Getting the Most of Your Investment Dollar pt. 1

Remember that commercial with the jingle "Hands in my pocket?" Well, that is the investment world. Everybody wants your dollar and they are spending lots to get it. Between mutual fund companies, insurance companies, and the banks, thousands are spent on one purpose: the privilege of managing your money and they will show you the numbers to back this up.

With so much out there, even the best professionals have a tough time choosing what is right for their clients. It is easy for people to make the wrong choices and worse, pay a financial advisor to do that for them. Moreover, most people do not know what is being done with their money and why.

As I type this I look at the TSX to see that there has been a recoup of some of the downfall that we saw over the summer. Many investors read the headlines and see their falling investments and ask themselves the question: "Where is the best place for my money?" It is a worthy question, but I would like to follow that up with "How can every individual get the most out of every dollar they have invested?"

Let's start with the trusty GIC. A dependable safe haven for volatile times. In times of historically low interest rates we also see a reflection in GIC rates. Billions of Canadian dollars are held with the banks in a GIC at this very moment receiving a low return, but on the other hand this is "low risk."

Let's define risk in terms of investing. I think we would all agree that risk to investors can be associated with the loss of capital. Studies have shown that after inflation (the reduction in the value of your dollar) and taxes your real return is actually in the negative with GICs. This means that at the end of the day, let's say in 5 years, the actual value of your dollar is less than when you started. Now that study is from 2004 but I have not seen a dramatic increase in GIC rates and one would argue that life has gotten more expensive.

In the meantime the bank has benefited from 5 years worth of leveraging and making a lot of profit from your money. Not only that, but if you choose to access your money within the stated period of time the bank will charge you a fee or penalty.

This defines risk to me and not necessarily getting the most from my invested money.

I use the idea of building a solid foundation in your portfolio like you would with a building. Once that core has been established you have a lot more freedom to take a more aggressive approach. However, with any investment time always reduces risk. For example, take a core quality balanced mutual fund that holds not only equity but also bonds and other fixed income vehicles. With quality management you will often see a decent real return based on five years (8-10%). I see that as a conservative core to build for yourself.

However, this opens up a big can of worms: Mutual Funds. Here's a crash course on how mutual funds work.

Do mutual funds fit the average Canadian? Are you better to invest in mutual funds vs. index funds? What about the fees associated with investing in funds? What about returns? What about loads? What am I investing in with my mutual fund?

All valid questions.....pt. 2 Mutual Funds