Second Opinion - Are your investments on the Right Track?

Fred Ketchen: Welcome to the Scotiabank Second Opinion webvideo.

Today, we’ll discuss why an investor might want to get a second opinion, and how changes to some key variables, like asset allocation and geographic diversification, can make a big difference over the long term.

We often seek second opinions for possible medical treatments and important legal matters. So why not get one for the investments you’re relying on to help you meet your financial goals?

That’s what a Second Opinion from Scotiabank is all about. It’s designed to provide you with peace of mind around some of your most important responsibilities – whether it’s saving for your child’s education, or your own retirement – whatever your longer term investment goals might be.

Bev Moir: I talk with investors every day, and a lot of them have lingering doubts about the long term financial decisions they’ve made. I always tell them, if you’re not totally comfortable about a decision – especially when it’s something as important as your investments -- then by all means come in for a second opinion.

There’s no doubt about it: Investing can be complex. Many people don’t have a plan and others are not sure if they have the right one. There’s lots of information, and lots of choice. So it’s not uncommon for people to look at all the options before them and have more questions than answers. Are these investments right for me? Do they work together? Am I taking on too much risk? Will I have enough to realize my long-term goals and dreams? A second opinion can help take a lot of the confusion out of investing.

Portfolios aren’t just about numbers. They have to reflect who you are, and where you want to be in the future. Each portfolio needs to be based on your individual risk tolerance, your overall objectives and when you’re going to need the funds you’re investing. And those things might change over time.

If an investor isn’t really sure what investments they own, why they own them, or just have questions about their investments, they should definitely have another look at their portfolio.

Sometimes a significant life event can force you to change your investment objectives. A marriage, a birth, a death or a job change - these are all circumstances that may affect your tolerance for risk, your time horizon, or the amount of money you’re saving. They might even change your long term goals.

When these kinds of life-changing events occur, it’s always a good idea to re-evaluate your investment objectives.

Another time when it might be a good idea to get a second opinion, is when your portfolio isn’t performing as you’d expected, or conversely, is producing what seems like inflated returns. If your portfolio isn’t doing as well as you’d expected, it could be you have too much cash generating a low rate of return, too many bonds, or maybe you just have too many of the same kinds of investments – all your eggs in one basket, so to speak. On the flip side, if you haven't looked at your portfolio in a while, you might be overweight in a particular sector or geographic area that's done particularly well in the short-term. That could also mean that you are exposing yourself to inevitable risk of being over represented. A second opinion will help ensure that you’re properly diversified, helping to mitigate some of that risk.

Fred: When you come to Scotiabank for a second opinion, there are a number of ways we can help you. First, we’ll look at your current asset allocation – that is, what you’re invested in today.

What is asset allocation? Simply put, it’s the process of carefully dividing investments among different kinds of assets, such as stocks, bonds, and cash, based on your risk tolerance, the time horizon of your investment, and your financial goals.

Diversification is the key to good asset allocation. A well diversified portfolio can help increase long-terms returns and reduce risk, by balancing possible losses in one asset class with stronger performance in others.

In fact, asset allocation is regarded as the single most important factor determining how well investments perform in future.

Many studies over the past two decades have shown that having the right asset mix is more important than picking individual investments or timing the market in terms of overall portfolio performance.

At roughly 3%, Canada represents a small part of the global stock market. By investing globally, an investor can increase their long-term return potential and minimize risk as it shields your portfolio from volatility in any one geographical region.

While Canada has outperformed in recent years -- thanks in part to strong global demand for resources -- a heavy weighting in energy and basic materials companies leaves the Canadian market vulnerable to volatile commodity price swings and the cyclical nature of natural resources sectors.

Investing in foreign markets increases exposure to industries that are underrepresented in Canada, such as healthcare and technology.

Not convinced you should tap into global investments? Well then ask yourself the following question: Who makes the car I drive or the cell phone I use? Chances are, one if not both are manufactured outside of North America.

Bev: If you’re still in doubt about getting a second opinion on your investments, consider the dramatic effect that even a small boost in performance can have on a portfolio over the long term. For example:

Eric is 35 years old, and has $50,000 in his RRSP to which he contributes $6,000 each year. He plans on retiring at 65, but hasn’t yet taken the time to carefully plan out his investments.

Without a comprehensive financial plan that takes into account his risk tolerance and investment objectives, Eric is likely missing out on additional gains.

Currently, Eric’s annual compound rate of return on his investment portfolio is a 6%. Assuming that a second financial opinion results in a modest 1% annual increase to 7%, his RRSP would grow by approx. $197, 000 by the time he reaches age 65.

Fred: The potential advantages of getting a second opinion for your investments are plain to see. We invite you to bring your investment statements into your local Scotiabank branch and we’ll give you that free second opinion that will ensure you’re making the most of your investments.