Some things never change
I am getting closer to retirement, and like many, suffered losses in the market crash last fall. Now I need to rebuild that nest egg. But compared to five years ago, my appetite for risk is somewhat diminished.
Recently I asked a very astute player, who has held senior positions in the financial world in Canada and internationally, what advice he had for someone who is a conservative, risk-adverse investor trying to establish a long-term investment strategy.
He told me what I already knew, but it’s worth mentioning again and again.
Number 1: Never invest in a product you don’t understand .This maxim is worth repeating because new investment products are becoming more complex and we often forget to ask basic questions to find out the underlying reasons as to why it is a good investment. If you don’t understand the answers to these types of basic questions, then you should not make the investment. It is that simple.
Number 2: Hold a diversified portfolio or the “don’t put all of your eggs in one basket” strategy. If you diversify your portfolio into cash, bonds and stock over the long term, you reduce your risk. Why? Because no single type of investment performs best in all economic conditions.
While these two simple pieces of advice seem obvious, it is surprising to us at the BC Securities Commission how often we see investors fail to follow this advice. In cases like Eron Mortgage where BC investors lost millions of dollars, we often heard that people had put their entire life savings into this one investment. They failed on both counts. They didn’t understand the product they were investing in and they certainly didn’t diversify!