Create Wealth – Page 3 – Adviceon Library

How simple is it to invest in segregated funds?

You may want to consider using segregated funds when the market is offering low snail-paced returns on guaranteed term deposits.

The following advantages, make investing in segregated (seg) funds simple:

Invest in stocks when interest rates are low Interest rates on term deposits pay a very low percentile return per year, whereas the stock market can grown rapidly.
Simplified investing You can select an industry or sector, for example, without having to hand-pick each security. The segregated fund manager does this selection process for you. You don’t have to be assessing which stock or bond may or may not be a winner. A seg fund manager is trained to weigh out all the market contingencies which can affect investor performance.
Low-cost diversification A small monthly purchase plan can have you moving forward in your segregated fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
Dollar-cost averaging Dollar-cost averaging allows you to buy more seg fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
Flexible access to your money You can sell your seg fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
Portfolio balancing Choices include the full range of seg fund types and strategies which are available to use such as strategic balancing of your funds holdings.
Automatically invest You can automatically invest more in segregated funds at any time or use dollar-cost-averaging.
Professional management Segreaged funds have active professional management watching over your investment
Segregated funds also offer some certainties Some guarantees are offered or optional as far as principal retention goes or the investor, which are quite different than segregated funds, which may differ according to the segregated fund policy.

Talk to your advisor about how you might benefit from the use of seg funds in your investment planning strategies.

How can Segregated Funds benefit an investor?

How Segregated (Seg) Funds Work

Segregated (seg for short) funds are professionally managed investment funds holding pooled investments, with a life insurance component.

With predefined investment objectives and policies, a professional manager selects the assets the seg fund will hold. Many individuals pool their money for the purpose of investing in stocks, bonds, and other kinds of securities by purchasing shares or units. The price per unit fluctuates in relation to the market price of the securities the fund holds.

Fund investors get a share of the fund’s ongoing investment earnings or losses, based on the number of units they own. When they redeem or sell units, the redemption value or price they get depends on the number of units redeemed, the unit price at the time of redemption, and any applicable fees.

The advantages of segregated funds during market turbulence Seg funds can offer growth when the market increases in value. Seg funds allow investors who have only a little capital or limited investment knowledge to invest in a diversified portfolio of assets. Individual investors share the expenses of running the fund, such as employing a professional manager who buys and sells assets. They are very liquid; in other words, individual investors can cash out at virtually any time by redeeming their units with the fund issuer.

1. Diversity can reduce investor risk The more diversified a fund is, the greater the mix of assets it holds in its investment portfolio. As with all investment products, there are various kinds of investment risk, such as inflation risk, declining market risk (referred to as bear market), default risk, currency risk, interest rate risk, and political risk.

2. Safeguards certainties The most compelling reason for buying a seg fund policy is capital protection. While GICs also offer a guaranteed return, they are limited in their growth potential. Since seg funds are invested in capital markets, they have a greater capacity for appreciation. Segregated fund contracts have special features offering certainties over and above those offered by other investment funds.

3. A maturity benefit The seg fund’s contract at maturity date, or at death, may guarantee a minimum percent of your invested capital to be returned (by a life insurance company). Typically, at the time of maturity set in the contract, some companies permit a resetting of the new guaranteed capital amount and a renewed maturity date.

4. Money security options Regardless of market performance, at maturity you are entitled to receive most or all of your initial invested capital back (or more if the market has performed well), less any withdrawals. Note: Examine the conditions of the contract.

6. Estate planning benefits As with the certainties of the maturity benefit, some insurance companies allow individual contract owners to reset the death benefit periodically to lock in increases in the value of the segregated funds the contract has invested in, equal to at least a percentage of gross contributions.

This benefit is payable directly to the beneficiary of the contract upon the death of the insured person. If a beneficiary is named and the death benefit paid to him or her, monies can be protected from probate, government estate administration fees, and any attending legal fees incurred.

7. Why seg funds appeal to senior investors This is of particular value when an investor is nearing, or has begun, retirement and cannot afford to lose capital invested during a volatile market. Even if the fund’s actual unit value declined, your seg fund investment contract may guarantee that you will get back a very high percentage of the initial capital invested.

Also, at maturity, you will get back the guaranteed minimum amount or, if the market has risen in value, a higher amount. This means less worry, as you will know with certainty the minimum amount of money you will have when the contract matures (some return up to 100% of the original capital invested). This is particularly good for those who intend to pass the money on to the next generation if it is not needed for income or emergency during any period of market devaluation.

8. One or more beneficiaries Segregated fund policies allow you to designate one or more beneficiaries, much like a life insurance policy. At the time of your death, the proceeds from your seg policy may not be included with the rest of your estate. The proceeds from your segregated fund policy pass directly to your beneficiaries.

Note: The provisions of a seg fund contract, such as the guarantee periods and the MER, may be dependent on age and insurance underwriting. There are many new seg funds being developed offering various guarantees (and periods related to those guarantees). You should note that individual contracts have their own restrictions on the age to which you can invest. In addition, the level of payout can vary depending upon your age.

9. Potention creditor-proof investments Depending on jurisdiction, some seg fund policies might be protected from creditors for an investor’s lifetime if the policyholder ever faced a lawsuit or bankruptcy. This is because seg funds include insurance-related contracts. There must be an irrevocable or preferred beneficiary (or multiple preferred beneficiaries)—a child, grandchild, parent, or spouse—named on the contract. This can be beneficial for self-employed small business owners who take more financial risk (such as consultants, dentists, lawyers, and accountants). Equally, since those who own a significant number of shares in a corporation or serve as an officer or director of a corporation may be liable if lawsuits are filed against that corporation, they also can benefit from this creditor protection. For example, a sexual harassment or environmental lawsuit could affect a small business owner or corporate officer. Losing a serious lawsuit can put both your business reserves and personal investments at risk.

Note: Subject to certain restrictions, these strategies should be discussed with a qualified financial advisor. The creditor protection is allowed as long as money was not placed in the seg fund with the intent to protect the capital from an impending financial crisis. In most cases, however, the creditor protection is valid when the lawsuit or bankruptcy (in the case of both personal and business situations) is unexpected. Recent court rulings have shown that creditor protection may not always apply. You should seek legal advice to determine under what circumstances (especially intentional quick-fix shielding of money) a seg fund policy might not offer such protection.

Seg funds are best suited for the investors involved in long-term wealth creation and preservation of capital.

Capital protection appeals to a variety of people, including:

• Everyday investors who are conservative and yet want higher returns than GICs offer;
• Pre-retirees who need growth but can’t afford to lose money;
• Seniors who require estate protection and certain capital guarantees; and
• Businesspeople who have exposure to personal liability and want to protect their assets.

What is an investor risk/reward trade-off?

Understanding investor risk/reward trade-offs.

The risk/reward concept states that the higher the risk of a particular investment, the higher the possible return. Although there is usually risk with any equity investment, assessing just how much risk your portfolio should carry is essential. Risk involves the potential for gain or loss of monies invested.

Many people take on more risk, hoping to achieve a higher return without regard to cyclic markets. If an investor expects higher returns based on the past, he must understand that markets can go through gain and loss periods.

In theory, many think that the higher the risk, the more you should receive for holding the investment. With cyclic markets, this is not necessarily true. Conversely, in theory, the lower the risk, the less you should receive. Unfortunately, the dilemma is this: a higher potential for above-average returns comes with a higher risk of below-average returns. Conversely, safer investments, such as cash and bond instruments, have a lower potential for high returns and a higher potential to not keep up with inflation.

While choosing investments for your portfolio, you need to be conscious of risk/return trade-offs and risk tolerance. Different types of securities have associated levels of risk. Every investor’s goal should be to find a balance that allows you to not experience undue anxiety in the markets and achieve your long-term financial goals at the same time.

Media chaos causes investors to fear investing.

Psychological fear can hold one back from investing. People behave according to their mindset. Some of the following thinking can keep one from not putting their money to work by buying equity investments such as equity investment funds. If you have said any of the following statements, you may be experiencing investor anxiety:

“I think the markets will pull back and lose some value.” I will wait and invest when this happens.” This viewpoint is based on the need to confirm a belief before acting, where the investor must minimize any evidence that contradicts their belief mantra. The media frequently offers terrible news if the market has a low day, and it is easy to hear only this information while filtering out other positive news. This process can paralyze an action plan to invest for years.

“I want to sell the investment if I see a profit.” People might sell an investment early once it rises in value for fear of future loss. Aside from considering taxation, once sold, an investment with either a gain or a loss ends any future potential of that investment rising in future value. To avoid this mindset, one should have a disciplined written plan for buying and selling assets that can be frequently referred to.

“The market is bound to correct and head down because it is at a peak.” Anchoring our point of view occurs when someone assigns a reference number, like a 52-week high or low, to compare the price of an investment stock, the unit value of a fund, or a stock exchange’s last peak value. Past price movements are poor predictors of future price performance. When you invest for the long-term for retirement, using past price patterns is comparable to driving your car while gazing in the rearview mirror as a reference.

Conclusion
The above emotional mindsets can ruin or avoid forming an otherwise excellent investment plan. They can help you develop a risk tolerance profile and investment plan. Please work with your investment advisor to help you understand how the mind can trick us into failure simply by not investing over the long term.

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Benjamin Graham

What is the value of good financial advice?

A good financial advisor will not only assess your current fiscal resources. They will also outline a plan to achieve your goal for a sound financial future.

As time passes, so does your opportunity to build a solid financial future. Suppose you are to develop an investment portfolio and a significant net worth. Will you personally determine how to purchase stocks among the international markets, analyse investment funds, and sidestep economic pitfalls as you invest all by yourself? Will your financial stability be based on our government’s pension plan? Did you know that its maximum benefit covers only 25% of the average Canadian’s wage?

Why involve an advisor in your financial affairs?

The majority of Canadians seek specialised professional help. Their work is to guide you towards achieving financial independence. An advisor’s work is to help you systematically achieve your goals and make your life dreams come true.

• An advisor must analyse your current financial resources to define appropriate financial strategies that are best suited to your current and future personal priorities, retirement goals and risk tolerance.

• Calculating your current net worth and cash flow after taxes is also essential. With a net worth statement, a financial specialist can identify any opportunities or problems relating to capital gains, life insurance, disability, and critical illness insurance needs versus your present coverage, investment growth, income taxation, retirement income needs, employee benefits, and potential capital gains tax liabilities for your estate. Parents must also assess educational funding needs and plans for any dependent adult child and special health care such as Long Term Care (LTC) for parents.

• Establishing a written plan sets forth specific solution-oriented recommendations and will enable you to see how ordering your finances can benefit your overall lifestyle.

• To achieve your goals and objectives, acting on the plan’s recommendations will be necessary. Building a solid portfolio of investments tailored to meet your goals and risk tolerance is essential for your future financial independence.

• Appropriate life and disability insurance coverage will ensure your plan meets family income needs, business debt or buy-out payments, and any tax liabilities for your estate.

• Finally, an advisor will establish a periodic review to monitor and refine your plan to accommodate birth, marriage, illness, or retirement events.

Can I mitigate risk in a diversified equity fund portfolio?

What is Diversification?

Diversification is a strategy by which you create a portfolio that includes several investments. You make investments over more stocks of different companies or securities, such as bonds or mortgages, with the objective of reducing risk.

Because of their higher risk, equity funds have historically offered the most promising growth over the long term, as compared with other funds that focus on assets such as bonds and cash. In markets that are volatile, how can we reduce the overall equity volatility over the long haul without losing the potential for gains?

In a volatile market, if you shift the asset class out of equities into bonds and/or cash prior to resurgence in the overall market, you can lose by trying to automatically time the market. Why is this? Most stocks increase in value through a new bull market period which can begin quickly over several days. By being out of the equity market (in this case at the wrong time), you could lose the gains you might have achieved by being more heavily invested in equity funds.

Understand geographic diversification.

Global equity markets are more closely correlated than they were five or ten years ago, reacting to world events in a more similar fashion. Technology has connected our world to make it a smaller place, so what happens today in China’s market can impact economies everywhere. And more importantly, global diversification offers scant protection from market crashes when correlations become indistinguishable, such as during the financial crisis of 2008–2009.

However, it is still prudent to have portfolios that offer geographic diversity, rather than focusing exclusively on a single geographic equity market.

How can I get serious about successful investing?

There are four basic types of people, each with differing mindsets when they approach investing; the Sideliner, the Gambler, the Hobbyist, and the True Investor. If you want to be a serious and successful investor, you must mindfully recognise the erroneous attitudes of the Sideliner, the Gambler, and the Hobbyist.

The Sideliner Sideliners are fearless in taking action as long as they are in the audience and won’t ever get bruised. They shout, stand, and clap, loving the action of a bystander. Sideliners love the excitement of stock market news and the investor’s game. They often look at how the indices, a stock, or a fund performed. Observation alone never gets you in the game of investing. Sideliners may feel it is dangerous in the arena of the investor.

The downside Sideliners are analytical and love running numbers hoping to reduce most risk by comparing return percentages. Yet, out of the paralysis of information, fear sets in, and they make minimal purchases to play it safe. The sideliner is a silent observer possessing discernment for weighing facts, yet witnesses other people’s investment success without taking action to enjoy investing personally.

The Gambler These people are confident thrill seekers who enjoy the casino, horse race, or scratch-and-win tickets, unlike the Sideliner. They confuse play gambling with risk tolerance, spend recklessly, consider that investment principles are for misers, and don’t seek the guidance of an advisor and consequently have a retirement portfolio that looks broke.

The downside The Gambler is comfortably numb and usually gets punished with frequent losses for taking above-average risks. They might buy an investment based on listening to the talking heads in the trading media, buy penny stocks, or low-priced failing company stocks — all based on uncredentialed hearsay. Because they think they might make some fast money, they believe they are investing but are not. Rarely does a Gambler stay invested for the long term.

The Hobbyists They buy things and investments based on their emotional value more than on investment value. As collectors, they buy for popularity status, notions of status, aesthetic gratification, and pleasure.

The downside Hobbyists, when excited, may jump to buy anything referred to them by word of mouth or a talk show host. They may own all the British Royal plaques on a wall or the top “500 must-see movies before you die”. Financial perspective gets lost because several investment funds may be bought by virtue of historic popularity instead of the potential for future gains. Because collections have been known to go up in value, they think they are investing. They do not understand the old Latin proverb “Non Quantum Sed Quale”, meaning it is not the quantity but the quality that counts.

The True Investor Utilizing an advisor’s wisdom, they buy suitable investments. Unlike Sideliners, they act. Unlike Gamblers, they minimise risk. Unlike Hobbyists, they buy based on investment value.

Investors are defined by their knowledgeable expectation for financial gain employing a principled process to minimise financial risk. Many also make it their practice to utilise professional managers and advisors when investing.

Actual investors act with a vision to achieve excellent returns on their investments while exposing themselves to mitigate the risk that suits their investor profile while enjoying the actions that lead to real financial success. It all comes down to how you think and whether you’re considering investment action.

What income advantages can segregated funds offer?

Segregated fund policies are unique insurance-related products with some guaranteed investment features that can benefit both your capital and income for years.

· Premiums are paid to the insurer for an insurance policy. These monies are allocated to segregated fund investment options.

· An investment manager then invests these premiums in the segregated fund. He invests in stocks, bonds or other assets, according to the fund’s stated investment objectives.

· Through the insurance policy, you can take advantage of unique benefits that can bring more certainty and flexibility to your financial strategies.

· Where a segregated fund invests in aggressive growth equities, there are some unique provisions that risk-averse investors may prefer. Often a portion of the capital invested may carry an agreement to be returned after the timing of maturity. Check the contract provisions which often include reinvesting options at certain junctures of time which also should be understood.

Guaranteed retirement capital and income

· Lifetime guarantee on your income Some policies offer some control over your retirement income by providing you an income for life. With a lifetime income benefit option, your income may not decrease regardless of how the segregated fund performs unless excess withdrawals are taken. This may give some protection against the risk of outliving your money, market volatility and inflation.

· Maturity guarantee on your capital Segregated fund policies provide some certainties to return a percentage of the premiums paid into the segregated fund (less a proportional amount of redemptions), depending on the product selected.

Make sure that you pay careful attention to the contract terms and time periods relating to any mention of a certainty regarding the return of a percentage of premiums paid. Go over this carefully with your advisor.

What are the warning signs of over-indebtedness?

Too much debt can threaten your future and destroy your peace of mind. Here are five warning signs to watch for:

You are spending more than 20% of your after-tax earnings on debt. Total up all you owe, excluding your mortgage, e.g. student loans, car payments, and credit card bills. Now total up how much of your after-tax income is dedicated to servicing this debt.
You are paying for daily essentials with credit instead of cash. Consequently, you are close to the credit limits on your cards. Credit cards charge notoriously high interest rates, which is exasperated by compounding when credit cards are not paid off monthly. This can also increase your actual gross cost of goods purchased.
You are deferring important expenditures. You may need maintenance work (on your car, your home, and your teeth) as you struggle to get by.
You seem to spend your paycheque the day you get it. This may be a sign that you’re also over spending, an activity that leads to debt.
You are not differentiating between ‘good’ versus ‘bad’ debt. Good debt is money borrowed for productive purposes to help generate wealth over time (such as an education, build a small business, or purchase real estate). Fancy cars, expensive vacations, restaurant meals, and over-indulgent gift giving may indicate a lifestyle that for many do not justify the average household’s paycheque.

If you are in serious debt, consult a debt counselor who will arrange a repayment schedule with your creditors.

What are the most common mistakes of fund investing

Here are several common mistakes that investors can make:

No clear investment goals. Determine what you want from your mutual fund portfolio. This will help you choose the right investments to realistically meet your future expectations.

Trying to time the market. Don’t get caught timing the market – when influenced by either of the two emotions – greed or fear. Greed compels people to buy when the stock market (and a fund’s unit value) is high. Conversely fear causes many to sell when the stock market’s value (and a fund’s unit value) is low. Make regular investments to benefit from dollar cost averaging (DCA) to level out the peaks and valleys of the market. It is time in the market, not timing, that counts.

Not selecting investments with a long-term track record. Don’t just look at a mutual fund’s most recent performance. For a long-term investment, it is important to check out performance over one, three, five and ten year periods.

Shopping for a specific mutual fund, not a family of funds. The fund you select today may not be the best one for tomorrow. By choosing a reputable family of funds, you ensure that you can switch in the future with minimal cost. A family of funds also allows you to move into a money market fund if the market is reacting in a state of fearful unrest such as prior to the debt crisis and the current continuation of the debt crisis in the Euro nations. Note: Fear is measured by a special volatility index called the VIX, which when above 40 can precipitate market sell-offs which can also affect a fund’s performance. It takes great skill to navigate the market (and fund investing) at these times.

Investing too conservatively. Even if you are in your 50s, you still have about 30 years of investing time ahead. Look at investing some of your money for growth by using equity funds while keeping some in bond funds and dividend funds, and/or balanced funds.

Not seeking financial advice. Making investment decisions can be confusing and intimidating. Unless you have exceptional knowledge of the market, your portfolio could be healthier with the help of a qualified financial advisor.