March 3, 2009, 6:00 am

How to Start Investing – A DIY Growth Investment Strategy Part 2

by: The Financial Blogger    Category: Financial Planning,Investment, Market and Risk,Trading
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– Determine your investor profile

After reading the first post of the “DIY Growth Investment Strategy”, you have a pretty good idea of how much you need to put aside if you want to retire comfortably. However, you may have made your investment projection with an investment expected return of 6,5% but you would like to invest the majority of your portfolio in a bond ladder. If it’s the case, you will earn approximately 4% – 4.5%. Now, go back to your retirement calculator and plug the new number in. You probably increase your periodic investment by a few hundreds, right?

This is why it is so important to determine your investment profile and buy financial products according to the correct asset allocation. Depending on banks, they created 5 or 6 investment profiles. I won’t named them (I’m too afraid of the trade mark issue 😉 ), but the asset allocations will look like this:

100% fixed income (money market fund, government, provincial and company bonds, certificate deposit, etc.).

This type of asset allocation is used for short term project such as putting money aside to buy a house or to go on vacation next summer.

80% fixed income, 20% equity (Canadian, American, International stocks or mutual funds).

We will often see this type of investment portfolio for retiree since they are withdrawing money from their account and they don’t want to risk too much.

60% fixed income, 40% equity

This is where we start the balanced portfolio. They give you a good “balance” between fixed income and equity. I noticed that most clients will go toward this kind of asset allocation.

40% fixed income, 60% equity

note: many “balanced funds” offer an asset allocation of around 50% / 50%. Technically, anything between 60/40 and 40/60 can be considered as a balanced fund.

30%-25% fixed income, 70%-75% equity

We call usually call this one growth portfolio. This is made for people who are not afraid of the market fluctuation.

10%-0% fixed income, 90%-10% equity.

This is obviously the most aggressive investors who would prefer such asset allocation. You are directly invested in the market with its good and bad sides.

In order to know what to buy and which asset allocation to choose, you need to start from something. You can find an investment profile questionnaire on any good bank websites. You will usually find it under “investment products or solutions”. Lookup for tools and calculators and you will find a quick questionnaire that will tell you which kind of investor you are. It is important to answer the questions while thinking of you goal. For example, if you think about retiring, you should consider that a drop of 10% of your portfolio is acceptable as you will not touch your money for a good 20 years or more. At the end of the questionnaire, you will end-up with an investor profile along with a suggested asset allocation.

Here are a few places where you can get such questionnaire. I suggest you do 2 or 3 of them to make sure you end-up with the correct asset allocation:

Canadian Banker Association investor profile

National Bank investor profile

Scotia Bank investor profile

US Bank investor profile

Rabo Bank investor profile

Tomorrow, we will look at options you have according to your investment profile.

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In my past experience I found that risk profiles investors tend to believe they can handle more risk than risk profiles reveal and in bear markets it is very hard to get them to stick with the plan.

by: The Financial Blogger | March 3rd, 2009 (12:53 pm)

I agree with you, especially in situation such as 2008-2009. Balanced portfolio are designed for fluctuation of 5 to 10%… they almost did -20% last year…

the key is to stick with the plan ;-0

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