Session 4Basic Investment Concepts

PERSONAL INVESTMENTSHELPING YOUR CLIENTS REACH

THEIR GOALS

Notice

This presentation contains investments illustrations. The rates of return used in these illustrations are not guaranteed. Actual results will vary from those illustrated. The purpose of these illustrations is too help understand the potential of certain investment concepts and strategies.

Each client is different.

• No “one-size-fits-all” solutions.

• Solution as unique as your client; solution should correspond to client’s goals and profile.– Know your client

• Some basic investment concepts and strategies are, in most situations key to investment success:– Time value of money– Avoiding market timing or major investment decisions based on

emotions– Dollar cost averaging

Time is an investor’s best friend.

A story about two investors…

Time is an investor’s best friend.

Similarities

• Average annual return of 6.00%

• Total amount invested over time: $36,000

Time is an investor’s best friend.

Differences

• Investor A:– Investment period from age 30 to age 60– Monthly investment = $100

• Investor B:– Investment period from age 45 to age 60– Monthly investment = $200

What will be the outcome?

A) - Both investors end up with the same market value at age 60.

B) - Investor A will have more money at age 60 than investor B.

C) - Investor A will have more money at age 60 than investor B.

Time is an investor’s best friend.

The Big Difference

• Investor A:– Market value at age 60 = $100,451.50

• Investor B:– Market value at age 60 = $58,163.74– To get the same end result as his friend,

Investor B would have to invest $345.41 per month for a total of $62,173.80

Time is an investor’s best friend.

Another example with a 6% annual return

Investor A Investor B

Investment Period From age 30 to 45 From age 45 to 60

Monthly Investment $200.00 $200.00

Total Investment $36,000.00 $36,000.00

Market Value at 60 $139,392.79 $58,163.75$

Required Investment to Match Investor A --- $479.31

Time is an investor’s best friend.• While it’s never too late to start investing, the sooner you

start, the better.

• It is better to start earlier with small amounts, than to start later and trying to catch up.

• To be motivated to start investing, your clients need to identify financial goals that are important to them.

No Goals No Motivation

No Investment

s

Remember…

Where to find the money?It’s a question of choice

Where to find the money?For example:Going from 3 cups of coffee ($2 each) a day to 2 cups.

• $2 x 5 work days x 4 weeks = $40 per month• Invested in a balanced fund and assuming a 6% annual return

$27,719.76 in 25 years

Where to find the money?Other example:

• How often do your client eat out? Restaurants can add up quite fast. Why not cut one or two visits to the restaurant from the weekly routine and invest that amount?

• Are all the bells and whistles included in a smart phone or cable package necessary? Or can your client go from 200 channels to 100 channels and still be satisfied? If so, less money will go to the telecommunication company, more will go for your client’s financial goals.

• There are many other areas where you can find money to invest (cinema, social outings, casino, etc.)

Investments and Emotions

They don’t mix well!

Investments and Emotions• Establish the investment strategy based on the

client’s goals and investor profile.

• Don’t let emotions dictate changes in the investment strategy.

• Changes in the investment strategy may be necessary if its based on new financial goals or circumstances or a different investor profile.

• Emotions tend to make us believe we can time the markets. Trying to time the markets is a bet most people lose.

Canadian Bull and Bear MarketsJan 1950–June 2012

All values are represented in CAD. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2012 Morningstar. All Rights Reserved. 9/1/2012

0.4

$1

3

6

1950’s 1970’s 1990’s 2000’s1980’s1960’s

40 months+57.0% 14.5%

24months

+109.4% 44.7%

25months+43.6% 19.0%

40months+81.9% 19.7%

Yellow bars represent Canadian recessions

16 1910

20 29 15 3443months

to recover

89 months+229.9%

17.5%

137 months+285.4% total return

12.5% annualized

81 months+288.4%

22.3%

61 months+252.7%

28.1%

90 months+202.5%

15.9%

68 months+168.1%

19.0%

7months–26.9%

13months–25.4% 11

months–35.0%

12months–39.2%

4months–25.4%

10months–20.1%

4months–27.5%

25months–43.2%

9months–43.3%

24

The longer the investment period, the lower the volatility

Dollar Cost Averaging

• Investment on a regular basis (i.e. monthly or bi-weekly) set-up to be done automatically which will average out the unit costs of an investment fund.

• Great way to keep emotions in check.

• Reduces risk of near or at a market high.

Dollar Cost Averaging

Diversification

• Just as it is nearly impossible to time the market, it’s just as difficult to determine which asset class will be the best perform in any given year.

• By diversifying, you lower the volatility of the portfolio.

• Diversification can be achieved at different levels:– Asset class– Geography– Economic sectors– Management style– Managers

Reaching Retirement

When discussing investments, we tend to focus more on the pre-retirement years.

How should one invest during retirement?

Investment Strategy During Retirement

• As clients start to withdraw funds from their portfolio on a regular basis, it’s important to consider protecting the amounts to be withdrawn in the next few years.

• However, growth still plays a part in a retirement portfolio as some of the money will not be needed for another 10 years or more.

• While the majority of people want to lower volatility of their portfolio when they reach retirement, there is a risk in being too conservative: that of outliving your money.

Probability of Meeting Income NeedsVarious withdrawal rates and portfolio allocations over a 25-year retirement

All values are represented in CAD. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2012 Morningstar. All Rights Reserved. 9/1/2012

91%

64%

34%

13%

4%

97%

80%

47%

19%

5%

97%

83%

57%

29%

12%

93%

79%

58%

37%

20%

88%

74%

57%

40%

26%

4% Withdrawal rate

5%

6%

7%

8%

100%Bonds

75% B25% S

50% B50% S

25% B75% S

100%Stocks

The higher the withdrawal rate, the lower the odds of the portfolio lasting 25 years.

Investment Strategy During Retirement

• As previously shown, diversification still plays an important part during retirement.

• Another approach one should consider is diversification of sources of income.

• General idea: match the type of expenses with corresponding types of income.

Essential Expenses:Food

ClothingShelter

Health & WellnessEtc.

Discretionary Expenses:Travel

EntertainmentClub Membership

Etc.

“Need to have” “Nice to have”

Expenses at Retirement

Essential Expenses:Food

ClothingShelter

Health & WellnessEtc.

Discretionary Expenses:Travel

EntertainmentClub Membership

Etc.

Non-flexible reliable income:CPP/OAS

Company pensionLife annuities

Limited flexibility:LIF

Flexible income:RRIFTFSA

Non-registered investments

Surplus

Unforeseen Expenses

Cover Gap

Match the Income with the Expenses

Final Word• The investment concepts we have just seen can be part of

your client’s tailor-made solution.

• Remember, find out why your client wants to invest before making recommendations. Get them committed!

• Establish their goals (how much?, when?) and their investor profile, bridge the gaps between the two, and then implement an investment strategy.

You can never know too much…

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www.morningstar.ca

www.advisor.ca

www.getsmarteraboutmoney.ca