Know Your Risk, or Risk Your Financial Future

Risk (n) – the one word sure to raise eyebrows and caution, especially if money is involved. It is also the number one reason persons give for not wanting to invest in financial securities, and so I figured we should spend some time today discussing risk. The truth is that all investments (not only stocks) have some degree of risk associated with it. Stocks, bonds, CDs, commodities, real estate, mutual funds, repos, ETF’s, unit trusts or any other imaginable investment vehicle could all be subject to volatility if market conditions change.

Many different factors affect the performance of an investment because the markets are directly tied to the economy, news, consumer speculation, and global events. As a result, we can therefore say that there are many different types of risk. For example, investments may rise or fall because of market conditions and consumer confidence or speculation, which is known as market risk. Sudden news that the CEO of a company has been fired has proven to be a good indicator that the stock price is going to fall; this is known as company risk. A newly elected political party or the passing of new laws and regulations could affect the markets; this is known as country or political risk. The ease at which an investor can get in and out of a security is known as liquidity risk, and is another important consideration to make when thinking about investing. Investing in emerging markets that usually have constantly fluctuating exchange rates which can affect the value of investments is known as currency risk, and the list goes on.

 

Risk is one of the most important factors in assessing the forecast of an investment.  It is generally understood to be the probability that an investment’s actual return might be different than expected.  One cannot avoid risk, and should not necessarily shy away from it. It is a necessary evil that causes markets to be cyclical and fluctuate. Think about it, if the markets did not go up and down, then how would investors benefit from ‘high prices’ and make a profit?

 

 

Luckily for us, there are many ways in which one can actively manage the level of risk an investment portfolio is subject to. Before beginning the investment, I encourage you to have an open, honest conversation with your financial advisor in which you discuss your objectives (long and short term), the chances you will have to pull on the funds unexpectedly, level of fluctuation you are willing to accept, and desired annual returns. This will help to form your risk appetite, and influence the types of securities used to comprise your portfolio. At SSL, we utilize a scientific approach to take the ‘guess work’ out of the equation and lower the subjectivity of classifying an investor.

 

One of the best ways to lower risk is by properly diversifying your portfolio. By diversification, I mean investing in different asset types, classes, industries, and securities, so as to not put all your eggs in one basket.  Therefore, if one security or industry were to fall (as we are currently seeing with oil), the overall value of the portfolio will not tank because there are other securities in other industries that will hopefully be performing well. For investors who may be thinking to themselves “I don’t have enough money to be buying all these various types of instruments” perhaps Exchange Traded Funds (ETF’s) would be right for you. They are becoming increasingly popular and have a great track record in terms of returns. ETFs pool various companies into one security which can be bought for a fraction of the price, and so just by their nature offer great diversity.
Lastly, being patient and not reacting emotionally to market fluctuations is essential to combating risk. History has shown us that it takes approximately 3-4 years for the markets to recover from a major recession. Quite often however, the markets rebound a lot quicker than that. Waiting out the storm and not panicking when the market takes a downturn is in theory the easiest way to ensure that you do not sell at a loss. Again, this ties in to proper planning and discussing a time period for investing before one starts.

 

At the end of the day, as I’ve said before risk is not necessarily a bad thing. They say ‘the higher the risk, the higher the reward’ and this can apply to investing. What is important is that you make an informed decision, and are comfortable with the level of risk, securities and strategies being adopted from the beginning. For more information on how we can help you manage your risk while getting great returns, please come in and speak with an SSL representative.

Risk (n) – the one word sure to raise eyebrows and caution, especially if money is involved. It is also the number one reason persons give for not wanting to invest in financial securities, and so I figured we should spend some time today discussing risk. The truth is that all investments (not only stocks) have some degree of risk associated with it. Stocks, bonds, CDs, commodities, real estate, mutual funds, repos, ETF’s, unit trusts or any other imaginable investment vehicle could all be subject to volatility if market conditions change.

 

Many different factors affect the performance of an investment because the markets are directly tied to the economy, news, consumer speculation, and global events. As a result, we can therefore say that there are many different types of risk. For example, investments may rise or fall because of market conditions and consumer confidence or speculation, which is known as market risk. Sudden news that the CEO of a company has been fired has proven to be a good indicator that the stock price is going to fall; this is known as company risk. A newly elected political party or the passing of new laws and regulations could affect the markets; this is known as country or political risk. The ease at which an investor can get in and out of a security is known as liquidity risk, and is another important consideration to make when thinking about investing. Investing in emerging markets that usually have constantly fluctuating exchange rates which can affect the value of investments is known as currency risk, and the list goes on.

 

Risk is one of the most important factors in assessing the forecast of an investment.  It is generally understood to be the probability that an investment’s actual return might be different than expected.  One cannot avoid risk, and should not necessarily shy away from it. It is a necessary evil that causes markets to be cyclical and fluctuate. Think about it, if the markets did not go up and down, then how would investors benefit from ‘high prices’ and make a profit?

 

 

Luckily for us, there are many ways in which one can actively manage the level of risk an investment portfolio is subject to. Before beginning the investment, I encourage you to have an open, honest conversation with your financial advisor in which you discuss your objectives (long and short term), the chances you will have to pull on the funds unexpectedly, level of fluctuation you are willing to accept, and desired annual returns. This will help to form your risk appetite, and influence the types of securities used to comprise your portfolio. At SSL, we utilize a scientific approach to take the ‘guess work’ out of the equation and lower the subjectivity of classifying an investor.

 

One of the best ways to lower risk is by properly diversifying your portfolio. By diversification, I mean investing in different asset types, classes, industries, and securities, so as to not put all your eggs in one basket.  Therefore, if one security or industry were to fall (as we are currently seeing with oil), the overall value of the portfolio will not tank because there are other securities in other industries that will hopefully be performing well. For investors who may be thinking to themselves “I don’t have enough money to be buying all these various types of instruments” perhaps Exchange Traded Funds (ETF’s) would be right for you. They are becoming increasingly popular and have a great track record in terms of returns. ETFs pool various companies into one security which can be bought for a fraction of the price, and so just by their nature offer great diversity.
Lastly, being patient and not reacting emotionally to market fluctuations is essential to combating risk. History has shown us that it takes approximately 3-4 years for the markets to recover from a major recession. Quite often however, the markets rebound a lot quicker than that. Waiting out the storm and not panicking when the market takes a downturn is in theory the easiest way to ensure that you do not sell at a loss. Again, this ties in to proper planning and discussing a time period for investing before one starts.

 

At the end of the day, as I’ve said before risk is not necessarily a bad thing. They say ‘the higher the risk, the higher the reward’ and this can apply to investing. What is important is that you make an informed decision, and are comfortable with the level of risk, securities and strategies being adopted from the beginning. For more information on how we can help you manage your risk while getting great returns, please come in and speak with an SSL representative.

A testament: Scholarship winner turns young investor

Many may say investing is for rich folk or even old folk; however, this could not be any more false. Investing is for everyone — everyone should have an investment account just as almost everyone has a savings account. It has become our culture to teach youth from early that they need to save, but we forget to teach them everything else about managing their finances.

Saving is not the be all and end all and it won’t get anyone to their goal of financial freedom. Yes, saving is important as we should not squander away our earnings. However, after saving must come investing — this way your money is hard at work for you to make you profits.

There are several types of investment options, from starting your own business to investing in stocks, bonds, real estate, and the list goes on. There’s no one investment type which is better than the rest, and diversification in your investment portfolio is always important.

So you may ask yourself, what should I invest in? This may be a very difficult question for you to answer if you’re new to the world of investing. However, it has now become very easy for anyone to start investing in the stock market, and so this is a great place to start.

Whether you’re a student, young professional just starting out, a struggling single parent — no matter who you are — an investment portfolio can be made for you. With as little as $5,000.00 you are now able to purchase shares in publicly listed companies.

Still, if you are new to this it may be a bit confusing, which is to be expected. That is why it is important to consult with a licensed investment firm.

Last week we had the pleasure of meeting with Romario Sterling, a recent recipient of a Cranwatawow Talk Up Yout Scholarship, and an aspiring lawyer who shared his story with our team at Stocks & Securities Limited (SSL).

After a mentorship session with the CEO and SSL’s service team, he opened his very first investment account. Romario’s experience goes to show that you’re never too young to start investing, as it is a means to pave the way to your financial independence. The earlier you start, the better off your future self will be. Here is the letter that initiated this very big step:

“My name is Romario Sterling; I was the recipient of the 2015 CranwataTalk Up Yout scholarship. I am currently a student at UWI (The University of the West Indies) studying international relations and public policy management, and I have a big dream of one day becoming a lawyer and an international investor. I plan on achieving this from taking the LSATs after completing my studies at UWI and hopefully gaining admission to a top-10 law school, preferably Harvard or Stanford Law to pursue a JD/MBA. This will put me in a position to establish links and learn from some of the smartest and most motivated people in the world.

I became interested in investing after completing sixth form at Wolmer’s. I stayed home for a year before going to

UWI, [and] during that period I discovered a book called Rich Dad, Poor Dad by Robert Kiyosaki.

It was after reading that book that I realised that investing and being financially literate is the best way to acquire and sustain wealth.

During that same summer I started reading and watching videos about financial securities, starting with stocks on Investopedia and Wall Street Survivor. I eventually signed up for the Investopedia simulator to gain a more practical experience in investing.

I am still learning and this summer I will be committed to learning as much as I can about investing in stocks and other securities, as well as real estate. I hope that one day, as a Jamaican, I can achieve a similar level of success like Michael Lee-Chin in investing. My goal is to have investments in industries positioned for long-term growth, such as the manufacturing, transportation, financial, technology, agricultural and real estate sectors in emerging markets all over the world. That is because I believe that emerging economies in Latin America, Asia, Eastern Europe and Africa are virgin markets that are poised with opportunities that will eventually be realised over time.

The intention is to create investments that will provide employment for people all over the world and aid in the development of emerging economies. I would really appreciate the opportunity to meet the force and knowledge behind Stocks and Securities Ltd, so that I could learn more about investing in the Jamaican and Caribbean markets. This would definitely be an important step in my journey to becoming a successful investor, as I will be given an opportunity to learn from the best investment firm in Jamaica.”

Romario has now started his journey to financial freedom with his first investment account. We should all take a page out of Romario’s book and be as proactive with our finances and our future. It’s as easy as picking up the phone and making that call to an investment firm such as SSL to get that information you need, or even just stopping by and speaking with a representative.

Your future is in your hands; it’s best to start preparing for it now.

How Diversification helps Mitigate Risk

Consider this: On the first day of June, 1968 a man sets out to sell 27 Air Conditioning (AC) Units. He successfully sells all 27. But he doesn’t stop there. He instead goes on to add refrigerators, freezers, microwaves, and continues to expand his product range until the company grows into a multi-million dollar empire. This company is Appliance Traders Limited and this man is the Honorable Gordon “Butch” Stewart. What, among many things, Mr Stewart did right was diversify his product range.

Diversification is the practice of spreading money among different investments in order to maximize returns and mitigate risk. Simply put: don’t put all your eggs, or in this case money, in one basket. This is one of the most important strategies one should use when deciding how to invest. In fact, it is one of the most basic building blocks of a good investment portfolio. Choosing the right group of investments, may limit your losses and reduce the dramatic changes in investment returns without sacrificing too much potential returns.

Anya- service team

Anya Mollison, Service Associate at Stocks and Securities Limited.

How you diversify your portfolio depends on three things: Your Investment Goal, Risk Tolerance and Time Horizon. Your Investment Goal is your primary reason for investing while your time horizon is the time it takes you to reach that financial or investment goal. Your risk tolerance is how able and/or willing you are to lose your investment capital in exchange for the potential to accumulate high returns. Here’s an example of how these three work in tandem: Twenty year old Mary Brown would like to start planning towards her retirement. She would like to retire at sixty so therefore her time horizon is 40 years. Because Mary has a financial goal with a long time horizon, she is likely to make more money by carefully investing in asset categories with greater risk, like stocks, rather than restricting her investments to assets with less risk, like bonds. This is the kind of information investors use to decide how to allocate your investment capital.

 

You should consider diversifying your portfolio not just between asset categories but within asset categories as well, remembering your time horizon, risk tolerance and overall financial goal. So in addition to allocating your investments among stocks, bonds, mutual funds and other asset categories, you’ll also need to spread out your investments to include a number of different stocks, different bonds, and so on. Amongst others, one major benefit of creating a diversified portfolio is that the combination of many different investments tends to have varying patterns of returns. Diversifying also helps avoid extreme overall results to your portfolio should any one asset category experience a long period of poor performance. The key is to identify investments in segments of each asset category that may perform differently under different market conditions.

 

One way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. On the Jamaica Stock Exchange there are stocks listed in the manufacturing sector, finance sector, retail sector and more. Here’s an example of how not diversifying can put your portfolio value at risk: Let’s say you have a portfolio of stocks only in the health sector. If it is then announced publicly that there is a major defect in one of their machines that was missed during production, and if this defect has serious implications for the health of the persons that have used them then share prices of these stocks are likely to drop. You will then notice the impact of this drop in the value of your portfolio. If, however, you diversified your portfolio to include not only stocks in the health sector but also some stocks in the finance sector, then only part of your portfolio would be affected by this decrease. Remember, you want to diversify across the board, that is, invest not only in different types of companies but also different types of industries. The less your stocks relate, the better.
Diversification, though challenging, can be a rewarding strategy if done the right way. If you have any doubts it’s always a good idea to consult a knowledgeable investment agent from a reputable investment firm. Remember however, that though diversification can help to mitigate some of the risks associated with investing, it can never eliminate it completely. The key is to find a happy medium between risk and return that will ensure you achieve your financial goals.

Money Matters: What they don’t teach you in School.   

As an Economics major I can tell you that there’s a huge discrepancy between what is taught in schools vs what happens in the real world. As a student, I’m worried about creating the most precise Excel model so I can get an A. In the real world it’s someone’s livelihood their hard earn cash that you are investing, so when you make a mistake the results is a very angry client and you’re handed a pink slip. Figuring out that successful investing is challenging is actually the first step to take to becoming a better investor.  The truth is with the time frame and curriculum schools are required to complete in one year they tend to overlook things that are important in the working world.

  1. People skills.

Schools tend to put more emphasis on knowledge, theories and model, but rarely focus on the one skill that everyone in the business industry needs to be an expert at – dealing with other people. Personally, I rather work with a B student who has social skills than A student who has no idea how to communicate or work with other people.

  1. Theory requires context.

Economics has a lot of theories/models example: perfect competition, however you can’t take these types of model literally, it’s all about interpretation. Correlation and market relationships are constantly changing or will never exist in its pure form. Nothing is stable and the past is not a perfect window to give a definite forecast. Theories can build your knowledge base, but they never tell the complete story. It’s a dangerous move to take them at face value without consideration for the real world implications.

Kelley Reid

Kelley Reid, Service Associate at Stocks and Securities Limited.

  1. Read!

I have spent thousands of dollars on textbooks in university. It’s not to say that textbooks aren’t helpful, but if I’m being honest if it wasn’t a reading requirement I didn’t read it. There are many informative books out there on business, investing and leadership etc. that cost less than what I spent on school books that have more useful and practical information. The majority of my own learning experience came within the first few weeks on the job than from reading textbooks. No I’m not suggesting schools do away with textbooks but include reading material from persons with firsthand knowledge of the industry to allow students to learn from some of the best in the business.

      4. Agendas 

 

My colleagues know firsthand that I am motivated by money, as a young person joining the workforce I haven’t found “the thing”  that I am passionate about as yet but I know what I can’t live without. When dealing with a person or an organization the first place to look when trying to figure out their motivation for doing something is their agenda. Their agenda shapes the outcome more than most would like to admit. Pay attention to incentives and you’ll be able to understand most of the actions people and businesses take, no matter how irrational it may seem.

 

         5. Sales

 

When I think sales I think clothing store clerks who constantly push their clothes on you even if it is out of your price range or doesn’t fit your body type. I believe if you let them they’ll convince you that you look exceptionally in a black scandal bag.  Fact is most people have a negative attitude towards selling. But it is inescapable in the world we live in. Every business is selling a product or service. In my opinion persuasion is an under-appreciated skill, but is one of the most important tools in getting ahead in business.

  1. Psychology courses should be prerequisites.

I studied Criminology because I watched way too much CSI and read one too many Sherlock Holmes novels. Often times when I say I also studied criminology to people who know my background is in economics they question the correlation. At face value nothing, but based my on the job experience it’s important to have a basic understanding of human behavior. How to deal with colleagues and clients, how to recognize red flags and how to be clinical and not take angry rants and criticism personally.

INFLATION AND INVESTMENTS

If a loaf of bread cost $100 today, you pay $100 for it. Next month you need another loaf of bread you find out that the price of the bread has increased to $110. You now need $10 more to purchase the same bread. Each person at some point can say they have had this experience in one form or the other. You will hear some people label this as inflation, but what exactly is inflation and how exactly does it affect you? More importantly how exactly does it affect your investments?

INFLATION: DEFINITION

Inflation is described as a sustained increase in the general price of goods and services in an economy. In other words, how much of a good or service can your dollar purchase over a given time period. From the example above, the increase in the price of bread in and of itself, does not solely constitute inflation it has to be a rise in the general price level across the economy. From the cost of taking the bus to gas prices at the pumps. The causes of inflation are widely debated on by economists however it is a monetary phenomenon where too much money is chasing too few goods. Following the rule of demand and supply, when demand is higher than supply, prices increase. Conversely, a rise in the cost of production can create price increases where in suppliers have to raise prices in order to maintain profit margins.

Shannon Harris

Shannon Harris, Private Wealth Associate at Stocks and Securities Limited.

INFLATION: TYPES

It should be noted that inflation by itself, is not necessarily negative. Steady inflation rate shows a growing economy; new jobs are being created. Too much inflation, or hyperinflation, comes from an economy expanding too quickly which leads to a breakdown of a country’s monetary system. Deflation or negative inflation reflects an economy which is contracting.  The effects of inflations at any given point in time depends on where an individual, institution or organization stands in the economy. In a high inflationary environment, a fall in the overall price of goods and services (deflation) has a positive effect i.e. the purchasing power of the consumer is strengthening.

INFLATION & RETURNS ON INVESTMENTS

When investing, returns are a focal point. Inflation directly affects the returns on investments. Let’s use this example, a bond instrument pays 10% annually on a $10,000 principal due to be repaid in a year. That is $1,000 in interest payment. The inflation rate for that given year is 3%. What is the real return on this instrument? In other words, how much of a good or service can that $1,000 in interest purchase? That answer of course is 7%. Real return is what investors receive after all deductions have been accounted for, tax being a major example. Ideally one should always look at the real rate of return when investing, not on the stated rate on the investment. This is similar to wages, where the funds you receive for your salary is after all taxes have been deducted, what is left is your real pay. In the example above, 10% is the nominal rate of return (stated returns) while the real return is 7%, which is found by subtracting the inflation rate from the nominal. This is done with the assumption, that no tax is charged on this investment.

INVESTING AGAINST EFFECTS OF INFLATION

With inflation in mind when creating or selecting a portfolio, it should be diversified to buffer against inflation and the rate of return of the instruments within the portfolio should be higher than the inflation rate. Inflation does not directly hamper the returns on equities, as in the long run the company’s profit should keep pace with inflation. Historically returns on the stock market have been shown to outpace inflation in the long run. One should always have a diversified cross-section of equities which provides real return in keeping with where you are in your investment life cycle. This should also be done with the aid of a financial advisor.

Inflation hits fixed income the hardest. Bonds interest payment, loan repayment, certificates of deposits (CDs), pensions are examples of fixed income. Inflation increases means the purchasing power of the dollar has fallen, the same dollar amount cannot buy what it could before. This can lead to a decrease in the standard of living or being unable to meet obligations. There are measures that can be taken against this occurring such as investing in TIPS or Treasury Inflation Protected Securities or having different amounts of fixed income securities within a portfolio which creates less exposure to inflationary environments to ensure real returns are higher than inflation rates. Always consult a financial advisor when making investment decisions.

INFLATION AND INVESTMENT CONCLUSION

How inflation affects you depends on where you stand within the economy. It can have a negative or positive influence on your purchasing power. It should always be considered when making investment decisions.

6 Millionaire habits we should all adopt

Too many of us think that becoming a wealthy millionaire is such an unattainable goal. Well I am here to tell you that it is not. Several people from undesirable circumstances have done it. However, once you tell yourself that something is not achievable, you have limited yourself, and for that reason alone you won’t be able to achieve it. If you want something badly enough you have to be willing to work for it and sometimes this means going through struggles and failures and embarrassment, but that’s ok because this will help to build you into the resilient person you’ll need to be to survive.  To help you reach your goals of financial success here are a few habits that were found to be common with most millionaires. 

Renee2 (1)

Renee Barnett, Brand Associate at Stocks and Securities Limited.

1.Increase your income

Now I know what you’re thinking, it’s not that easy to increase your income, employers aren’t just giving out raises. You’re right, they’re not, but you shouldn’t let this stop you. Most millionaires have several income streams. In these harsh economic times you have to create other sources of income for yourself. A great way to start is to find something you’re good at and capitalize on this skill. Create a business for yourself on the side, a business that is scalable. There is a solution for every problem. create these solutions and believe everything is possible even when others see impossibility.

2. Allocate your Funds correctly

Managing your money well is a crucial habit to learn, and it’s something many persons don’t know how to do. After all they don’t teach you how to manage your finances in school. The first step is to evaluate your income in proportion to your expenses. A general rule almost every single wealthy person adheres to is ‘pay yourself first’ this means you have to put a portion of your earnings away before you even begin to pay any of your bills or spend any money. I know this may seem hard but once you start making a habit of this it will become second nature and in turn, will force you to implement rule number one (increasing your income).

Your expenses should never exceed your income. I know, minimum wage in Jamaica is low, the cost of living is high etc… However, most times, these are just excuses. Create a budget and track all your expenses, then find room to cut back on some of these expenses. Once you’ve done this, allocate a percentage of your income to saving. Now it’s important to note that saving alone isn’t enough and you must always save to invest (as this will give you returns on your funds). Split your savings into two segments; your emergency fund and your investments.

3. Forget the Jones’

If someone were to ask you if you think that most persons are financially successfully, your answer would probably be no. Which brings me to my point, if most persons aren’t financially successfully then why are you following the crowd? You need to study the habits of those who are financially successful, find a mentor and learn from them. If you’re always following the crowd you’ll never achieve the success that only the small percentage are able to achieve.

4. Be Decisive

“Analysis of several hundred people who had accumulated fortunes well beyond the million dollar mark disclosed the fact that every one of them had the habit of reaching decisions promptly” – Think and Grow Rich, Napolean Hill. You may not necessarily be a decisive person but it’s something you can train your mind to be, by making decisions that can easily be corrected as quickly as possible. Persons who are decisive know what they want and most often times than not they get what they want. This trait is not just a trait of the wealthy but it is also one of the most crucial qualities a leader should possess.

5. People Skills

“In the process of reaching the seven figure mark, I’ve learned dealing with people is the most important attribute”- Daniel Ally. After all the core of a business is sales and these sales can only come from consumers (who are people). Businesses are in business to serve people, in order to perform profitable behavior one must master the art of dealing with people assertively and with charm just as much as strategizing. No one likes doing business with unpleasant people. It is important to understand and have the ability to relate to your consumers in any given situation.

6. Understanding your risk tolerance and taking the right ones.

The only way you will reach your goal of true financial success is by taking risks. We have to learn to take risks, when you play it safe in life you’ll get mediocre results. No one ever achieved great results by playing it safe. In order to success your desire for success must be greater than your fear of failure. Sometimes the risks you take won’t pay off and you’ll end up failing, but that’s ok. Failure is part of the process but is not final. Failure is to be treated as a lesson which in turn make you better prepared to take the next step to success. Understand your risk profile and how much risk you are able to endure and make strategic decisions in accordance with this.

Building an Investment Portfolio

First and foremost, lets talk about your options. What can someone actually invest in? Well, there is an array of options to choose from when it comes to investing and they are all distinctive in their own way. One of the more popular financial instruments is stocks/shares/equities. These all mean and represent the same thing, that is, ownership of a business. The benefit of investing in shares is that they have a higher propensity for growth overtime. How fast it grows depends on a myriad of different variables like the amount of you, the investor are willing to endure.

Kunal Thakurani

              Kunal Thakurani               Sales Associate, Managed Products, Stocks and Securities Limited

A bond is another financial instrument an investor may look to purchase as well. It is a debt instrument issued by a Government or Corporation where in you are paid back the full amount at a future date or in parts at different dates. The repayment is accompanied with interest, which is paid annually, semi-annually or quarterly. The benefit of bonds is the income stream it provides for an investor. The income stream it provides is derived from the interest payouts. Bonds are generally lower in risk when compared to stocks. Preference shares give you the best of both worlds. It has the steady payout of a bond and the growth feature of a stock. It works like shares wherein you have part ownership of the business depending on the amount of preference shares you own and you are paid part of the profits (dividends) first (preferred) before holders of regular shares (common stock/shares/equities). If you are looking for capital preservation, exchange traded funds (ETFs) may be a great solution. The best aspect about them is the diversification it brings to your portfolio. The ETF represents underlying assets that could range from several stocks from different corporations to commodities like oil and gold.

So you may be thinking to yourself “What do I invest in?” No need to worry, this is probably the most asked question by any potential investor, client or person alike. Any advisor from any financial institution around the world would love to give you the answer right on the spot, if it were only that simple. You see, when it comes to building someone’s investment portfolio it takes a lot of information about the client in order to give those answers. Everyone is unique in their investment styles, as we all have different lifestyles and goals which therefore affects how n how they would like their investments to be handled, or should be handled. There is no one-size-fits-all when it comes to investment advice.

There are a few aspects that must be taken into consideration when seeking investment advice in order to build your portfolio. One of them is your tolerance to risk. This is by far one of the most important aspects to investing. It can help any advisor point you in the direction of stocks, bonds, preference shares or exchange traded funds and may even delve more into detail regarding the type of stocks/bonds are more suited the investor.

Another aspect an advisor may look at is your time horizon on your investment. “How long do you wish to have the funds invested?” It really is important that the portfolio be tailored to how long you would like to have the funds invested so as to not choose financial instruments that do not match your time horizon. For example, if you as an investor plan to invest for a specific goal, like to further you studies in a Master program, within the next five years. You would not want to invest in a bond that matures in 30 years because the investment does not match the time horizon of the goal.

An investor’s age may also impact their time horizon. Advisors tend to recommend more aggressive portfolios for younger clients because they would have more time to recoup the funds in the instance that there is loss to the portfolio. This would lead to a portfolio more heavily weighted in equities than bonds in your portfolio. Investors reaching retirement age would be more conservative with their portfolio and need a steady income stream to fund their retirement, so therefore would be more likely to have a portfolio with bonds more heavily weighted than equities.

A general rule of thumb when it comes to investing is having a diversified portfolio. You know the saying; “Don’t put all you eggs in one basket” is essential to build a more sustainable investment. You put yourself at greater risk if you concentrate all you funds in one singular investment, whether it be in one stock/bond/ETF/pref share etc. If your portfolio is only invested in one security then if that security is decreases in value, this means your entire portfolio is down.  As opposed to if you had a well diverse portfolio, which would help to mitigate risk.

In order to get proper advice as a client and to be really happy with your investments you need to know your options and make decisions that hold true to you, the investor.