The basic issue here is that after graduating post secondary and starting your professional career it's important to think about the short, medium and long term goals that you'd want to set up for yourself.
Note: Financial goals are easier to meet if you have a longer time horizon and so the earlier you get started the less you will have to put away from your paycheques annually.
Now the main thing here is that the financial planner and yourself will go over the specific goals that you have. The most common are paying off student debt, saving up for a down payment on a house, saving up for a cottage and preparing for retirement.
The trick with goals is to keep them as realistic as possible.
Now i'm going to talk about some important general issues that you will have to consider
Time Horizon Issue
- The general rule is that with all other things being the same the longer your time horizon the better your investment results. The following example will show just that.
For Example 20 year old John wants to put away only a $1000 a year to save for his retirement at a 45 year averaged rate of return of 9.5% By the age of 65 he'll be retiring with roughly $614,000 dollars. Plus the equity value of his house and other things.
Now lets say 40 year old Fred wants the same results as John and puts away the same $1000 a year, it's unrealistic for him to attain that same result because his time horizon is only 25 years and so he'll only grow his investment up to $91,000 by the age of sixty five.
Investment Vehicle Issue
-With modern portfolio theory the general notion is that the safer your investment vehicle the lower your return will be. I'll provide a list of different investment vehicles and explain what I mean.
There are three broad investment vehicle classes:
Cash and Cash Equivalents
- These include currency, money market securities, canada savings bonds and GIC's.
- This asset class will generally give you the safest return (i.e. you won't lose your money) but also give you the lowest return, (i.e. 2-4% annually)
Fixed-Income Products
-Consist of bonds due in more than one year as well as preferred shares.
- Now bonds are great because not only can they provide you with a bit of a capital gain over the life of the invesment but also provide income in the interum through coupon payments which can either be used to suppliment your income or reinvested for faster achievement of your financial goal.
Equities
-Now equities are basically your stocks in individual companies in the stock market. Their main purpose is to provide capital gains however some issue dividends which acts as a cash flow stream to investors.
- Stocks over the years have gotten a bad reputation for consistently ruining the fortuines of many individuals however much of that bad reputation is not earned by fact but rather by ignorant news reporters who DON'T understand the market.
Let me prove my case (http://stockcharts.com/charts/historical/spx1960.html) Here's a chart of the S&P 500 index which groups together 500 of the best and generally largest stocks in listed on the New York Stock Exchange. Had you invested $1000 in in the S&P 500 in 1960 that money would be worth $135,000 today. That would include all the apparent "stock market crashes," and "financial meltdowns," that apparently occured throughout the century.
Infact a piece of advice would be to always buy shares in the S&P 500 index when all you read is bad news about it in the press. This is generally the time when stocks are essentially trading at a discount because the rest of the world is selling out.
ASSET MIX ISSUE
Now the main issue becomes how much of what asset class should you be putting in your portfolio.
My general advice which is derrived from quite possibly the smartest man in finance who ever lived and the trainer of the current 2nd richest man in the world (Warren Buffet) Mr Benjamin Graham. He stated in his book the "intelligent investor" that you should always stay within the 25%-75% area. I.e. if you're younger look to have 75% of your portfolio on equities and 25% in bonds.
I personally (and B. Graham) also reccomend that if your horizon is 20 years or longer that you should be fully invested in equities.
Now which stocks should you buy?
The best answer to this question I find is not to answer it at all. Why should you spend all your time running financial models and looking for the best stocks to buy in the market. The professionals are barely right picking stocks.
The best thing to do here is to purchase a large basket of all the stocks (S&P 500 INDEX FUND or in Canada S&P/TSX INDEX) and never worry about if the market goes up or down because you as a smart investor know that over the long term (which is what you're focused on) the market will inevitably go upwards, as you saw in the graph shown earlier. All you have to do is laugh when people reccommend specific companies to you and reply with "I don't know and I don't care!"
Oh and a word of advice, if someone says that investing in a "BLUE CHIP" mutual fund is a safer and better investment vehicle, ask them to prove it by comparing it to the index over the last 10 years. You'll find that the management and administrative fees that you pay to be invested in "professionally managed" funds is not worth it and you'd be better off in an index fund where the management and admin fees are so low that they're non-existant.
Ok so I did write alot, please comment on the blog and let me know your opinions and questions and i'd be happy to assist you in any way that I can.
Taymour :)
