Is Your Investment Strategy Worth The Cost?

Whether you're a seasoned investor or just starting, it's crucial to conduct thorough research and ask the right questions before committing your money to any investment opportunity. Here are some key steps to help you determine if an investment is worth pursuing:

- Set Clear Investment Goals: Define your short-term and long-term financial objectives. Are you saving for a home, retirement, or your child's education? Each goal will influence your investment strategy.

- Risk Assessment: Understand your risk tolerance. Are you comfortable with the potential ups and downs of the stock market, or do you prefer a more stable approach? Your risk tolerance will guide the types of investments you pursue.

- Due Diligence: When working with financial professionals or considering investment opportunities, always conduct thorough research. Check the credentials and disciplinary history of investment advisers and brokers. Verify that they are registered with relevant regulatory bodies, such as the SEC in the US.

- Ask Questions: Don't be afraid to ask questions about the investment products and the people selling them. Ask about fees, risks, the company's management and track record, and how the investment will generate returns.

- Monitor and Review: Regularly review your investments to ensure they align with your financial goals and risk tolerance. The frequency of reviews depends on your goals and investment timeline. Diversify your investments and be prepared to ride out market downturns.

Remember, investing is a long-term commitment, and it's important to make informed decisions based on research and a clear understanding of your financial goals and risk tolerance.

Check the credentials of the investment professional

It is important to check the credentials of any investment professional before handing over your money. Unlicensed, unregistered persons commit much of the investment fraud in the United States, so it is crucial to do your research.

The first step is to ask the individual for their credentials. Investment professionals might hold a variety of designations and other credentials, offered by a multitude of organizations. These designations indicate specific areas of expertise that an advisor is qualified in.

• Chartered Financial Analyst (CFA)
• Certified Financial Planner (CFP)
• Certified Public Accountant (CPA)
• Chartered Life Underwriter (CLU)
• Chartered Alternative Investment Analyst (CAIA)

Other common financial advisor certifications include:

• Chartered Investment Counselor (CIC)
• Chartered Financial Consultant (ChFC)
• Certified Management Accountant (CMA)
• Financial Risk Manager (FRM)
• Chartered Mutual Fund Counselor (CMFC)

You can also use the Securities and Exchange Commission (SEC) website to verify financial professionals. The SEC offers three resources to search for financial professionals:

• SEC Action Lookup – Individuals (SALI): This resource allows you to find information about financial advisors who have been named in SEC court actions or administrative proceedings that resulted in judgments or orders made against them.
• Investment Adviser Public Disclosure (IAPD): This tool on the SEC’s website will help you find your investment professional’s background if they are registered. You can enter their name on the IAPD website to see if they’re registered.
• Financial Industry Regulatory Authority (FINRA) BrokerCheck tool: You can use BrokerCheck to find an advisor by their name, location, and Central Registration Depository. This will give you information about a broker's employment history, regulatory actions, investment-related licensing information, arbitrations, and complaints.

In addition to these resources, you can also contact the North American Securities Administrators Association (NASAA) or your state securities regulator for more information about how to verify the credentials of an investment professional.

Assess the investment's risk level

When assessing the risk level of an investment, it's important to understand that the higher the potential returns, the more likely it is that the investment could also decline in value. Therefore, it's crucial to determine your risk tolerance and capacity.

Risk tolerance refers to your emotional response to investment losses. It's normal to feel anxious when witnessing investment losses, but it becomes a problem when that anxiety leads to impulsive financial decisions. Your risk tolerance is influenced by factors such as your personality, lifestyle, and age.

Risk capacity, on the other hand, is based on your investment objectives, initial investment amount, and time horizon. It addresses your ability to handle risk and the primary investment goal. If you're investing for a long-term goal, such as retirement, short-term dips in your portfolio may not significantly impact your plans due to the longer time horizon for recovery. However, if your investment goal is in the near future, a substantial loss could be more detrimental.

Additionally, it's essential to consider the various types of financial risks associated with investments, including systematic and unsystematic risks. Systematic risks, also known as market risks, affect the entire economic market or a large portion of it. Examples include political risk, macroeconomic risk, interest rate risk, inflation risk, currency risk, liquidity risk, and sociopolitical risk. Unsystematic risk, on the other hand, pertains to risks specific to an industry or company, such as operational risk, legal risk, credit risk, and country risk.

By understanding your risk tolerance and capacity, as well as the different types of financial risks, you can make more informed decisions about the level of risk you're comfortable taking with your investments.

Understand the fees

Understanding the fees associated with your investment is crucial to investing wisely. While these fees may seem insignificant, they can significantly impact your investment portfolio over time. Here's a comprehensive guide to help you navigate and understand the various fees involved:

Types of Investment Fees:

• Expense Ratio or Internal Expenses: This represents the total cost of operating a mutual fund, expressed as a percentage. For example, a fund with a 1.60% expense ratio means you'll pay approximately $16 per year in operating expenses for every $1,000 invested.
• Investment Management Fees or Investment Advisory Fees: These fees are charged as a percentage of the total assets managed by an investment advisor or brokerage firm. Typically, they range from 1% to 2% or more, depending on the size of your portfolio and the services provided.
• Back-End Load or Surrender Charge: Certain mutual funds, such as Class B shares, charge a back-end load or surrender charge when you sell your fund. This fee usually decreases the longer you hold onto the fund.
• Annual Account Fee or Custodian Fee: Brokerage and mutual fund accounts may charge an annual account fee, typically ranging from $25 to $90 per year. Retirement accounts like IRAs often have custodian fees to cover IRS reporting requirements, ranging from $15 to $80 annually.
• Platform Fees (or Administration Fees): These fees are charged by a linked investment service provider, offering a single point of contact and access to a range of investment options. While generally low, these fees are often ongoing and should not be overlooked.
• Asset Management Fees: Also known as fund manager fees, these are levied by investment managers for managing an investment fund. They can be fixed, performance-based, or a combination of both, and are typically expressed as a percentage charged annually.
• Financial Adviser Fees: Financial advisers may charge upfront or ongoing fees for their professional services. These fees can be structured in various ways, such as a percentage of assets under advice, consultation rates, or a flat fee for developing an investment plan.

Tips for Comparing and Minimizing Fees:

• Total Expense Ratio (TER): Familiarize yourself with the TER, which represents the cost of running a unit trust or exchange-traded fund (ETF). It includes management and administrative costs and is published on fund fact sheets. However, note that it may exclude certain charges like brokerage, distribution, and scrip lending income costs.
• Total Investment Charge (TIC): This is a newer metric that combines the TER and transaction costs (TC), providing a more comprehensive view of the total value lost to fees.
• Effective Annual Cost (EAC): The EAC is the latest measurement designed to capture all fees, including admin, platform, product, adviser fees, TER, and TC. It allows investors to compare charges across suppliers and understand the impact of exiting an investment over specific periods. Aim for an EAC of 1.5% or lower.
• Ask Questions: Don't hesitate to ask your investment advisor or firm about the fees. Understand what services you are paying for and how they are compensated for recommending investments.
• Direct Purchases: In some cases, you may be able to reduce fees by purchasing investments directly rather than through an intermediary.
• Index Funds and ETFs: Broad index ETFs and mutual funds typically charge lower expense fees than actively managed funds.
• Regularly Reassess Fees: Stay vigilant by regularly reviewing the fees you're paying. Compare them with market rates to ensure you're getting a competitive deal.

Monitor the investment's performance

Monitoring the performance of your investments is crucial to ensure your money is working hard for you and that you're on track to reach your financial goals. Here are some detailed strategies to help you monitor the performance of your investments effectively:

• Review your account statements – Regularly review all records and account statements to understand how your investments are performing. Keep track of the costs you're paying and compare the performance against your financial goals and guidelines set out in your investment policy statement.
• Check stock tables – Stock tables, commonly found in the business section of newspapers and online, provide valuable information about changes in stock values and trading activity.
• Compare against benchmarks – Compare your investments' performance to market or sector indices, such as the S&P/TSX indices. If a stock consistently underperforms its index, it may be a warning sign.
• Stay informed about the companies you invest in – Read recent disclosure documents, news releases, and other timely information from the companies you've invested in. Additionally, seek information from third-party sources like newspapers, trading sites, and analyst reports.
• Consult your financial advisor – If you have an advisor, they can provide valuable insights into market movements. Ask them to explain sudden price changes and their potential impact on your portfolio.
• Follow stock market and economic news – Stay updated with stock market news to understand the overall market direction. Keep up with economic news and indicators, such as interest rates, inflation rates, and currency exchange rates, as they can influence stock prices.
• Utilize online tools and platforms – Take advantage of online tools and platforms, such as Morningstar, Bloomberg, and brokerage platforms, to monitor your investments. These tools provide real-time updates, performance charts, and portfolio analysis, making it easier to stay informed and make informed decisions.
• Review fund performance and expense ratios – Regularly assess the historical performance of your investments and compare it against relevant benchmarks. Keep an eye on the expense ratios, as lower ratios generally indicate that a larger portion of your investment is being put to work.
• Understand the fund's investment strategy – Different funds have varying investment objectives, such as growth, income, or a combination of both. Ensure the fund's strategy aligns with your financial goals and risk tolerance.
• Rebalance your portfolio periodically – Market fluctuations can cause your portfolio to deviate from your original investment strategy. By rebalancing, you can ensure your investments remain aligned with your goals and risk tolerance. Consider rebalancing annually or semi-annually or whenever your portfolio strays from your target allocation.
• Diversify your investments – Diversification is a key risk management strategy. Spread your investments across different asset classes, sectors, and geographical regions to reduce the impact of any single investment's performance on your overall portfolio.
• Seek professional advice – If monitoring your investments feels overwhelming, consider seeking guidance from a financial advisor or investment manager. They can provide expert advice, help you analyze performance, and make appropriate recommendations.

Know when to sell

Knowing when to sell an investment is a challenging decision. There is no one-size-fits-all strategy, and it depends on your individual investment strategy and several other factors, including your risk tolerance, time horizon, and financial goals. Here are some signs that it might be time to sell:

• Adjusting your portfolio: If your portfolio becomes unbalanced or inappropriate for your investing goals due to life events such as marriage, divorce, retirement, or the birth of a child, you may need to sell some stocks to diversify your portfolio and reduce risk.
• Hitting a price target: Many investors use price targets to determine when to sell. If the stock reaches your predetermined price range, you can start selling your position.
• Change in fundamentals: If the company's fundamentals deteriorate, such as steadily decreasing quarterly earnings or poor performance compared to its industry peers, it may be time to sell.
• Change in ownership or merger: A company being acquired or merging with another company can impact its fundamentals and stock price. Investors should assess whether the merged company's fundamentals remain strong or if it's time to sell.
• Tax purposes: Selling a stock that has experienced a loss can help offset capital gains realized on other stocks and potentially lower your tax bill. However, it's important to consult a tax professional before selling for tax purposes.
• You've found something better: If you discover a more attractive investment opportunity that better aligns with your financial goals and risk tolerance, it may be wise to sell your current stock and allocate your funds to the new opportunity.
• You need the money: If you require access to cash in the near future, it may be prudent to sell your stock, especially if it's intended for long-term investment. Building an emergency fund is an essential part of financial planning.
• Rebalancing your portfolio: If a particular stock has performed well and accounts for a larger portion of your portfolio than intended, you may consider selling to maintain proper allocations and avoid overexposure to a single stock.
• Valuation no longer reflects business reality: Sometimes the market can get overly optimistic about a company's future prospects, driving the stock price to unsustainable levels. Selling your shares before a potential downturn can help lock in profits.

It's important to remember that selling an investment should be aligned with your financial and investment goals, risk tolerance, and time horizon. Consulting a financial adviser can help you develop a comprehensive short- and long-term financial plan that guides your investment decisions.

Frequently asked questions