Episode #17 - Two Minutes to a Better RSP: Do-It-Yourself Portfolio Building 101
Announcer: Welcome to The Money Clip podcast series from The Vault, Scotiabank’s online guide to helping Canadians get ahead financially. Listen in to gain a deeper understanding of your personal finances and find out how a few small changes to the way you manage your money can make a big difference.Michael Seaton: Thank you for joining us on The Money Clip podcast series from Scotiabank. I’m your host, Michael Seaton, and with The Money Clip we provide Canadians with a deeper understanding of personal finance and money-related matters. This is our series titled “Two Minutes to a Better RSP”. We hope to put you on the path to maximize your retirement savings plan as the deadline approaches. For today’s eleventh episode, we are speaking again with John Ballard of ScotiaMcLeod Direct Investing. I asked John to explain how to build a portfolio on your own using a self-managed account. And here’s John’s answer.
John Ballard: When it comes to building an investment portfolio, there are really only two ways that it can be done. The first is to purchase a product, or an asset, that you expect to go up in value over a period of time. The second is to lend your capital to someone whom you expect to pay you interest over the period of the loan and whom you expect to be able to pay back the capital at the end of the loan period. Of course, if we look at these two types of investments individually, under the purchasing of individual assets category, the most commonly purchased assets are, of course, stocks, shares, mutual funds – items that trade typically on a stock exchange. But it shouldn’t be overlooked that, of course, real estate and, for some people, antiques also fall into this same category. Of course, the likelihood of a particular asset going up in value is the main thing that people consider when looking for something to buy for investment purposes. But a second criterion of equal importance is how liquid is this particular asset and how easy will it be for me to sell it when I choose to do so. And, of course, certain assets are much more easy to sell than others. For instance, real estate; it may well take many months before a sale is concluded, whereas an asset purchased on the stock exchange can normally be sold and settled within three days, which is the typical settlement cycle. Now, there will be another podcast that talks a little bit more about research and how the individual selections may be made within a portfolio. But I’d like here just to go on to the second category, which is lending money to someone. And, of course, most people consider, when lending money, what is the yield and what interest am I going to be able to receive over the period of this loan. However, there are two other important aspects to consider. Firstly, how long is the loan period and how long will it be before I get my capital back? And secondly, exactly to whom am I making this loan? And, of course, making a loan to someone like a major bank or a federal government or a provincial government, normally speaking, carries a very low level of risk. Whereas there are possibilities available in the marketplace to make loans to private individuals, to corporations, and to other types of issuers of loans, which may carry a slightly higher risk, in consequence. Typically speaking, the yield – or the interest that’s paid – is proportional to the amount of risk involved in the loan that’s being made. Now, as well as these two types of assets used in investments, we at Scotia like to adhere to a couple of other little guiding rules as well: Invest early and stay invested. This perhaps will help you to avoid the investment fads that come and go in the marketplace and will help you to be successful in growing your assets over the long period. And finally, remember the old adage, “Don’t put all your eggs in one basket”. Diversification is the key to successful long-term investing. I hope these comments have been helpful.
Michael Seaton: Well thank you again, John. And that will conclude another Two Minutes to a Better RSP podcast. Keep listening for more in this series as we take two minutes to review tips and suggestions to reach your retirement goals. Thank you again for listening.
Announcer: Do you have any thoughts on today’s show? We’d love for you to get involved and become part of the conversation. Send us your questions, comments or money management tips so that we can address them in future podcasts. Our email address is themoneyclip@scotiabank.com and our call-in number is 1-866-652-5333. The Money Clip is brought to you by The Vault at Scotiabank. Be sure to tune in again next time.