Investment Planning - Strategies for Life

Choosing an investment should be based on your investment goals. Cash investments provide greater safety of principal and a higher current income, while equity investments have more growth potential and provide a better inflation hedge.

Your tax exposure with equity investments may be lower because of dividends and capital gains being taxed at preferred rates, while cash investments may be fully taxable.

Even professional money managers who devote all of their time and resources to studying markets will often miss market ups and downs.

Individual investors who try to pick the best time to be in or out of the market are usually less successful than the professionals.

By adopting a long term "buy and hold" strategy, individual investors can avoid one of the major risks of the market timing - missing the market's best performing periods.

The effect of missing even a few of the best performing months can be dramatic on your investment returns as shown on the chart on the next page.

A $10,000 investment in the S&P/TSX Total Return Index over the 10 year period from 1995 to 2004 would have grown to $26,127 if you had stayed invested during the entire period.

If you missed just the best 3 months performance of the S&P/TSX during this period and put your money into 3 months T-Bills instead, your investment would have only grow to $19,343.

Missing the best 6 months resulted in growth of $15,530 while missing the best 12 months resulted in growth of only $10,595.

A $10,000 investment in the S&P/TSX Total Return Index over the 10 year period from 1995 to 2004 would have grown to $26,127 if you had stayed invested during the entire period.

If you missed the worst 3 months performance of the S&P/TSX during this period and put your money into 3 months T-Bills instead, your investment would have grown to $41,704.

Missing the worst 6 months resulted in growth of $53,142 while missing the worst 12 months resulted in growth of $79,841.

Dollar cost averaging is a method of making regular investments (monthly, quarterly, yearly) of the same amount of money. By making investments at regular intervals you will achieve the above stated under 1 to 4.

Dollar cost averaging does not guarantee you will make a profit or protect you against losses in a falling market. This strategy is most effective when shares are purchased in both market ups and downs.

Cost of shares purchased = $600
Market value of shares = $1,056 ($15 June share price x 70.4 shares)

Average cost per share = $600 / 70.4 shares = $8.52
Average market price per share = $58 / 6 purchases = $9.67

Asset allocation is a tool designed to maximize the return on your portfolio while minimizing the risk. It involves structuring a diversified portfolio from three broad asset classes - stocks, bonds and cash - based on your income and growth needs and your risk tolerance.

A balanced portfolio with fixed percentages for each asset category (stocks, bonds, cash) is selected based on the investor's growth and income needs and risk tolerance. Since each category will grow at different rates over time, the portfolio percentages will change from the initial allocation.

The portfolio is then rebalanced to bring the assets holdings back in line with the original fixed percentages. The same allocation is maintained over time despite changing economic and market conditions.

A balanced portfolio is selected based on the investor's growth and income needs and risk tolerance. Under tactical asset allocation, the percentages for each asset category (stocks, bonds, cash) are altered over time on the changing economic and market conditions.

Research has shown that choosing among asset classes has a much greater impact on your investment returns than the specific investments you select or how well you time the market. The study cited below* concluded that asset allocation accounted for 91.6% of a portfolio's investment return.

*Source: Brinson, Singer, Beebower, "Determinants of Portfolio Performance II: An Update, "Financial Analysts Journal, May - June 1991.