Guarantees or Predictability

The dollar amount you will receive as an investment return depends on many factors.  The obvious ones are the rate of return and the amount you invest.  That is far too limiting for planning purposes.

There are more than three dozen factors that affect the rate you can receive.  Keep in mind that it is a negotiated rate even if you are not party to the negotiation.  No payer will give more than they must; and no investor will take less than their entitlement.

Sometimes, possibly usually, people do not know the amount they should receive.  They invest with incomplete knowledge and use weak indicators to find their investments.

Consider Canadians who invested in US dollar denominated situations.  Apple at the beginning of 2010 was US$29 per share and the Canadian dollar was worth 96 US cents.  Now Apple is US$110 and the Canadian dollar is 76 cents.  In US dollars, Apple is up $81 or about 25% annually compounded.  But in Canadian dollars it has gone from $30 to $145 or more than 30% annually.  Which yield matters?

The $US yield represents the business, while the 5% + represents foreign exchange.  To get the same foreign exchange boost in the next 5.75 years the C$ must become 60 cents.

Currency risk and reward is a part of most portfolios and you should notice.  Results can be misleading.  Risk means uncertainty and it can be for you, or not.

When investing recognize that if you take some risk you may get more or less than you bargained for.  In some ways risk means the same as unpredictable.  If ambiguity is something that you cannot tolerate, some investments are automatically excluded.  Knowing what you don’t want lightens your thinking load.

Guarantees are not a complete antidote to risk.  A guarantee will certainly describe the most you can get.  You might still get less but the probability is lower.

If you invest additional time and money, then you must get a greater rate of return.  A rental property requires more effort than a bond, so you expect to get more.

If what you have invested in is illegal, maybe 5 kilos of cocaine, you should expect a very high rate.  There are large and many adverse consequences that could befall you. Sudden death or arrest and imprisonment require a return.

Strangely fashion matters.  A near certain loss in a movie partnership somehow makes sense.  I suppose talking about a bond at the golf club draws few listeners, whereas the wrap party with the cast of an Angelina Jolie movie might make you the center of attention.

Some tax things are like the movie.  Interesting but not an investment.

People should examine all the things they bring to their investments and be sure they get paid for each part.

An easy one.  Why roll 1-year investment certificates?  If you can give up liquidity, then a 5-year certificate of deposit will pay a higher rate than a 1-year version.

Get paid for what you invest and in your particular time frame, value predictability over guarantees.

Like the currency risk.   If you spend 20% of your money in $US, maybe having 20% of your cash income in $US would neutralize the risk.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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