This is where your finance takes place

Some of you are probably reading those lines thinking “well I’m a small investor and I made double digits returns more than once, what’s his problem?”. Bear with me for a few more lines and you will understand my thinking.

Small investors are fairly conservative in general. The problem is not that they do not want 10% returns every year. The problem lies within their deepest fear of loosing everything. They are usually not ready to take a -15% hit in order to get three consecutive years of +10% and more.

When you look at the S&P500 or the TSX over the past 50 years, you will find out that it seriously dropped a few times. This is exactly what small investors are afraid about. Since they have limited knowledge of the market, they tend to think that the market will drop down to 0 every time they see market fluctuations.

They will most likely sell everything when the market is at the lowest point or simply invest in more conservative investment solutions. Unfortunately, conservative portfolios will do 5% to 7% at best. On the other side, they should technically never show a negative 10% return.

I am writing this post for small investors that might have a plan done by a financial advisor with 10%,11%,12% projected annual return. If a financial advisor is predicting such high annual returns, ask him to show you the price history of his mutual funds. He is probably not lying to you, but he might not tell you about the market fluctuation within your investment horizon. You can go -20% and then +51% from one year to another and it still makes an average of 10% for two years. However, your heart may not survive the rollercoaster if you are a more conservative investor.

For those who are making good returns without a fortune, it could be related to your good financial knowledge or your high risk tolerance. Unfortunately, small investors usually lack both of them and this is why they turn to financial advisor to advise them.

I think it is actually to good thing to do. However, you should never follow one’s advice blindly. Ask question and be sure that you understand where you invest your money. This is the most important part about investing.

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image source : ifa.com 

Do you remember the first time you wanted to invest money with your banker or financial advisor? He asked you to fill in a “stupid” questionnaire of 5 to 10 questions that took you 2 minutes to complete. You gave it back probably without knowing that these 2 minutes of your life will influence your whole retirement plan (and your probable drug addiction to sleeping pills!).

        Well this questionnaire was in fact to determine your investment profile. They are created by specialists in finance and psychology to in order to provide you with the most accurate investment profile in regards to your situation, goals and risk tolerance. Unfortunately, this document is as good as the time and involvement you will take to complete it.

        One of my readers, Dom, recently asked what he should do since he made only 2% of return for the past 3 years. He mentioned that he invested money after meeting with a financial planner. The first thing that came into my mind was to tell him to look at his investment profile before doing anything else. Most people will feel very courageous when they look at their “small” return compared to what the market has been doing for the past 3 years, especially if the market has been sky rocketing.

        Everybody wants to make good money and make a good return, that’s the easy part. The not so easy is to determine if you are willing to pay the price to get those kinds of returns. The price to pay is obviously incertitude. If you take greater risk, you should earn greater returns but it is normal to have bigger losses at one point in time as well. The question is not about how much you are willing to earn but more how much are you willing to lose in order to hope earning great returns on your investment?

        By taking the time to complete your investment profile with a financial planner, you will be in a better position to put your money where you will feel comfortable over the long run. Since most investors lost money over the past two months, this should be the perfect timing to take a look back at your investment profile and maybe adjust it according to your new perception.

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This is definitely a period of high volatility. If you can’t sleep at night because the market is going up and down, then wait until it become stable again. For those who don’t mind having more spices on their plate, this could be a good entry point for you. The recent dips could create great buying opportunities on many levels.

Both the US and the Canadian government are getting very implicated in order help the economy bouncing back. Over the years, they have become more proactive and they certainly do everything in their power in order to avoid a huge recession. Therefore, interest rate should continue to drop and people should start buying again. I wish I would see them saving for once, but that is another story!

While you will always find economist to predict the end of the worlds, I prefer to trust those who says that it is not so bad. Most recessions are coming with a 15% to 20% loss on the market. Then, we are almost at 15% considering the TSX. Therefore, the laws of statistics are telling us that we are about to stop suffering and start getting good returns again. I would say that 2008 will not be the best year to invest but that 2009 will definitely be a good year for investors.

We will luckily learn from our mistakes and banks will become stricter when it comes down to lend for a mortgage. In an ideal world, people will start saving again in prediction of their retirement. Unfortunately, too many people think that the government will do something for them once they start working. Please, don’t be part of them and gather you money over the next months so you can be ready to go back on  the highway once your engine restarts!

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