Perspective on how we perceive time to invest

The neuroscientist, Dr Daniel J. Levitan, in his new book, indicates why our time remaining to invest may pass by faster as we age compared to when we were younger. He explains, “that our perception of time is…based on the amount of time we’ve already lived.” The Organized Mind, (Penguin Canada Books, Toronto, 2014)

Time from a financial perspective

Dr Levitan’s observation may apply mainly to the anxiety people can experience, as they age. As the time to retirement shortens, some may begin to fear that they might not have saved enough for retirement. Procrastination takes its toll on compounding investment gain potential. When looking at an average retirement age of 65, the two tables in this article reveal the serious truth about dwindling of time and the shrinking opportunity time remaining to invest as we age year by year.

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Graph Source: Adviceon©

Time offers the opportunity to create wealth

We need to sincerely acknowledge the fantastic opportunity that investment time provides the investor. Most people have had lots of time within which to invest. At age 35 we cross over the halfway mark of the time remaining to invest our hard-earned income the age of 65; at age 45 approximately only one-third of our time is left! Look at the shrinking opportunity of time in the second table, revealing how as time passes, the availability to have compound gains working for you dramatically decreases.

Some parents begin wisely investing for their children right after they are born and get time working on their side early.

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Graph Source: Adviceon©

Why does investment opportunity time get lost?

Greed and fear work against investing. Many people get caught up timing the market when influenced by either of the two emotions, greed or fear. Here’s why this never works. First greed compels people to buy when the stock market (and potentially a fund unit value) is higher. Conversely fear causes many to sell when the stock market’s value (and possibly a fund’s unit value) is lower.


When you can’t seem to begin investing, make regular investments in good companies to benefit from a method referred to as dollar-cost averaging (DCA) to level out the peaks and valleys of the market by purchasing at regular intervals of time. If the value of shares in a fund, go down, you buy more units. Conversely, if they go up, you buy less. It is time spent invested in the market, not timing the markets, that counts.

Don’t just look at an investment fund’s most recent performance. Instead look for long-term investment performance over one, three, five and ten-year periods. Moreover, make investment decisions with the help of a professional advisor who has access to investment managers.

How can mutual funds help manage financial risk?

In business and investment, greater gains can be accompanied by greater risk. Six risk factors are examined below, along with constructive ways to deal with them.

Risk increases with the potential for gaining wealth in the markets

Any successful business person or investor will tell you, “There is no such thing as gaining wealth without risk.” In fact, within any business or investment, risk generally increases when the potential for gain is greater. Investing in equity mutual funds is similar to investing in any given business because mutual funds actually invest in the stocks of many businesses. If a business succeeds, its stock will increase in value and pass that value on to the shareholders.

If many companies’ stocks increase in value in a mutual fund, the investor’s wealth can increase relative to the resulting net increase in the fund’s value of each fund unit. In the short term, a mutual fund, like any business, can fluctuate in value, so the risk of losing money in the stock market increases if equity fund investments are held for only a short period of time.

Defining Investment Risk

The potential for gain increase the longer you hold equity fund investments. Because economic performance is uncertain, an investor who seeks growth by investing in the ownership of companies via equity mutual funds cannot have zero risk. Most successful investors realize that the following risks exist yet invests in spite of them:

• Interest rate risk, when increasing, could negate gains of certain income funds investing in bonds.
Solution: Maintain a balanced portfolio including equity funds along with different types of income funds: money market, short-term bond, and long-term bond funds.

• Business failure risk could deplete the value of any one company’s stock.
Solution: Consider investing in equity mutual funds because they hold many different stocks.

• Purchasing power risk is an alarming reality faced by everyone due to inflation’s historical average which has been between 3% and 4%.
Solution: Calculate inflation into your retirement planning and consider investing in equity mutual funds over the long term, with the potential to build sufficient wealth to meet increased future budget demands due to inflation.

• Market risk occurs because markets are cyclic, rising, correcting, and occasionally declining.
Solution: Diversify your funds, investing in a family of domestic mutual funds and internationally among foreign mutual funds as not all markets move together.

• Opportunity risk occurs when you cannot invest your money for a potentially better return, such as when you are invested in a locked-in type of investment, such as term deposits, or have tied up your income in monthly payments.
Solution: Try not to lock up all of your money, keeping some in money market funds over any given period of time.

• Liquidity risk occurs when you cannot quickly sell a given investment such as a large real estate portfolio.
Solution: Invest in mutual funds. If money is urgently needed, funds can be sold and money accessed on any business day with some possible costs incurred.

What is an investor risk/reward trade-off?

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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 normally risk with any equity investment, it is important to assess just how much risk your portfolio should carry. 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 on the basis of past experience, he must understand that markets can go through both periods or gain and periods of loss.

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.

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

Media chaos causes investors to fear investing.

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Psychological fear can hold one back from investing. People behave according to their mind-set. 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 for having a belief confirmed before acting, where the investor must minimize any evidence that contradicts their belief-mantra. The media frequently offers bad news if the market has a low day, and it is easy to hear only this kind of information while filtering out other positive news. This process can paralyze an action plan to invest for years.

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

“The market is bound to correct and head downward 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 a price of an investment stock or 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 rear view mirror as a reference.

Conclusion
The above emotional mind-sets can ruin or avoid forming an otherwise great investment plan. Work with your investment advisor to help you gain an understanding of how the mind can trick us into failure simply by not investing over the long term. He or she can help you develop a risk tolerance profile along with an investment plan.

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

How do I bear up in a Bear Market?

shutterstock_104159111If you are an investor who remembers the mortgage debt crisis of 2008-9, you know that the market lost significant value. From an investment standpoint, the real downside occurred precisely when some investors sold off their equity holdings due to fear mid-way or near the end of the market devaluation.

Hindsight is 20-20 The people who financially survived this market anomaly were the ones who did not sell their good stocks and/or equities held by investment funds. Many risk-averse investors who may have been tempted to sell but did not, in the long run, received a blessing in disguise! They had an opportunity to hold on and patiently watch their funds’ unit values increase again in one of the longest bull market periods to 2014.

Investor risk is part of life in this world Massive debt held collectively by individuals, companies or sovereign nations can have an indirect effect on currencies, bond markets, and interest rates. Geopolitics, macro- and microeconomics, corporate banking and/or national solvency, all pose significant fiscal risk to the world’s capital markets.

Bull and Bear markets are cyclic If there is a warning of a hurricane, you know it is coming and don’t pitch your tent near the beach. Yet, with the stock market, you rarely know when a correction or a bear market is coming (when the stock markets decline 15-20% value for a period of time). Investment fund managers will work to retain your value while looking forward to the markets’ recovery in these periods. The nature of the market is cyclic. The smart investor who is well studied and cautious is nevertheless a risk taker, realizing that one must hold on to investments patiently until the stocks held in the fund portfolio regain any lost value and enter a rising bull market period.

The market moves in mysterious ways Though the major world stock markets went through a correction in early 2015, we saw some major markets in North America break records. On March 12, 2015,  for example, though four of our Canadian banks were down below 10-17% from their 52 week high, the Canadian TSX was only a quarter of a percent below on the same day.  This shows how various sectors can be in or out of favour, and move up and down due to market concerns. Despite the TSX doing well, on March 12, 2015, the TSX Energy sector was down 38% due to the oil prices dropping worldwide, presently a great time to buy when stock prices are lower in energy-related investments.

Moving money in a family of funds Most funds allow you to move a portion or all of your money into money market, bond and/or balanced funds amidst an investment fund family (those offered by the same company); or your advisor may be able to move them into an alternate investment vehicle.

Buy more fund units when prices drop Consider seeking opportunity among bargain-priced investment fund units. In this way, wealth can be created when buying stocks of many companies held by the investment funds when they are priced lower. If you take this strategy you must be ready to stay invested over the long haul.

An effective strategy Dollar cost averaging (DCA) involves buying fund units at regular intervals, investing the same amount of money each time. Thus, you buy more fund units when the value is lower, and fewer when higher. DCA is probably the single smartest investment strategy to utilize during a long-term bear market because you increasingly purchase more fund units at lower prices. If you are not fully familiar with the benefits of that concept, talk to your investment fund representative.

Insofar as you realize the risk of investing to produce long-term gain and beat inflation you can make bear markets work for you if you are patient. This is because a bear market paves the way to the next bull market when rising prices may take your investment funds higher in value.