Invest & Leave it Alone
If you’re like many investors, you’ve considered allocating at least a portion of your portfolio into a Guaranteed Investment Certificate (GIC). Why not? After all, GICs are secure investments that are guaranteed to pay back your money. On the other hand, many investors view mutual funds as being too risky, and so avoid them. But is this the whole story?
The beauty of GICs is that they are straightforward and easy to understand. Because market values for GICs aren’t readily available, there’s a built-in discipline to commit to the maturity date. There’s no point in monitoring the financial pages every day, nor in worrying that you won’t get your money back. Once you’ve decided to put your money into, say, a five-year GIC, there’s really nothing to think about until it matures.
Short-term thinking leads to rash decision-making
The approach many investors take can be very different when it comes to mutual funds. That’s because with mutual funds there’s always the option to redeem or to switch into a different fund that appears more attractive. This can lead to the temptation to track the performance of mutual funds on a daily basis. Unfortunately, this focus on the short term can lead to rash decisions that are made without proper perspective.
It’s similar to driving in heavy traffic on the highway and being convinced that every other lane is moving faster than the one you’re in. You typically won’t get to your destination any faster by switching back and forth between lanes, although it can be tempting. And in the same way, it takes discipline to see beyond all the day-to-day fluctuations in the markets – but it’s still the best way to reach your financial goals over the long term.
Treat your mutual funds like they’re GICs
The secret to successful investing is to focus only on the information that’s relevant to you over the long term. While it takes far more self-discipline to invest in mutual funds, the potential returns can make it worthwhile. Cut back on how frequently you check the value of your funds, as it doesn’t matter how the markets perform on a daily basis. Invest in mutual funds in the same way that you invest in a GIC. Once you’ve made the decision to invest, it can be detrimental to start second-guessing yourself. Your advisor can also help you by ensuring that your investment portfolio is meeting your long-term objectives and by helping you filter the information that’s relevant to you.
Example: Trimark Canadian Fund - the benefits of thinking long term
Let’s take a look at how this strategy paid off for investors in the past. For example, the following chart shows Trimark Canadian Fund’s rolling five-year returns since inception (September 1981) through December 2007. As you can see, the Fund did not lose money over any five-year period. Instead, investors who took a long-term view and weren’t sidetracked by short-term market value were well rewarded – the average five-year rolling return annualized since inception was 10.99%.
(Note: The current 5 year average, as at Sep. 30 2009, is 2.7%)
Invest and leave well enough alone
Treating your mutual funds like they’re GICs can be the most effective way to ensure you stay on track to meet your long-term financial goals. That’s because, to be successful over the long term, you have to think long term. It’s as simple as that.
Mutual fund securities unlike GICs are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. The indicated rates of return are the historical annual compounded total returns, including changes in security value and reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges, or income taxes payable by any securityholder, which would have reduced returns. Mutual funds values change frequently and past performance may not be repeated. Please read the prospectus before investing. Copies are available from Andray Domise, Independent Financial Advisor, or from Invesco Trimark Ltd.
* Invesco and all associated trademarks are trademarks of Invesco Holding Company Limited, used under licence.
Trimark and all associated trademarks are trademarks of Invesco Trimark Ltd. © Invesco Trimark Ltd., 2008
Tags: Investments, Mutual Funds
This entry was posted on Friday, October 30th, 2009 at 7:07 am and is filed under Investments, Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
