FINANCIAL FILE
In Search of the
Perfect Investment
Understanding your needs and goals are key
“I will not abandon a previous approach whose logic I understand even though it
may mean forgoing large, and apparently easy, profits to embrace an approach
which I don’t fully understand, have not practiced successfully and which,
possibly, could lead to substantial permanent loss of capital.” – Warren Buffet
At our firm, we get the opportunity to review the invest-ment
portfolios of a great number of people. We get
asked if they are appropriate and effective. We also get
asked, “Is there anything better?” In order to answer the questions,
it is necessary to know the individual’s complete financial picture,
risk tolerance, time horizon and most importantly, their goals.
All investors – big or small – must understand one simple fact:
there is no perfect portfolio. There are, however, some important
things to consider, starting with “know thyself.” It’s as much about
you as the elements of a portfolio.
Know what you own
Rarely do I meet an investor who knows how many securities make
up his or her portfolio, let alone what these securities are. You
should absolutely know how many businesses make up the equity
portion of your holdings. You should know the names of the busi-nesses
and what they do. Are they are profitable? Do they pay their
owners dividends? Will they still be in business five years, 10 years
or 20 years from now? Are they liquid? A portfolio with more than
40 or 50 businesses in it will be so over-diversified you will be water-ing
down your returns.
And what about the fixed income portion? Who have you lent
your money to? What interest rate are you receiving? What is the fi-nancial
strength of the borrower? Is there sufficient security in place
in case of default? Have you exposed yourself to interest rate risk
due to long duration?
Know why you own it
Every security you hold, whether it is an individual security or part
of a pool of some sort, should have a reason to be there. Most port-folios
we see are actually a collection of various funds and securi-ties
picked up over the years with no planning or thought attached.
If your goal is to grow capital in order to replace income at a fu-ture
date (sometimes we call this retirement), the underlying invest-ments
should reflect that goal.
BY CHET BROTHERS, CFP, RFP,
BROTHERS AND COMPANY
Know yourself
You need to think about your own investment personality. How do
you react to changes in value of your investments? Does a sudden
drop make you anxious and prone to make sudden changes? Do you
dream of sudden riches materializing in your investments? Do the
media or your friends influence you when it comes to making de-cisions?
Do you understand your own investment behaviour? As
human beings, we are hard-wired to react to seek out quick gains
and to panic over sudden losses, to endow a higher value on things
we own and to follow the herd. These are a few of the very many
handicaps brain chemistry and psychological make-up present to
all investors.
In conclusion, there will never be a perfect portfolio but you
can achieve long-term success and avoid permanent capital loss
if you concentrate on quality businesses that are profitable and
sustainable for your equity portion while managing both the cred-it
risk and interest rate risk on your fixed income portion. This
approach, coupled with a long- term commitment to your strat-egy
that avoids the pitfalls of human behavior, will get you to
your goals.
Chet Brothers is founder of Regina-based Brothers and
Company and is the only Saskatchewan financial advisor
named to the Top 50 Canadian Financial Advisors
ranking by Wealth Professional magazine.
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