Six Points To Help You Ease Into Investing After Divorce Family Law Toronto

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Chris Coulter

Getting Into Investing After Divorce Can Be A Smart Move. Here Are 6 Points To Help Get You Started

Investing can be an excellent way to slowly build wealth, especially if you’ve received a large payment, or are looking to enhance your retirement savings plan, post-divorce.

But, the investment industry can make you feel excluded from their inner circle, and that can be very frustrating. This has been going on for as long as money has been invested in the market. With all that financial vernacular, it’s not hard to understand why one might tend to feel confused.

I am not an investment guru, but I do understand how the industry works. By paying attention to the following important principles, you will gain an unbiased and important overview of how to build your financial portfolio. Understanding these 6 keys will enable you to approach investing with more confidence, and start you down the road to a more prosperous future.

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1.  Nobody Can Predict the Market

Anyone who says they can predict and beat the market on a consistent basis must own a crystal ball. When a stock prospectus says, “past performance is not an indication of future returns,” they  say it because it’s true. If they are able to duplicate the returns of the previous year, that means they were lucky twice in a row.

An interesting fact, of all the mutual funds out in the marketplace today, 96% of them do not beat the market index over a 10-year period. If these financial experts only beat the market 4% of the time, your chances won’t be much higher.

2. Diversification is Critical

Most investors understand that you don’t build your investment portfolio by picking a handful of stocks, and testing your meddle for when to buy and when to sell. Diversification means diversifying across an entire stock exchange. With the likes of index funds and ETFs, you have the ability to own an entire portfolio of stocks that makes up the S&P500, the NASDAQ, the TSX or any other exchange throughout the world. Again, since 96% of mutual funds don’t beat the index over time, wouldn’t you want to own the index, especially if you could avoid paying those high fees that just erode your returns over time?

Diversification of exchanges is important, but you also need to diversify across commodity markets, Treasury Bond markets, and real estate.

3. Pay Attention to Asset Allocation

Asset allocation includes categories like stocks, bonds, commodities, gold, currencies, and real estate. These different asset categories tend to shine at different times. Stocks may average close to a 10% annual rate of return, however, what happens if there were a similar event to the 2008 crisis when stock indexes lost 40%, or more, of their value? What happens if you planned on retiring within one year of your portfolio tanking by 40%? Different asset classes tend to work in relation to one another. If stocks are going down, then government treasury bonds will usually go up. Your asset allocation is the composition of your assets by classification.

As an example, Ray Dalio (see the end of the article for more about him) talks about the all-season portfolio. His asset allocation looks something like this:

30% stock indexes

15% intermediate term government treasury bonds (7-10 year)

40% long term government treasury bonds (20-25 year)

7.5% commodities

7.5% gold

This is an oversimplified version of the all-season portfolio, but it offers a clear picture. This type of portfolio has been tested against some of the worst financial times in history. In 2008, this asset allocation would have lost 3.9%, but would have made as much as 40% in 2012. The return over time translated to an average 10% return over the past 26 years.

Each individual should assess their risk tolerances and decide what their best asset allocation should be, after discussion with a credible financial advisor.

4. Rebalance Annually

So what happens over the course of a year? Stock values may go up considerably, and bond prices may move only marginally. Your asset allocation percentages may look very different year-over-year. Your stock values may now represent 40 or 50%, versus the 30% that they started out at in the previous year. As a result, you need to rebalance to get your asset allocation in line with the desired percentages. This will mean selling some stocks, and perhaps purchasing more bonds. If you don’t, one major correction in the market may translate into greater losses than you had anticipated.

5. Watch How Much You Pay in Fees

The one thing that you are privy to now is how much fees you are being charged. It may not be obvious, but you may be paying more than you realize. If you are paying 2% or more in fees, you need to make 3-4% in returns annually just to break even (because of fees and inflation).

If you’re unsure how much you’re paying, you have a right to ask. Fees are supposed to be completely disclosed. Many financial advisors charge 1% to manage your money, but you need to decide if you are receiving enough value in return for those fees.

6. A Financial Advisor is Still Important

Financial advisors still fulfill a vital role in managing your financial portfolio. They offer a solid second opinion so you don’t do anything counterintuitive. For example, losing a lot of money over a couple of trading days may not be reason to sell. In fact, it may be a huge opportunity to take advantage of lower stock prices. In other words, financial advisors take the emotion out of managing your portfolio. The role of a portfolio manager may be one part financial advisor, and one part psychologist. They should set up an asset allocation according to your risk tolerance, age, and proposed retirement date. This shouldn’t be a storm that you need to endure throughout your working career. A well-crafted and well thought out portfolio shouldn’t give you sleepless nights and make you constantly question whether you’re doing the right thing.

By understanding these six important concepts, you should begin to build the confidence and knowledge needed to start questioning why your financial portfolio is performing the way it is.

If you’d like to understand more, I’d highly encourage you to read or listen to these books; Tony Robbins – Unshakeable (Your Financial Freedom Playbook)Tony Robbins – Money (Master the Game), and Ray Dalio – Principles. I’ve been a Tony Robbins fan for the past 30 years. His network of the top financial minds in the world will give you a simplified, unbiased opinion which will help you to start you feeling confident about what you’re doing. Ray Dalio is the founder of Bridgewater Capital, the world’s largest hedge fund company.  He’s a promoter of the all-season portfolio, which diversifies your risk over all asset classes to mitigate against huge fluctuations in the market.  His theories have been time tested throughout some of the best and worst times in the financial markets.

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