Learn these key concepts to become a more confident investor
When it comes to investing, it may seem like there is a lot to learn. One of the most rewarding moments in your investment experience comes when you feel you’ve got a grip on what’s going on in your portfolio.
Getting there takes a little bit of time and effort. But there are a few key principles that help lay the foundation for your confidence as an investor. Some fundamental concepts for investing better include:
Every investment decision includes striking a balance between expected returns and the volatility it will take to generate those returns. Being swayed by eye-popping returns on an investment without considering the degree of volatility it took to generate those returns may set you up for disappointment. Understanding the degree of risk you are willing to accept to pursue higher returns is an important aspect of investment risk.
Here’s the general rule: if you want to earn a higher investment return, you typically have to accept the greater degree of risk that comes with it. The safest investments also tend to generate the lowest returns.
When financial markets become volatile, it’s hard not to react irrationally because the ‘fight or flight’ response can take hold when your portfolio loses some of its value.
However, making unplanned changes to your portfolio based on short-term events can make it difficult to achieve your financial goals. Investing with discipline instead of emotion isn’t easy, but that’s how the world’s most successful investors build wealth over the long term.
One of the most effective ways to manage risk is to create a diversified portfolio that reduces volatility and smooths out returns. A diversified portfolio will have exposure to cash, bonds (ideally also diversified to include government and corporate debt with exposure to high yield and emerging market debt where appropriate), equities (globally diversified across developed and emerging markets) and alternatives (such as commodities and real estate).
Why does this work? Because financial markets are not all ‘correlated,’ which means they tend to perform differently at various points in a market cycle. For example, in an environment with a slowing economy and declining interest rates, bond markets may perform well while equities markets may underperform.
Longevity risk is the possibility that you may outlive your financial assets. With people living longer than they ever have before, an environment of lower-than-normal interest rates and the potential for lower stock market returns relative to historical norms is something that all investors should think about and plan for.
This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus of Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017
It may not be as hard as you think to set a plan … and stick to it