With the current turmoil in the financial markets, a return to basics can reassure you.
Here is the first of two chronicles to stimulate your thinking.
A pause is necessary in order to put all of your objectives into context. You will first need to update the list of your different objectives and their order of priority.
Then, it will be necessary to set up or update two essential tools for your financial health: your balance sheet and your budget.
Balance sheet
This involves taking a picture of all of your assets and liabilities to establish your current net worth (assets minus liabilities).
The desired long-term evolution (five years and more) is to increase your net worth. This goal can be achieved in three ways: by increasing your total assets, by decreasing your total liabilities, or by doing a combination of the first two.
Budget
This tool often has a negative connotation in the eyes of many because it is associated with austerity, spending cuts, belt tightening.
But you have to see it quite differently. It includes all of your income from which all of your expenses are deducted to determine your financial capacity to achieve your goals. This is therefore the heart of your financial planning.
To be useful, your budget must be precise and detailed. There are several methods to obtain such a budget, several financial institutions offer budget applications associated with your transaction account or you can also use your transaction account statements, credit cards statements and your checkbook of the previous year to constitute it.
Update your investor profile
The investor profile established when your investment account was opened must be updated at least once a year or as soon as a change affects your personal situation.
Here are the main questions to answer in order to determine your investor profile:
What is your risk tolerance?
What part of your portfolio can decrease without affecting your standard of living in the short or medium term?
When will you need your capital?
What is the total picture of all your investments?
Is investment income paid to you or reinvested?
What is your investment experience?
Manage your investments
As the financial markets are constantly changing, once a year you (often with the help of your advisor) will have to reset your asset allocation in order to respect your most recent investor profile.
This will allow you to know what type of investment to invest in rather than trying to guess which asset class will give you the best return.
Invest as often as possible
The natural reflex of any investor is to invest when the markets are up and, on the contrary, not to invest when they are down. This behavior demonstrates a certain propensity to try to guess the behavior of the markets and this can never be 100% winning.
Rather, you should see the investment process as a long-term work (5 years and more) and invest as often as possible (weekly or monthly) rather than annually. Thus all types of markets will be captured (high, low, medium).
Minimize your investment management costs
The return on your investments depends on their distribution in the different asset classes, but you must also subtract the percentage of related management fees.
According to Morningstar, the median management fee for mutual funds in Canada is 1.98% for equity funds, 0.99% for fixed income funds and 1.94% for balanced.
Considering these non-negligible fees, it is crucial to ensure that you choose the investment vehicles that offer you the desired exposure to the financial markets with the lowest fees.
Establishing the present value of your defined benefit pension plan
Long-term participation in a defined benefit pension plan will allow you to receive a stable and guaranteed monthly retirement pension until your death.
It is essential to determine the current value of your pension and take it into account when allocating your investments in order to respect your investor profile.
This calculation must be precise and take into account the exact starting pension, the annual indexation and the planned reductions.
Schedule withdrawals
In order to avoid having to liquidate investments after they have suffered a decline in value, you should instead secure the investments that you will need to disburse over the next 3-5 years.
This exercise will be supported by the results of your detailed cash flow projection. There is no valid general rule, it must be a custom calculation.
Staggering your withdrawals, every 3-6 months, will allow you to better match your needs. However, you will have to check with your financial institution to avoid exposing yourself to transaction fees.
Continuation and end of the chronicle in September 2022
We will be organizing one-hour webinars on the subject starting in September. Write to us at info@gaumont.ca to let us know you are interested in participating.
It will be our pleasure to prepare or update your financial plan so that you always have a clear vision of your financial destiny, even during periods of turbulence.