This means that if one single sector suffers a big setback, it won’t drown your entire portfolio. In the dotcom crash of 2000 many tech stock prices plummeted. Had you invested everything you had in tech companies you would have made a very big loss.

 

Investing in stocks via ETFs

The most effective way to diversify a portfolio is by investing in mutual funds or ETFs that act as a wrapper for hundreds of different stocks or bonds; many of these will mirror the composition of well-known indices like the S&P 500. You can find a number ofinvestment providers that allow you to invest your money in market tracking index ETFs.

 

Investors not only need to consider diversification, they must also consider what their investments are costing them. “Fees” they’re called, and they’re like the termites of investing — always eating and never satisfied. Actively managed mutual funds have what’s called a management expense ratio, or MER, which is the percentage of the entire fund that the mutual fund company assesses annually to pay its managers, support staff, for advertising, rent, and about anything else you could think of.

 

In the U.S., a 1% MER is not uncommon, and it’s more likely to be closer to 2% in Canada. Whether the fund value increases by 15% or loses 5% over the course of a year, that percentage will always be lopped right off the top.

 

Though it might not even sound like that much, this financial advisor demonstrated how a mere 2% MER could decrease investment gains by half over a 25-year investment. But surely these fund managers must be so great at picking stocks that their fees are justified? Au contraire! Recent research reveals that over a 15 year period, 82.2% of managed stock funds have been bested by the overall market. For this reason, many investors have jettisoned the old mutual fund strategies of their parents in favor of low-fee, passive ETFs that seek to mirror the market rather than beat it, since MERs of passive investments are generally a fraction of those of actively managed funds.

 

Real estate investing basics

There’s an entire genre of TV shows that make it appear as though buying and flipping real estate is the modern equivalent of alchemy. You'd think just about everyone has the amazing ability to turn drywall and vinyl siding into gold. Those who buy property hoping to get rich quick should understand the dangers.

 

Real estate is a business that comes with huge, expensive complications, ones that can potentially ruin unsavvy speculators. Any back of the envelope calculation of investment return must take into account expenses such as property taxes, insurance, and maintenance.

 

Canadian business guru Joe Canavan, founder of GT Global (Canada) and Synergy Asset Management, looked at the numbers and realized, that over the last 25 years, the S&P TSX Composite Index was up by about 325%, while during that same period, the average home price across Canada increased about 200%. That said, buying a house has been for generations a kind of forced saving plan for undisciplined investors; it might not be the absolute best investment, but without that monthly mortgage payment, they might not have saved anything at all.

 

Those seeking diversification in their portfolio in addition to stocks and bonds can invest in real estate without any of the headaches that come with actually owning a house or apartment. Real estate investment trusts, or REITs, are companies that sell shares in their various real estate investments. Just as diversification is important in stock holdings, REIT investors can spread their risk among dozens — or even hundreds — of REITs through REIT ETFs, of which there are literally hundreds to choose from. REITs also offer some major tax benefits that neither home ownership, nor investments in stocks or bonds, offer.

 

JMD

 

11.10.2019

Investment