I’m nervous about another stock market crash. How do I choose the right low-risk investments?
For some of us, the crash did more than just put a dent in our money confidence; it stomped on our investing hearts. If you want to play it safe for a while or forever, you have a few options. If you are saving for a down payment to buy a home within a few years or less, then you need easy access to your money without penalty or the risk of a capital loss. In this case, you might consider a highly liquid investment, like a money market fund or short-term bonds.
As your time frame gets longer, you can include investments that offer higher returns, but are less liquid. You might also want to consider a segregated fund, which guarantees a minimum of 75% of your original investment if you stay invested for a specified length of time (usually 10 years). Your best choice? Speak to a financial professional about the choices that are best for you.
How can I cope with uncertain markets?
A knee-jerk reaction is rarely a good one. (Have you ever ended a relationship only to demand your hairdresser give you the Halle Berry crop? We’ve been there.) It’s the same when markets get a little flaky. There are some hard-and-fast rules, though, that will help get you through market uncertainty. First, don’t abandon your long-term-hold strategies. The best way to realize substantial gains is to hold equities (a.k.a. stock) for the long term. Review your portfolio and fine-tune your holdings and remember that diversification is the key to protecting the value of your investments and achieving a reasonable rate of growth. That means holding investments from different asset classes that represent a variety of geographic regions and a range of industry sectors.
I keep hearing that Canadian stocks are doing great. Why would I even consider investing outside of Canada, when there is so much uncertainty?
Remember the advice your guidance counselor gave you in high school? It went something like, “Don’t drop English because you’re an ace at math. You need a well-rounded education that will give you options later.” Well, that advice applies to investments. Sure, Canadian stocks are doing great, but Canadian equities account for less than 3% of the total world stock market value. Investing in foreign stocks and bonds through mutual funds or segregated funds lets you invest in diverse markets around the world. It also reduces the risk of investing solely in Canada. Think of global diversification as a way of getting the best of many worlds.
I’ve heard that it’s possible to make money from an investment that’s falling in price. Is that really true or is it like one of those late-night infomercials that promise you can “eat all you want and still lose weight”?
It is possible, and it’s called “short selling.” We first thought this was a rather rude term for petite sizing, but we know better now. Short selling is a sophisticated strategy aimed at making money when the shares of a company fall in value. In short selling, as with any market transaction, the goal is to “buy low and sell high.” The difference is that, with short selling, the “selling high” occurs before the “buying low.” In short (excuse the pun), you borrow some stock from someone who owns it already, sell it high/buy it back low, return the borrowed shares and pocket the profit. Phew! (That’s assuming the value drops... it doesn’t always!)
How does short selling work?
Suppose an investor — in this case a mutual fund manager — believes the shares of XYZ Corp., now $50, are really worth just $30. She arranges with a brokerage firm to borrow XYZ shares and sells them for $50. Soon afterwards, the stock does indeed fall, and the fund manager purchases shares to replace the ones she has borrowed from the brokerage. If the new price is $30, the fund has made $20 per share, less fees and borrowing costs. Sounds great, but doesn’t always go as planned... i.e. if the stock price actually rises.
What does “beta” have to do with mutual fund performance?
Want to impress at your next cocktail party? The next time someone starts talking about their mutual fund, ask something like, “How’s the beta on that baby?” You’ll get bonus points (and you’ll impress them more) if you actually know what it means, so listen up: Beta indicates whether a mutual fund was more or less volatile than the broad market in which it primarily invests. A 1.0 beta indicates that a mutual fund matched the market. Betas for index funds, for example, are typically 1.0. In general, betas are below 1.0 for less volatile funds and above 1.0 for more volatile ones.
What do economists mean when they talk about the yield curve?
Want an instant snapshot of the economy? Then check out a yield curve. When economists predict where the economy is headed or what may happen to bond markets, they often refer to the yield curve. The yield curve is a graphic representation of the difference in rates on short-term and long-term bonds. In a positive market, the cost of money rises as the term lengthens, so the graph goes up. When there’s little difference between short-term and long-term bond rates, the curve is flat. When longer-term rates are lower than short-term rates, the curve is said to be negative or inverted.
How can the yield curve guide my investment decisions?
Under normal circumstances, the yield curve is positive — that is, long-term bonds pay more than short-term bonds. When it flattens, or inverts, it’s an indication that something out of the ordinary is happening. It might be that inflation is heating up or Canadian bonds have fallen out of favour with foreign investors. When that happens, it’s time to talk to a professional about whether your portfolio could use a little fine-tuning.
