So, another day another fall in the markets, or as the "professionals" like to say: "A volatile day ", which is the polite way of saying a bad day. So what's an investor to do? Here are some very important and fundamental points that will give you a clear idea of what your next steps should be.
When you first put an investment plan together (if your advisor put a written plan in place at all), you should have been told the best case scenario and the worst case scenario, in real numbers. To give you an example, a portfolio that has half of its investments in the stock market (a good mix of Canadian, U.S., and international stocks) and the other half in very safe instruments (like GICs or bonds) can drop as much as 25% over one year, or can go up as much as 30% in one year. Now that's volatility! However, if you go out five years then the worst case scenario that we've ever had with such a portfolio is 0% and the best case scenario is about 12% per year, on average. So the farther you go out the lower the volatility. However, can you sleep at night knowing that your portfolio can fall by 25% over one year? If you advisor did not show you the worst case scenario, you were not properly informed.
What is the rate of return you need to achieve your goals?
The most important question that you need to ask yourself is the following:"What is the rate of return (%) that I need to earn every year to meet my goals?" I can't begin to tell you how many times I have seen people taking way too much risk because they do not know what rate of return they need. Once you know this number you can then construct a portfolio that has given this return in the past. If this portfolio is too volatile for you, you should reduce your goals and expectations and construct a portfolio that gives you lower returns, but will also be a lot less volatile.
Back to the "So what do I do now?" question. You should be meeting with your advisor and rebalance your portfolios to the percentage of stocks and bonds (or GICs) that is best suited for your goals (and mental health!). If this has been done in the past, great! If your mix was 50% safety (bonds or GICs) and 50% stocks (big companies all over the world) your current mix may now be 40% stocks and 60% safety because of the drop in markets. You should be selling your safe stuff and buying stocks so you can get back to the 50-50 mark. This is buying lowand selling high.
The 6 Questions Business Owners Must Ask A Financial Planner Before Hiring One
If you feel you have not received the proper guidance from your advisor, or are looking for one, I have put together a consumer awareness guide titled "The 6 Questions Business Owners Must Ask A Financial Planner Before Hiring One". This guide gives you a very unique set of questions that covers the specific needs of business owners. I'm sure you will find some questions that you never thought of. You can find the guide at the following link:
https://meritfinancialplanning.leadpages.co/the-6-questions-landing-page/
I know there are some of you out there that are quite nervous at this point. Please don't hesitate to reach out to me and we can talk financial planning 101.
John
