Finance Problem: not enough liquidity Financial experts typically tell investors to take a long-term view of their portfolios and be prepared to hold their positions for several years before selling. That’s fine in theory. But, as anyone who’s lived for a few years knows, reality is often different. In real life, “stuff” happens – and, when it does, the solution usually involves money. And if you’re not able to access yours quickly, that could be a huge problem if a family member needs quick cash, or you have an unexpected hospital stay or medical expense, or your roof starts leaking at the first thunderstorm of the summer. That’s even more the case if a sizeable portion of your portfolio is in relatively illiquid investments: a rental property, for example, or locked-in investments such as GICs, or shares of an operating business. Problem: you have a “kitchen sink” portfolio The financial industry often focuses on new ideas, the latest trends, and fresh strategies that investors are only now hearing about. Nothing wrong with investing this way once in a while − indeed, some of the most successful investments that you’re likely to make will be responses to new technologies, new trends or newmarket events. But if that’sall that you’re doing, you could end up with a kind of “kitchen sink” portfolio − a collection of investments that cover a wide array of industries or trends, with different levels of risk and widely varying performance, without a lot of purpose or reason for any of them to be in the portfolio. Such portfolios make investment decisions exceptionally difficult: without knowing why a given investment is in the portfolio, or how you hope for it to bring you closer to your long-term goals, it’s difficult to assess your risk tolerance, evaluate portfolio performance, or even know when to buy or sell. Solution: find the purpose for your positions There’s nothing wrong with investing in a “hot stock” or a fresh investment trend as long as you’ve done your homework and you’re staying within your personal risk tolerance. But, when you look at your portfolio as a whole, you should be able to see a broad plan or purpose behind your holdings: how they position you for long-term growth; how they align with your risk tolerance; how they help you accomplish your financial and life goals; and so on. If you have a collection of investments that doesn’t really fit with any of those bigger-picture purposes, it might make sense to sell, or at least trim some of your “collection” and instead, give some thought to crafting a long-term financial plan that can provide some longer-term direction. Problem: too many bets, long shots and “wild punts” Are you an investor or are you a speculator? Are you investing in a quality business with the intention of long-term price appreciation (investing)? Or are you buying a risky asset in hopes of quickly selling it at a higher price (speculating)? If you’re an experienced investor with a strong stomach for risk, you can certainly make a lot of money on high-risk, high-return speculations. But, if there are too many of those high-risk “quick flips” in your portfolio, or if you find yourself gravitating more toward long-shot opportunities on which you could just as easily lose a fortune as make one, then that’s an attitude that’s more akin to gambling than investing. Solution: focus on investing, not speculating If you must speculate, make sure that you understand the rules of the game: it requires an inherently different mindset than long-term investing, and a lot more attention, too. You can make a lot of money, sure, but you could lose a lot, too − don’t ever fool yourself into thinking that this universal truth doesn’t apply to you. You canminimize this risk by keeping your positions small, keeping your expectations reasonable and keeping your attention laser-focused on what’s going on with your positions. Speculations should comprise no more than what you could afford to lose completely − perhaps 5% of your overall portfolio at most. Make sure to do your research with every speculation, and seek out second (or third) opinions to check that research before you commit. Above all, be prepared to quickly exit positions that don’t work out and move with extreme caution − it’s often the “high-risk, high-reward” ideas that get punished first in any downturn. Problem: too much safety The opposite problem is also pretty common: investors who are so concerned about stock market volatility that they try to avoid it altogether. In extreme cases, these investors load up their portfolios with cash, low-yielding investments such as GICs, savings accounts and similar investments − earning little on their investments at all. As a result, the portfolio barely manages to keep up with the rising cost of living, much less make up for regular withdrawals. Given enough time, such an approach leaves the investor at considerable risk of running out of money entirely. Solution: realize that you need some risk It’s understandable that we would want to avoid risk as much as we can. But, in an age in which medical advances and healthier lifestyles mean that we’re living a lot longer, it’s time to realize that not taking on enough risk may be an equally dangerous problem. You can solve this problem by making sure that your portfolio always maintains a balance between “less risky” investments such as cash and GICs, and assets that are “more risky,” but offer performance that can actually keep up with the rising cost of living over time. For most snowbirds, this will mean keeping at least a portion of the portfolio allocated to well-managed, blue-chip, dividend-paying equities. Another alternative is to take a portion of your portfolio and purchase an annuity that guarantees you a certain base level of income for life − a particular benefit for those of us who don’t have a defined-benefit pension. This way, you’ll always have peace of mind knowing that a good portion of your wealth is unaffected by the ups and downs of the market. Solution: hold some cash and cash equivalents Should you sell your rental property or cash in all of your stocks just to ensure that you always have enough cash on hand? Of course not. But neither should you ignore the need for cash altogether. Instead of tying up your portfolio solely in long-termholdings, make sure to keep at least a portion in cash or short-term, near-cash investments. Howmuch? Five per cent of your portfolio or six months’ worth of everyday expenses is probably a bare minimum. Feel free to adjust that number up or down, depending on your individual circumstances. 26 | www.snowbirds.org
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