NEW YEAR’S RESOLUTIONS

Financial

Given the impact of the current virus on the economic welfare of the world, and the uncertain timing of a return to “normal” . . . socially, politically, and economically, there has never been a more propitious time to re-examine our financial investments, with a view to minimizing investment risk.

Two major areas of investment-risk exist.

1. Periodic market volatility, including occasional “Bear Markets”; an investor has absolutely no control over the timing or magnitude of such market moves. 2. Controllable risks that are very much in the hands of the investor. a. Minimization of the annual holding cost of portfolios b. Selection of products with solid and consistent income streams (yield) c. Employment of extensive product, sector, and geographic diversification d. Utilization of currency hedging strategies e. Allocation of appropriate Equity/Fixed Income percentages

Each of the following risks is worth serious attention.

Holding Costs If you can reduce annual holding costs from, for example, a typical mutual fund annual MER cost of 2 per cent or more, to an Exchange-Traded Fund (ETF) or Index fund structure costing no more than 0.5 per cent annually, the 1.5 per cent difference becomes an immediate and lasting addition to total returns, regardless of market performance.

Since we cannot reasonably predict the long-term performance…we are wise to broadly diversify our investments.

Solid Yields Most well-structured portfolios should be able to deliver a highly predictable dividend and interest income stream of at least 3 per cent annually. If our realistic Total Return target is to average 6 per cent annually over the long term, fully 50 per cent of our objective is in hand from the income alone, with only 3 per cent required from capital appreciation. Broad Diversification Since we cannot reasonably predict the long-term performance of individual corporations, market sectors, or geographic areas, we are wise to broadly diversify our investments. Currency Hedging While significant foreign holdings such as in the U.S. and Europe are advisable diversification, we must recognize that a major currency risk accompanies such investments. ETF-based strategies that minimize that risk are available. • Asset Class Allocation

A carefully considered allocation between Equity and Fixed

Peter Dolezal

Income holdings is crucial to minimizing long-term investment risk. Although age and proximity to retirement are important factors in this decision, they are only part of the equation. Other factors, such as the existence of workplace pensions and the degree of required capital drawdown, should also be key considerations.

If an investor structures his or her portfolios in a manner that minimizes fully controllable investment risks, a solid “Couch Potato” investment structure should result—requiring little, if any, ongoing tinkering.

Aside from periodic rebalancing to return each investment to its original percentage allocations, the optimal ongoing strategy is to make minimal changes.

Investors may say, “easier said than done.” Surprisingly, all the key risk-minimizing objectives can be achieved through the exclusive use of Exchange Traded Funds (ETFs) that are broadly available in all sectors and geographic areas. Ideally, specific product choices are best made in the context of a comprehensive Financial Plan, in which the Investment Plan component is only one, albeit very important, segment. s Independent Financial Consultant Peter Dolezal, who sells no products, is the author of a number of books, including his most recent Third Edition of The SMART CANADIAN WEALTHBUILDER.