vision + - Opticians Association of Canada

Playing it Too Safe
You might sleep soundly knowing that your money is
invested in safe, income-generating vehicles such as Guaranteed
Investment Certificates (GICs). But what about the
money you’re not making by playing it excessively safe?
Every individual has to determine the degree of risk
with which they’re comfortable (see Vision magazine,
March/April 2006), but if you’re a 40-year-old whose
portfolio is in fixed income and cash, you’re simply
playing it too safe.
While safe, low-return investment vehicles, such as
GICs, can play a role in a well-balanced portfolio,
investors who want to meet long-term goals should also
invest in higher return potential investments, such as
equities.
One rule of thumb for a moderately risk-tolerant
individual is to allocate "110 minus your age" to
equities. That means that a 40-year-old might have 70 per
cent allocated to a mix of equity-oriented mutual funds.
On the other hand, investors with short time horizons
might be better off with a very modest – if any – stake
in equities.
Having Unrealistic Expectations
While it's normal to hope for the best from your
investments, you could run into some serious long-term
cash flow problems if you base your future financial plans
on unrealistic assumptions.
According to an August 2004 Gallup poll, nearly
one-third of 800 U.S. investors surveyed expected to
generate profits of 10 per cent or more in their portfolios
during the coming year.
Yet, based on data from Standard & Poor's and the
U.S. Federal Reserve, from 1926 to 2003, a hypothetical
portfolio divided equally among stocks, bonds and cash
would have had an average total return of 7.3 per cent
annually.
Research the historical performance of appropriate
investment indexes – or appropriate benchmarks – and
use their average long-term returns to help maintain
realistic expectations for your own investment returns. ISI