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Never leave your investment portfolio on ‘auto pilot’

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Dear Money Lady:

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I invest on my own but am thinking of talking to a financial planner from my bank to expand my portfolio. Do you think that is a good idea or should I just keep doing it on my own? Should I take on more risk to get a better return?

John

Dear John:

Good question – but make sure your new advisor understands your risk tolerance and your future goals.

Most Canadians are invested in the market in some way or another with or without an advisor through mutual funds, market linked GICs, guided stock portfolios or exchange traded funds.

Experienced investors understand the risk-return trade-off of the market and are more comfortable with market volatility, constantly looking for opportunities to profit over long time horizons.

While it is true that one must accept a higher degree of risk to earn a higher return, not all investors can afford future losses. Our ability to bear risk has a tendency to decrease as we age, and often those investors who believe they have a high tolerance for market risk, suddenly change their minds when the market turns against them.

If you are not a knowledgeable investor John, and plan on relying solely on the decisions of your new advisor, you should make sure you have communicated your risk tolerance and are invested correctly. Often clients fill out risk questionnaires with their advisors the way they would like to behave when faced with risk, while how they really behave, may be completely different.

To give you an example, if you are moderately risk averse, you would not want to be invested in a precious metals fund since they potentially have high volatility.

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Your investment portfolio should never be left static or on “auto-pilot” with your advisor (no matter how much you like them).

Assumptions should not be made when it comes to your money and you should be speaking to your advisor regularly with a routine six-month financial review. As people age, their objectives, financial and personal circumstances and overall risk tolerance change.

Proper tax planning should be a part of every investor’s overall financial strategy, but not at the expense of more risk adverse investments. Tax minimization should never be the sole objective, nor can it be allowed to overwhelm the other elements of a proper financial plan.

Remember that it is the “after-tax income return” that is important. Choosing an investment based solely on a low tax status does not make sense if it results in a lower after-tax rate of return.

The best risk and tax advantages are usually gained by planning early and planning often. Financial plans should be simple, easy to implement, and easy to maintain. Make sure you understand each investment product you have chosen and are aware of the potential risks as well as the potential future rewards.

Good Luck and Best Wishes,

Money Lady

Written by Christine Ibbotson, author of the best-selling book, How to Retire Debt Free & Wealthy, and a new book Don’t Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus. Both are available at all bookstores across Canada. If you have a money question, please email on website: www.askthemoneylady.ca

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