Investing

The Value of Advice: Finding the Active-Passive Balance

February 13, 2024

For the most important aspects of your life, there is typically a half a dozen things that matter.  Keeping healthy means daily exercise, eating well, a good night sleep, finding me time, positive personal relationships, and moderated drinking. Investing and accumulating wealth is no different, there are only a few things that really matter:

1. Regular contributions

2. Understand what you are invested in

3. Work tax rules to your favour

4. Watch costs

5. Avoid dumb mistakes like chasing hot trends

6. Keep a long-term perspective

Keeping a long-term perspective of your goals and managing your behaviour accordingly is the most challenging aspect of investing. Ultimately, this means having a plan that guides you when to be active and when to be passive. Some people, with the time and inclination, want to take charge of all the above. Most of us, however, prefer to dedicate more time to other elements of life – like family, hobbies or travel. A Q Wealth Portfolio Manager can alleviate this burden by knowing when to stick or twist. After all, some of the best investment minds, like Warren Buffet, say there are times when the best thing to do is nothing.

Have a Plan

The most proactive discipline an investor can have is having an asset allocation model and re-working it annually. Through understanding who you are, your risk tolerance, what’s important in your life, and how you want to use your money, an advisor can allocate the appropriate mix of assets, and a plan for how that might change as you get older or things change, be that with financial markets or your personal situation.

The most important benefit of this plan is to manage your behaviour. If you are still accumulating, you can add new money to those areas where there is price weakness. If you are nearing retirement, the plan can guide you where to sell profit and add to areas that may be more important such as fixed income. The key is that you are being active when the plan tells you there is an opportunity, and being passive when investments are working in line with your goals.

Revisiting your allocation plan annually, or even quarterly, with an advisor is important. But a lot of time passes in a year, and doing it alone means we may miss market opportunities or just generally lose touch. In the other extreme, monitoring price movements on our cell phones twice a day might be good entertainment, but its not useful for managing money. An advisor can take these scenarios out of the equation by keeping the long-term perspective, helping you maintain a feasible monthly contribution rate (the seeds of portfolio building) and preventing allocation drift.

Remember, markets go up, markets go down. We have no control over it. The media often suggests volatility is bad. It’s not. Volatility is an opportunity for those with a plan to add during price weakness. That’s a good example of when to be active.

The Value of Advice

Investing is both incredibly easy and difficult at the same time. In one hour, you can open an investment account, do an assessment, pick a typical asset allocation plan and get going.  If you’re a DIY investor, the hard part is the drift of time. Things happen, we get alone in our thoughts, we might lose focus or interest. Some of us might have the mental toughness or interest to go it alone, but for the most of us advise is crucial, and here is why:

Expertise and access – in Canada you can count the number of investment tools like mutual funds and ETFs in the thousands.  For the average investor, filtering through that is a staggering challenge yet these are the building blocks of our portfolio. An advisor is in the business of screening the options and is in the best position to help build the plan. Advisors also may suggest investments less publicly known, such as alternative investments, for greater portfolio diversification.

Dumb idea protection – we all get excited about the shiny new toy, lately that is cannabis, crypto, IPOs and even boring GICs.  An advisor, in addition to your plan, can protect you from the impulsiveness of chasing a hot idea with your serious long-term money.

Your own CFO – think of your advisor as the CFO.  The unemotional, experienced third party to your finances who can guide you when to act and when to sit tight. A sounding board when you need it or a bridge that brings spouses together on financial planning.

When you research active-versus-passive investing the information is mostly focused at the product level, ETFs being passive and everything else being active. While that is important, when it comes to investing, the active-versus-passive philosophy is important at a behavioural level as well.  With that in mind, a Q Wealth Portfolio Manager can help you be active with the annual strategy, be active buying and selling to stay within allocation, and be active on assessing new ideas. The rest of the time be passive and focus on more important investments like family, career and passions.

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