FEATURE PRACTICE MANAGEMENT The key decisions Determining asset allocation BY PAUL PHILIP I In this second part of a series on the key decisions every investor needs to make, we examine “the asset allocation decision. ” t is vital to have a good understand-ing of risk to be able to make an informed decision regarding which general asset classes to include in your investment portfolio. Bay Street and the fi nancial media often focus on an investment’s potential return (how much you might make on that investment) rather than the risk you must take in order to achieve that return. A core understanding of risk and the relationship between risk and return is necessary for any prudent, long-term investor to make smart investment decisions. For long-term investors there are two general types of investments that make up a portfolio: . Equities (or stocks) – are an owner-ship interest in a company. If the company does well, as a shareholder you should benefi t from its rising stock price. The company might also pay a discretionary dividend to shareholders in the form of cash or more shares of stock. If the com-pany does poorly, its stock price might go down, causing your shares to decline in value. There are many factors that can a ect a company’s stock price, many of which are completely external to the company itself. In general, equity investments are considered higher risk/higher expected return investments. . Fixed income (or bonds) – are an IOU or a loan to an entity such as the Canadian government, a prov-ince, or a company. Bonds are contractual obligations that usually involve interest payments paid by the borrower at regular intervals and, ultimately, the return of your initial investment at maturity date. Bonds are generally considered to be lower risk/lower expected return investments (especially high-quality, short-term bonds). RISK AND RETURN ARE RELATED PAUL PHILIP, CFP, CLU, has been advising hundreds of chiropractors across Canada on building and protecting their wealth since 1992. His firm, Financial Wealth Builders Inc. is located in Toronto, Ontario. To learn more about building your wealth visit www.fwb-inc.com or contact Paul at [email protected] or 1-866-735-5581. 28 Canadian Chiropractor July/August 2013 Although Bay Street and the fi nancial media encourage us to believe that we can find a “free lunch” or a market pricing error on investments, these op-portunities are very di cult to exploit. In other words, there are no low risk/high expected return investments. Here’s why – if an investment o ered a disproportionately high return for the risk it involved, word would spread and others would try to capitalize on it. This additional demand would result in the price of the investment being driven up to the point where its expected return is commensurate with other invest-ments of similar risk. This is how free markets work. Each day, the prices of tens of thousands of www.canadianchiropractor.ca Photo: iStock
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