Investment Concepts
Starting to think about investing
Get off the Sidelines
Investing sooner can make a big difference in the long-term growth of your investments.- Purchasing power
To maintain your power to purchase the same items in the future, your savings should generate returns that, at a minimum, can keep pace with inflation. Investing early can help.
- Power of Compounding
Compounding refers to the ability of an investment to generate earnings, which are then reinvested in order to generate their own earnings. This can make a huge difference in savings over the long-term.
- Market timing
Many of the market’s most significant moves happen in short, unpredictable spurts. You could miss out on crucial gains, which typically come after dips in the market, by being on the sidelines for even a few days.
- Long-term growth
Negative events in the media may cause fear in investors who then stay on the sidelines at the expense of their long-term financial goals. Market volatility is normal and expected, but long-term growth can beat short-term fluctuations.
Investing for the Long Term
Negative events in the media may cause people to react emotionally and lose sight of their investment strategy. In the past three decades, there have been a number of events that may have kept investors on the sidelines.
When you look at the big picture, as of December 2015, over the last 30 calendar years, the S&P/TSX Composite Index gained approximately 864% or 7.8% per year and 21 of the 30 years had positive returns.
Making investments
Diversification
Diversifying across a number of asset classes and geographic regions gives your investment portfolio a built-in ability to potentially benefit from each year's top performers, while seeking to reduce overall portfolio risk.
As an example, following the infamous market crash of 2008, most asset classes achieved positive returns in the immediate aftermath, giving credence to the stay-invested-for-the-long-term philosophy. Many investors could have recovered a majority of their 2008 losses in a relatively short period of time if they remained invested in a diversified portfolio of equities and fixed income assets.
Tax-Efficient Cash Flow
Ensuring your portfolio is invested in the most tax-efficient way is a key consideration when planning for your future. If you are seeking cash flow, tax-efficiency is also paramount. The good news is that there are a number of income options to choose from.It's important to understand their differences as they are not treated equally from a tax perspective. Consider the after-tax net-return value of $100 from these different types of investment income held in a non-registered account:
After-tax net-return value of $100
Surviving market events
Emotional Investing
Have you ever felt a thrill from purchasing a new investment? You begin with high hopes for the future, but as time draws on, the peaks and valleys that your investment undergoes as a result of normal market movements make you uncomfortable. Occasionally, your discomfort leads you to sell your investment simply to regain a sense of control. If this situation sounds familiar, you are not alone. Many investors let their emotions guide their investment decisions. However, emotional investing may influence us to buy and sell at inopportune times and eventually lose faith in our own financial decisions. Break the cycle and consider investing for the long term.
Reaching retirement
Sequence of returns
While no one can predict when volatility may strike, markets have historically bounced back over the long-term. For retirees however, periods of high volatility can have a serious impact on their savings if the sequence of returns is unfavourable.
If a retiree is withdrawing five percent of their savings per year, then the asset base will likely decline over time (depending on overall returns). As a result, investment returns that occur at the beginning of decumulation impact a greater number of assets, thereby setting the stage for the portfolio's future income flow. On the other hand, the effects of investment returns in later stages of decumulation are not as pronounced as they impact a smaller amount of assets.
Timing matters. The sequence of returns at the beginning of retirement often has the greatest impact on future income flow. Take Kim and Dan, for example. Each are withdrawing $15,000 per year in retirement income, and each earns a similar average return over ten years. However, Kim’s returns are favourable during the first few years of retirement while Dan’s are not. Dan’s unfavourable returns early in retirement, combined with his need to withdraw income, has left his retirement account significantly depleted.