When the investment industry mentions the term ‘balanced portfolio’, many investors interpret it as a low risk approach to investing. Yet, many people don't know what balance they have and whether it's the right balance for them.

They trust the balance they receive, and are unsure how to confirm if it is the rightz balance for them. Thus, when the balance is inappropriate, clients become disappointed, which is a disservice to the client and clients as a whole. It also strains the integrity of the industry.

In this episode, I will share with you the basics of the balance in a portfolio. The next few episodes will expand this topic further.

The word “balance” means the client portfolio has a mix of fixed income and equity. These terms are industry jargon, which makes it difficult for clients to understand. So, in simpler terms, balance typically means there is a mix of bonds and stocks in the client portfolio.

I will also share another simpler term for us here and that is the word ‘return’. You as a client think in terms of ‘return’ while the industry uses terms like gains, yields, and interest. While industry terms are more accurate, they interfere with the client’s understanding. For my discussion in this episode and this podcast, I’ll use the term ‘return’ as gains, yields and interest all contribute to your return.

When you have a long period to invest, stocks are more suitable. When you have a short period to invest, bonds are more suitable.

Where you fit between these two ends is influenced by your risk tolerance, which I will discuss in 2 episodes from now, where you are in your investor life stage (like how close you are to retirement), and other factors, which I’ll discuss indirectly throughout this podcast.

At this moment, you want to know why the industry leans toward stocks or bonds as this helps you understand the balance given to you.

When you have a long time to invest, you most likely prefer to have more return on your investments. Thus, you want to invest in something that gives you more return and you will accept the rollercoaster ride that gets you there. This is what you get from stocks.

When you have a short time to invest, you most likely prefer to have more stable investments that give you a smaller return. In other words, you want to invest in something that gives you principal protection and a smaller return.

You get principal protection from individual GICs and individual bonds you hold to term with caveats your advisor will explain to you. For example, if you sell a bond before it matures, like indirectly through a mutual fund, the principal protection begins to decline.

I'll use an everyday term to explain this. It is like supply and demand. When you need to sell a bond, the demand might be high or low, which means you might sell it at a discount.

Just so you know, when you start thinking you need to liquidate some assets in the next few years, let your advisor know because how your advisor invests for you might change.

As a client, you want to know the value set aside for short-term investing and you want to know whether you get principal protection or not.

For the longer time frames, you want to know the weight of stocks versus bonds in your portfolio. This is a good topic for discussion with your advisor.

With regards to stocks, I will share one idea with you. Some people believe a larger roller coaster delivers the largest return. In truth, there is a sweet spot between the kiddie rides and the largest roller coaster. It’s broad though not as broad as you might think. It also ebbs and flows though not as much as you might think. You will get a better feel for this through some of the other episodes.

Contact me at informedcanadianinvestor@gmail.com

In the investment industry, the word risk means there is a potential negative impact on your financial future.

The word risk covers a broad spectrum of topics, like currency, market and liquidity risks. Biases like the home country bias are also risks. With so many topics, the word risk encourages worry.

When I started working with engineers, I’ve found a great way to explain risk that gives clients far greater clarity and confidence. It is as follows.

In the 1990s, the engineering profession shifted from the term risk to the terms hazard and risk. By separating hazard from risk, engineers gave their clients greater transparency.

This is what the terms mean:

A hazard is something that might happen and risk is the probability of that hazard happening.

For example, if your portfolio had only one stock within it, a hazard is that stock might fall in value dramatically, negatively impacting your financial future. If that stock were a penny stock, that risk or probability would be higher. If it were a blue chip stock, that probability would be lower.

When you as a client separate the hazard from the risk, you will become emotionally detached from the hazards and you will become objective with risk management. Then, you become a more informed client, which I value as this means we get to roll up our sleeves when we work together.

In your journal, reserve a page for the hazards and risks you know. This will go a long way to reduce surprises.

In summary, learn how to separate the hazard from the risk. Then, discuss the strategies applied to your investments to make sure how you invest is most comfortable for you.

Contact me at informedcanadianinvestor@gmail.com

I imagine you have completed the risk tolerance questionnaire. It is related to investing though I’ve had one client say it is like throwing salt over your shoulder.

The risk tolerance has a few questions and the client’s choices create a score. This score determines the weight of stocks and bonds this process recommends.

I like the risk tolerance questionnaire because I get to read my client’s emotions and level of objectivity, which helps me coach them to invest for their needs.

Let’s look at the three types of clients the risk tolerance identifies:

The first type accepts what the risk-tolerance process recommends.

As Investing is inherently intimidating, people often put a wealth of trust in their financial advisor and the advisory firm. They are taking a good step though they would benefit from learning more about investing. This is one reason why I made this podcast.

The second type of client has little interest in what the process recommends. Maybe the client wants all GICs or all stocks.

Through listening to this client’s emotions and objectivity, I know if they are the source of their own misfortune or whether they know the investment world. Said in a different way, I know whether the client will be a lot of work or whether they will be someone who rolls up their sleeves when we work together.

The third type asks the question, is this the right balance for me?

When I hear this question, it is a breath of fresh air. It means the client is engaged in their future and are seeking a partnership with their advisor instead of putting full trust in what they receive.

The objective of this episode is to encourage everyone who listens to become the third type of client. Ask questions. Few advisors can answer all questions, but those that go the extra mile to answer questions transparently are the ones that personalize their service to their clients.

Contact me at informedcanadianinvestor@gmail.com