Investing temptations
Pitfalls are easy to fall into, and that’s why discipline is so essential.
By Kevin Flanagan, Head of Investment Management for
Royal Bank of Canada Global Private Banking, Toronto
For investors seeking consistent returns, market fluctuations can be exasperating. Whether they are market advances or declines, they pose very real challenges — and temptations.
Unfortunately, the right decision often becomes clear only in hindsight. For example, consider the not-so-distant past, with the steep decline in the markets from 2000 to 2002. Many investors exited near the market bottom, only to miss out on sharp increases in 2003.
It takes discipline
Making decisions in response to short-term market movements can lead to missed opportunities, as well as the higher costs associated with frequent transactions. So what’s the solution? How can you minimise portfolio declines during poor market conditions, but share in the upside when markets rebound?
The answer lies in having, and maintaining, a disciplined approach. When you adhere to a disciplined investment strategy, you’re far less likely to be distracted by short-term fluctuations, and far more likely to reach your goals.
A disciplined approach is one that clearly sets out your investment objectives and outlines a realistic way to reach them, given your time horizon and tolerance for risk.
With such a strategy in place, you can safely focus on the long term as you track your progress through market fluctuations and progress toward your goals.
To create such a strategy, you first need to have a clear understanding of yourself: What are your investment objectives? How long do you plan to be invested? And how much investment risk are you willing to assume?
Working within a disciplined framework can give you the confidence you need to refrain from chasing every new idea or trend that comes along — a practice that exposes your investments to undue risk.
The need for market savvy
You also may need more than a little market knowledge in order to identify which investments, in which economic sectors, in which areas of the world, are most appropriate for you.
Finally, you need the time and energy to monitor your portfolio and assess your progress. The more assets under management you have, the more challenging it can be to manage your strategy effectively.
Eventually, you may reach a point where it’s to your advantage to bring in a professional management team to maintain the discipline of your approach. If you feel you may have reached this stage, see the article below about our new Global Investment Solutions of interest.
A fresh approach for tailoring a truly personal investing plan
Most investment management services focus on determining the right combination of financial assets for the current economic environment. Global Private Banking’s new Global Investment Solutions takes a different approach to discretionary investment management.
With Global Investment Solutions, finding the right asset mix is only one part of a total solution. Our structured and disciplined process focuses first on understanding your unique goals and needs. Then, from this foundation, we can develop an investing strategy tailored to precisely meet your individual objectives.
A deeper understanding
To gain a truly in-depth understanding of your investment objectives, your Relationship Manager, in partnership with a Portfolio Manager specialist, will take you through a systematic evaluation process. It can take several conversations for us to gain an accurate understanding of your time horizon, your goals, your tolerance for risk, and your expectation of return.
To assist in assessing your needs, Global Investment Solutions uses an exclusive suite of proprietary interactive analytical tools that help clarify your personal investment profile and illustrate the effects of various strategies for you. In a matter of minutes, you can explore any number of scenarios with your Relationship Manager and Portfolio Manager.
Once your objectives and profile are clear, your Relationship Manager can proceed to the next step in Global Investment Solutions — developing an appropriate investing strategy, with the assistance of your Portfolio Manager.
This goes beyond simply setting a traditional asset mix of equities, fixed income, and cash in your portfolio. Based on the results of the discovery process, your Relationship Manager and Portfolio Manager can recommend investment solutions ranging from cash and bonds for income, through to equities and alternative investments such as hedge funds for capital growth.
More to choose from
Besides RBC’s own network of investment specialists, Global Investment Solutions gives you access to top-tier third-party money managers not typically available to individual retail investors.
We select these managers according to a rigorous and disciplined process, seeking those managers who understand the unique expectations of private banking clients. In particular, we want managers who aim to protect your assets in falling markets, while taking advantage of market upturns. By regularly monitoring their performance and investment activities, we check that they stick with their investment mandate.
Access to these additional investment managers gives your portfolio an additional degree of diversification. Not only do you benefit from professional management, you also reduce the risk associated with depending on just one investment manager or style.
The additional investment options available through Global Investment Solutions allow your Relationship Manager and Portfolio Manager to construct for you an even more precisely customised portfolio — one that matches the investment objectives and strategy you arrived at through the discovery process.
Ongoing discipline
Once your strategy has been implemented, your Portfolio Manager will take on the responsibility of monitoring your portfolio in light of your objectives, rebalancing your asset mix whenever necessary.
Should a change in your personal circumstances or your objectives require a shift in your investment mandate, your Relationship Manager will coordinate with your Portfolio Manager to make any appropriate amendments to your portfolio.
The result is a disciplined investing solution designed to both meet your needs and be one that you’ll be comfortable following, no matter what short-term market fluctuations occur.
For details on how Global Investment Solutions can help you achieve your financial goals, please contact your Relationship Manager.
Moving from the grandstand to the starting gate
I’m a great fan of horseracing, and I am thinking of buying a horse. What should I consider before making a purchase?
The sheer emotion that comes from owning a beautiful creature that has just won its first race is indescribable — but not every owner gets to experience it. Horseracing should be pursued first and foremost for the personal enjoyment of the sport, and not entered into with the expectation of reaping a windfall.
Though some pay more than £1 million for a horse with an impeccable pedigree, a lesser bloodline can still produce an athletic, competitive animal. If you have a good bloodstock advisor and choose carefully, you can spend considerably less than £100,000 and potentially still own an animal that can compete with the best.
Regardless of the purchase price, there’s a significant cost to owning a racehorse — on average, between £20,000 and £25,000 annually to train and insure the animal. There are also the costs of upkeep (feeding, stables), travel and veterinary expenses to consider.
Owning a racehorse by yourself is the most expensive and time-consuming approach. You need a trustworthy agent with a thorough knowledge of the market to buy a suitable horse, and a reputable trainer to look after it. But the horse runs under a name you choose, and you keep all the prize money and any potential gain from selling the horse.
An increasingly popular ownership option is a partnership or syndicate. A group of people signs a contract to share the ownership of two or three horses. This “diversification” strategy spreads out the costs and increases the potential of owning part of a top-class horse.
A syndicate agreement specifies how much you’ll have to contribute, how long you’ll be an owner, the percentage of any winnings you’re entitled to, and possibly even formal guidelines for communicating with all the members.
To buy into a syndicate of 15 or 20 people, who own two or three £100,000 horses, might cost from £15,000 to £20,000. You might pay around £5,000 annually for maintenance and management fees, although any prize money or gains from selling a winning horse may help offset this cost. Consult a professional advisor in your country of tax residence about the tax implications of owning racehorses.
Our thanks to The Honourable Harry Herbert, who is Managing Director of Highclere Thoroughbred Racing, one of Europe’s leading racehorse ownership companies (highclere.co.uk).
Flexible investing with structured notes
Part of a series of articles featuring the managers of our investments.
Antonio Vianna is Vice President & Director, International Advisory Group & Latin America, for Royal Bank of Canada Global Private Banking. He manages a highly specialised group of international investment advisors with global investment portfolios. These portfolios quite often include structured notes, and in this interview he explains how investors can utilise structured notes as part of an investment strategy.
What are structured notes?
A structured note is a form of security or deposit instrument issued by a variety of issuers. These notes can be fixed or variable-income instruments. Structured notes can also offer a rate of return linked to the performance of some other financial benchmark, such as the value of an equity index, the direction of U.S. interest rates, or the price of a commodity.
In part due to the use of options, fixed-income structured notes typically offer a higher potential rate of return than current market rates. They have proved popular with investors looking to maximise returns in today’s low-interest-rate environment. In addition, equity-linked notes are popular with clients who want to invest in an equity market, but retain a level of capital protection.
How do they work?
Suppose that you buy a structured note linked to the Standard & Poor’s 500 Index when it stands at 1,200. For every year the index stays above, say, 1,300, the note will pay 4.5%, a rate of return higher than the prevalent interest rate. If the index does not stay above 1,300, then you will receive no return.
In many cases, a structured note offers protection for an investor’s capital by guaranteeing to pay back the original investment when the note matures. Still, they are considered to be riskier than conventional fixed-income investments because there is a greater potential for investors to receive no return.
Who are they suitable for?
There is a wide variety of structured notes available. They range from conservative fixed-income or equity-linked investments that have their principal protected, to more aggressive equity-linked or fixed-income-linked notes that pay a rate of return based on the performance of an equity index, a basket of shares, an individual commodity such as silver or gold, or the direction of a rate index. In some cases, a structured note will be created to meet the needs of an individual client.
The suitability of an individual structured note depends on the investor’s financial circumstances and tolerance for risk, so it’s important for investment advisors to fully understand the objectives of their client.
What role can a structured note play in an investor’s portfolio?
It depends on how the note is created. In our example, where the structured note is linked to the performance of the S&P 500, the note allows the investor to diversify into equities with principal protection. The investor gains exposure to the potential returns offered by equities, while protecting his or her initial investment.
Structured notes can be customised to fit your unique situation, and serve as a hedge to reduce overall investment risk.
For example, let’s say you own a distribution company and ship most of your items over land. Your financial situation depends a great deal on the price of oil. You could purchase a structured note with a rate of return that is linked to the price of oil.
If the price of oil rises, the structured note pays a higher return, which can help offset the negative effect that higher fuel prices would have on your trucking business.
What are the potential risks?
Because they can be customised, structured notes also tend to be less liquid than conventional fixed-income investments. Though they can be traded on some equity markets, there may not be an active trading market in them before their maturity date.
A structured note offers some participation in other markets, but the exposure may be limited, which also means the potential upside may not be as great as it would be if you invested directly in the market, although this depends on the path the index takes to maturity. If you are considering this type of investment, you need to keep in mind that different types of notes are subject to different regulations depending on the country you live in.
For further information, please contact your Relationship
Manager or your Investment Advisor.
To find out more, please visit the Structured
Products section.
Access our expertise — we’re here to help
As your life circumstances and goals change over time, your Global Private Banking Relationship Manager can help you find effective solutions for your financial needs.
With each significant life event — such as the birth of a child or grandchild, changing jobs, moving abroad, or buying property — there is a potential set of issues that needs to be addressed. Your Relationship Manager can help you access specialised services, identify potential opportunities and challenges that you might have overlooked, and suggest solutions to resolve any issues that arise.
A wealth of expertise
Your Relationship Manager is the most important element in your relationship with Royal Bank of Canada Global Private Banking. Because your Relationship Manager has expertise in a wide range of issues, he or she can assist you as your circumstances change.
For example, as you approach retirement, you may want to move to another country, and this can have far-reaching effects on your finances. Your Relationship Manager will be able to assist you in considering the effects of such a move, to ensure a smooth relocation. He or she can also draw on the expertise of specialists throughout our global network, and introduce you to external advisors, if needed.
True communication
That’s why the frequency and quality of communication between you and your Relationship Manager is so important. It’s the key to being able to offer effective solutions at every stage of your life. This personal rapport grows out of the trust and the comfort that comes from knowing your best interests are being looked after.
Whether it’s meeting in person or simply talking over the phone, your Relationship Manager will stay in touch, offering assistance when you need it. The more you share about your circumstances, life changes, goals, and aspirations, the more he or she can assist with identifying opportunities and potential solutions.
Regularly scheduled sessions will allow the two of you to periodically review your financial objectives to keep your plan on track.
Life is never static, and the more you’re able to let your Relationship Manager know about changes that may affect your financial situation, the more he or she can help you take advantage of opportunities and avoid potential setbacks.
‘Spoofed’ emails are no joke
Email enables people to communicate almost instantly. Unfortunately, it’s just as convenient for “hackers,” who use it to spread damaging computer viruses.
The latest trend is “spoofing” — a technique where a virus mimics a legitimate email address and sends out fake emails that appear to come from a reliable source.
Unfortunately, RBC Financial Group, along with all other companies, is not immune to spoofing. It is possible that our clients may receive emails from what appears to be a Global Private Banking representative, but which are in reality from someone else’s infected computer.
Industry experts are actively seeking ways way to block these emails or identify their source. In the meantime, we strongly recommend that you do not open any emails that look suspicious, and that you update any anti-virus software on your computer to minimise damage.
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