Business

Build wealth slowly and ride out market volatility

(Special) – Stock markets have been on a good ride since the end of the last crash in 2009, but the good times don’t last forever and investors need to prepare themselves for the periods of political and financial volatility that ultimately come.

“Investors need to exercise patience through the ups and downs of the markets,” Mia Karmelic, division director and senior financial consultant with Investors Group, said in an interview. “When uncertainty comes, people get nervous and are prone to act on impulse. This is when a good financial plan and strategy can help them stay focused on long-term returns and goals and manage their expectations. Building wealth is by no means instantaneous.”

Numerous studies have found that people who have a comprehensive financial plan are more likely to feel they are on track with their financial affairs than those who do no or limited planning. This includes feeling better about being on track to retire, save, handle unexpected emergencies and tough economic times, and ensuring loved ones are looked after financially if something unexpected happens.

Generally, people with a financial plan feel better about being able to live life today and have a higher level of emotional and financial well-being, overall contentment and sense of achievement.

The first thing people should do is to look at their overall financial situation and determine what their long-term goals are. One of the biggest dangers in investing is trying to time ups and downs in the market as it fluctuates and chase after returns on their investments.

Getting a holistic, overall picture of your financial situation first will help determine your investment strategy for such things as how much risk you are willing to assume, asset allocation and the kinds of investment products you choose.

Karmelic recommends sitting down with an adviser and putting your financial plan under a stress test which will give you an idea of the impact on your portfolio from different market volatility scenarios.

The type of strategy often will depend on the stage of life of the individual investor.

Early investors, for example, have a longer workforce time horizon and therefore may have a higher tolerance to risk and may not be as bothered by periods of market volatility as much as more mature investors.

Mid-life investors who likely have families to care for may be tempted to completely avoid investing in precarious times.

Building a secure income is one of the most important factors for those preparing for and in retirement. Karmelic recommends people look at what they want their retirement to be, their tax situation, cash flow, fixed and discretionary expenses and their levels of debt. As people move closer to retirement they tend to think more about how their portfolio will generate sustainable income through this phase of their life which, with increases in longevity, now can last 20 or 30 years or more.

Karmelic says investors should avoid what is commonly known as a home bias. This is the tendency to invest primarily in domestic equities because of difficulties associated with legal restrictions and transaction costs when investing in foreign equities, and a comfort in investing in companies they are familiar with, despite the purported benefits of diversifying into foreign global markets

Karmelic advises investors to consider different types of investments. These include managed products such as Exchange Traded Funds and pooled products, which provide lots of managed diversification, as well as fixed income investments such as Guaranteed Investment Certificates to save in the short term.

“In times of good returns like we’ve had in the last few years, people are much more likely to manage their investments themselves, but it’s really important that investments are managed 24/7 so they can be adjusted when needed,” Karmelic says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Talbot Boggs , The Canadian Press