Wealth Insights - September 2016

Wealth Insights

September 2016

DIY Investor? There's Value in Partnering with an Advisor

Sharing the challenge of managing your money can make you a better investor

A $100,000 investment in 1995 by the average equity mutual fund investor in the US more than doubled in value to just over $249,000 by the end of 2015. Impressive? Hardly. That same amount tracking the benchmark S&P 500 index would have grown to nearly $483,000.1

Is the gap surprising? Not when you consider why the typical investor underperforms. Whether it’s overreacting to market ups and downs, improperly managing risk or simply failing to recognize their own limitations, investors repeatedly make mistakes which derail their best efforts.

When you’re investing on your own, it can be tough to get everything right – especially as your wealth grows or your affairs become more complex. That’s why having a little help along the way can move you closer to your goals, with less worry.

Five ways an advisor can help

Investing on your own doesn’t mean you have to go it alone.

Teaming up with a financial advisor can benefit you in ways you shouldn’t ignore. Here are five things the right advisor can do to make you a better investor.

1. Build a plan

Rather than making planning a priority, self-directed investors too often pin their hopes on finding the next hot stock, or try to trade their way to riches by jumping in and out of the market. At the other extreme, they succumb to analysis-paralysis, overanalyzing to the point of inaction, thereby losing a valuable ally in building wealth – time. Another problem? Overlooking tax matters. Paying too little attention to how assets are divided between TFSAs, RRSPs, RRIFs and taxable accounts can significantly reduce a portfolio’s returns.

A financial advisor helps you see the big picture. They’ll work with you to build a plan you can count on through good times and bad. They’ll recognize your goals, and factor in key elements that drive investment returns, like asset allocation, tax efficiency and risk management.

An advisor will set up a process to track your progress, while helping you make adjustments to your strategy when your circumstances, goals or risk tolerance change.

Studies say that when you have a plan, you feel more confident about the future. Research from Deloitte found 53% of those who felt very secure about their retirement worked with a financial professional and had a formal plan in place. Only 17% of those without a plan or an advisor felt the same way.

2. Create and maintain a proper asset allocation

Being preoccupied with individual security selection is one of the ways investors mishandle asset allocation, an essential tool in controlling risk. But, it isn’t alone.

Difficulties also arise when investors take on either too much or too little risk to achieve their objectives. An example? Going with an aggressive, all-equity portfolio in an effort to beat the market, when assuming less risk would suffice. Or, turning too conservative by loading up on bonds, GICs and cash, which can stifle growth.

Without a proper plan in place, a portfolio risks becoming a haphazard collection of investments based on hot tips, yesterday’s winners and the latest hype. Instead of achieving diversification, piling on more securities does the opposite. Investors ‘deworsify’ their portfolios, adding complexity without improving performance or reducing risk.

Another trouble spot is home-country bias. For a typical Canadian investor, staying with the familiar can create an unbalanced portfolio heavily weighted in the financial, energy and materials sectors, which together make up the lion’s share of the S&P/TSX Composite Index. What’s more, because Canada accounts for only a tiny fraction of global capital markets, sticking too close to home means missing out on the vast majority of the world’s investment opportunities.

An advisor can work with you to establish a broad mix of stocks, bonds and cash to target your savings goals while respecting your attitude towards risk. And, because it’s easy to neglect your portfolio when life gets busy, they’ll establish a disciplined system to review, rebalance and maintain your ideal asset allocation.

3. Help keep your emotions and behaviours in check

Investors face psychological and behavioural traps which can result in poor decision-making. These include:

  • Holding losing positions too long. Investors can become fixated on what they feel an investment should be worth, even as it steadily loses value. Rather than take a loss and move to better opportunities, they continue to hang on, convinced their sinking investment will bounce back.
  • Being overconfident. One way is when investors credit their success to a knack for picking winning investments, while conveniently ignoring other factors, for example, a bull market that’s pushing everything higher. Misplaced confidence can lead them to forget the value of diversification and eagerly take on excessive risk, putting their portfolio in peril.
  • Myopia, or the can’t-see-the-forest-for-the-trees phenomenon. When investors pay too much attention to how individual investments are doing, it can mask what’s really important – the performance of their portfolio overall.
  • Responding emotionally to financial markets. Becoming overly greedy or fearful in response to the market’s moves is a classic investing error, inevitably leading to buying high or selling out in panic at a market bottom.

Having the objective, calm perspective of an advisor in your corner can help you avoid these pitfalls and maintain your financial well-being.

4. Act as a sounding board

In our connected world there’s no shortage of information and opinion when it comes to investing. When you’re trying to put money to work on your own, it can be difficult to tune in to what’s worth listening to and tune out the rest.

An advisor is a valuable sounding board for your ideas, with the skills and knowledge to cut through the clutter, analyze the facts, and offer a sound second opinion.

5. Deliver advice beyond investing

Even if your focus is investing, your financial life is about so much more. Perhaps there’s a mortgage to manage, kids to raise or a pension to deal with. Unless you have the ability to figure it all out, how well your investment portfolio performs may not mean as much as you think to your overall financial health and wealth.

That’s where working with an advisor for your investments comes with a bonus: access to wider expertise.

Advisors, and the circle of specialists they partner with, help you make smart decisions in key areas like retirement and estate planning, insurance, debt management, tax planning and educational savings. They integrate the pieces into a comprehensive financial plan that can evolve with your changing lifestyle and priorities, giving you the best chance of reaching your goals.

Make the most of working with a financial advisor

Your financial advisor is responsible for acting in your best interests, making recommendations consistent with your objectives and risk appetite. But remember, it’s a partnership. Here are a few tips for getting the most out of your relationship.

  • The more your advisor knows about your financial situation the better they’ll be able to serve you. Be open to sharing details about your investments, tax situation, income and liabilities.
  • Together, set out a plan for monitoring and reviewing your investments, and agree upon the benchmarks you’ll use to assess performance.
  • Know where you stand. Keep on top of statements, tax slips and other key documents you receive.
  • Inform your advisor when there’s an important change in your personal or financial situation, like marriage, divorce or birth of a child. These changes can significantly impact your financial and investment plan.

Get the right advice

Want to learn more about what a Westminster Savings financial planner can do for you? Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.



1For background see Dalbar Inc., Quantitative Analysis of Investor Behaviour 2016.

Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, cash balances, mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.