[Two of my friendly clients expressed
similar concerns of not having a fund in their portfolio that has created high
double digit returns and also felt their friends have much higher return with
other advisors/financial institutions. I looked in their portfolio and found
that one has an investment profile of Low-Risk-Tolerance where as the other has
a Medium-Risk-Tolerance. I explained to
them in detail about their portfolios and stated their returns are according to
their investment profiles and we can modify their portfolio if their profile
has changed. However, my conversations with them inspired me to write the
following article for the benefit of other clients.] February
09, 2006
Individual
investors and financial experts recognize the Bear Markets and Downtrend
Markets, and Bull Markets and Uptrend Markets - Only
after its occurrence, after the fact and not before its occurrence.
Many predict the markets’ trends. Predictors take pride when they were right
and reasons with excuses when there were wrong. If predictors knew that their
predictions would be right then they would have invested all their assets in
markets accordingly and have become rich by now. Is it not? Who has the Crystal
Ball? Find out how the world’s
richest people became richer? Certainly, they became richer not by speculation
or gamble on basis of probabilities.
Results of a
downtrend or bear markets investors are emotionally bias to fear, their risk
tolerance suddenly becomes low with panic, and psychologically feel exhaustion,
disbelief and demoralization. A negative return is unacceptable by investors,
as they think the returns should be positive.
Results of uptrend
or bull markets investors are emotionally bias to greed, their risk tolerance
suddenly becomes high with excitement and psychologically feel euphoria, greed
and extrapolation. A single digit positive return is unacceptable by investors
as they think the return should be some thing higher.
At Shah Financial
Planning (SFP) we do not predict whether the markets’ will be up trended
or down trended, or will be bear or bull markets, when we develop clients’
investment portfolio. We believe that markets’ volatilities depend on several
factors, which are uncontrollable. You cannot predict the markets and history
has shown that any asset class, sector/industry, region/country, investment
style, or market capitalization seldom is the best performer one year
after another - Because Winners Rotate.
So, at SFP we do
not chase a winner or a winner fund. We focus on your financial and investment
objectives, and an investment time horizon, along with most importantly your
risk tolerance - all these factors comprise your interment profile. With this profile we develop your portfolio
by diversifying your investment by asset allocation, regional representations,
investment styles, market capitalization. Realistically, investors should
expect their returns according to their investment profile on our record - KYC
(Know-Your-Client form). If ones’ portfolio is built with moderate risk, then
expecting a double digit return is unrealistic, when up trended markets.
Similarly, if ones’ portfolio is built with moderate risk then there should not
be a double digit negative return, when markets down trended. Having a high
percentage of a portfolio with labour-sponsored (which gave 30% - 35% tax
credits) and specialty funds makes a portfolio of high risk tolerance.
Should
you have any concerns with your returns, we encourage you to set a meeting with
us to review your portfolio and modify it according to your new investment
profile. Primarily, we
focus in protecting your principal and have a long term growth accordingly to
your investment profile. We encourage and keep reminding our clients to have
their KYC update, which includes Investment Profile, at least annually, as it
is important and mandatory by Regulator’s. This is for your benefit allowing
us to serve you better with your objectives.
By: Narendra Shah, B.SC., PFP, Senior Financial Advisor
SHAH FINANCIAL PLANNING INC.