Investing is the act of allocating your money into assets (usually, stocks, bonds, and alternative investments) with the goal of generating a financial return through capital gains and/or income. It’s a long-term initiative that requires careful planning, monitoring, and adjustment.
Crucially, investing is about much more than picking the right assets in which to invest. It’s about understanding your personal and financial situation and establishing a plan based on realistic assumptions to meet specific long-term financial goals. It involves identifying the optimal asset and regional allocation to build an efficient portfolio and choosing diversified investments that have the right profile and expected returns to achieve the plan. It’s about understanding and accepting risks. Investing also requires removing any emotions from the process and not letting short-term noise cloud your judgement. Finally, it’s monitoring and rebalancing the portfolio regularly to stay on track, as well as adjusting the plan should market conditions or your situation change significantly.
Investing can play an important role in most of our lives, but it also requires time and expertise—even for buy-and-hold strategies—to build the right strategy and monitor it.
An advisor can help you invest.
Hedging is the use of certain financial instruments that are often more complex—for example, options, forwards, futures, and swaps—to mitigate or even eliminate certain types of risks that come with investing in stock and bond markets. A hedging strategy is intended to reduce one or more of the risks in your portfolio. Therefore, it acts as a complement to an existing investment strategy (which is intended to generate returns). Currency risk, interest-rate risk, and default risk are examples of some risks that can be hedged away with proper use of hedging instruments.
It’s important to know that hedges are designed to reduce specific risks, rather than to generate returns. Because of this, they can result in a gain or a loss. For example, a successful currency hedge for a Canadian investor with an exposure to the S&P 500 Index would’ve gained 0.68% in 2021 but lost 0.53% in 2020. In other words, this investor would’ve generated a gain from the hedge in 2021 but a loss in 2020. However, in both years, the risk the investors faced (specifically, currency risk) was reduced.
An important point: implementing hedging strategies is much more complicated than trading stocks. For this reason, many hedging instruments are available only to the most sophisticated investors, mainly institutions. While there exist strategies that are managed by investment professionals with various embedded hedges, it’s important to analyze the underlying methodologies to make sure you choose the strategies that best suit your needs.
An advisor can help you identify the risks to which you’re exposed, and if and how they can be hedged away.
Speculating is the act of interacting with financial markets with one goal in mind: generating short-term gains. Overlooking risks—sometimes big ones—while chasing extraordinary returns, speculators are the main reason why “gambling” and “betting” are two words often associated with financial markets and too often mixed up with investing.
Speculators tend to trade more frequently, attempting to time the market. In hindsight, every decision and market event can seem obvious, but in reality, financial markets are unpredictable, and trying to time the market has proven to be all but successful over the long term.1 For example, 2021 was a great year for stocks—with the S&P 500 Index returning more than 25%—and the temptation to sell along that great run was real as prices and valuations were getting higher and higher. However, the Index remained strong all year, and a speculator missing only the best five days of the year would’ve left more than 10% on the table.
Speculators also tend to make decisions based on others’ opinions, which may not result in rational decisions as chasing quick gains and fearing of missing out can fuel impulsivity. Moreover, with the rise of financial content on forums and social media platforms, investors need to be more careful than ever, as speculating can get out of proportion. In 2021, for example, speculative trades made headlines as online forums hyping so-called “meme stocks” gained so much traction that it even became a risk to the broad market, and many brokerages had to restrict trading in those stocks.
A prudent advisor wouldn’t help you speculate but can help increase awareness.
1 Henriksson, Roy D. “Market Timing and Mutual Fund Performance: An Empirical Investigation.” The Journal of Business 57, no. 1 (1984): 73–96. http://www.jstor.org/stable/2352889.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management nor any of our affiliates or representatives (collectively Manulife Investment Management) is providing tax, investment or legal advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social ,and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Manulife Investment Management
Manulife Investment Management is the global brand for the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship and the full resources of our parent company to serve individuals, institutions, and retirement plan members worldwide. Headquartered in Toronto, our leading capabilities in public and private markets are strengthened by an investment footprint that spans 18 geographies. We complement these capabilities by providing access to a network of unaffiliated asset managers from around the world. We’re committed to investing responsibly across our businesses. We develop innovative global frameworks for sustainable investing, collaboratively engage with companies in our securities portfolios, and maintain a high standard of stewardship where we own and operate assets, and we believe in supporting financial well-being through our workplace retirement plans. Today, plan sponsors around the world rely on our retirement plan administration and investment expertise to help their employees plan for, save for, and live a better retirement.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.