of retirement life could be destroyed
when the “well” runs dry.
Knowing your options in advance
of your retirement date is a plausible solution. During the days when you are
accumulating your wealth, you need to decide where to invest your money for it
to grow. Having some knowledge is better than having no knowledge about savings and investing.
Previously, we discussed mutual
funds in the blog, Investing
in the Rise and the Fall of the Markets.
With all the hype in the investment world about transparency in regards
to fees, people are beginning to take notice exactly how much they are paying
in management fees. I don’t believe the true cost of management fees could ever be determined because the task would be too onerous for mutual funds companies. Yet here’s the
dilemma we, as investors, face. We are
trying to reduce fees and increase returns while we minimize risk. That
sounds like quite an accomplishment to undertake.
What's the answer? You’ve heard the adage, “Don’t
put all your eggs in one basket” known as diversifying
your money into bond and equity investments spread over different sectors of
the economy and world markets. Another investment option, which does this and
is gaining popularity, is ETFs, exchange-traded funds. These investment funds
trade like stocks and derive their value from the markets by riding the
coattails of indexes, for example, the S&P/TSX 60 Index. Because ETF
returns are mirrored from the performance of an index, technically, the
management of the funds is minimal which in turn reduces the fees and expenses. This strategy is known as “passive investing” as opposed to “active investing” where portfolio
managers actively buy and sell securities.
The following excerpts explains ETFs growing popularity.
The article, The
Rise of ETFs, reported that “At the
end of 2007, there were only two ETF providers in Canada. Today, there are 13, including Vanguard,
which entered the market in December 2011.
Between 2008 and March, 2016, the number of Canadian ETFs rose to 424
from 77 while AUM (Asset Under Management) increased to $95.0 billion from
$19.4 billion.”
Another article, (Canadian EFT Industry: Why Exchange Traded
Funds isn’t the question any longer) points out, “…while the ETF industry here nears the $100 billion milestone, it
remains a fraction of the Assets residing in the Mutual Fund space ($1.3
Trillion).”
The last point about ETFs comes
from US analyst Dave Nadig, from Factset. He commented, “I can’t believe how strong fund flows into Mutual Funds still are in
Canada…In the US, that ship sailed about a decade ago, with ETFs the
beneficiaries of the shift.”
Here’s your challenge.
If you are unfamiliar with ETFs,
make an effort to learn about this popular investment option. A great amount of education is available from
various sources. My role as your
financial planner is to point you in the direction where you gain the knowledge
necessary to make an informed decision about ETF investing. Choosing core-type
broadly diversified ETFs (notice the lingo) is the same as if I said, choose
“plain
vanilla, nothing fancy, ETFs”. The
frightening part is another kind of ETFs is wandering into the market place. Embedded-Strategy ETFs (ESETFs) encompass a
broad range of strategies which may lead you down a different path with
undesired risks.
This “stuff” isn’t always easy to
understand at the onset. The more you immerse yourself in the information, the
more you will grasp tidbits that will eventually make sense. Repetition is helpful. Exposure to articles, webinars, and
conversations with financial advisors and financial planners will increase your
understanding. When you reflect on your
life, you will see many things in your past that you didn’t master at the first
crack, (riding a bike, using a computer, or driving a vehicle). Be patient but be persistent. Learn.
Here are places to learn more about ETFs.
1. Credential
Direct, an online trading brokerage firm, invited Dan Bortolotti, in September,
to lead the educational webinar, 7 Steps to the
Perfect Portfolio. Dan is known for
his infamous blog posts at Canadian
Coach Potato and numerous articles for Money Sense magazine. Dan walks
investors through the process of planning, building, and maintaining a low-cost,
diversified portfolio of EFTs. You will be grateful for the time invested in
this session.
2. Another
article worthy of your time is “Make
an Informed Decision When Investing in ETFs.” Kevin Rusli, a lawyer, provides a list of five
topics to discuss with your financial advisor prior to investing in ETFs. Kevin is a partner in the Investment Products
& Asset Management Group at Blake, Cassels & Graydon, LLP and regularly
advises asset managers.
3. I
cannot end this blog without adding a book to your homework assignment. At the onset of the financial crisis of
2008-2009, I recall Danielle Park making her national TV debut and instructing
people to “run for the hills”. Well, that’s
not exactly word-for-word what she said. She was advising investors to move
from the equity market to cash. The title of her book speaks for itself. Juggling Dynamite provides an
inside view of how to protect your investments. In her book, Danielle Parks opens Chapter 13~~Building and Preserving a Rich Life~~
with a quote from Henry Ford. “If money is your hope for independence, you
will never have it. The only real
security that a man will have in this world is a reserve of knowledge,
experience, and ability.” My
perspective from this message, “Arm yourself. Learn all you can."
