Good Habits for Financial Health – Part 3 of 3

Consistency is essential for financial stability

Questions you need to ask yourself when making an investment planning strategy

General Financial Stability – There is great value in consistency.

A job with a salary provides more stability than one in which you earn commission, or have a lower salary with the potential for a large bonus. With a salary, you know how much money you have coming in so you can plan better and create discipline around saving what you need to. If you have a highly-variable income you have to set aside more money just for emergencies and basic provisions because you don’t know what money will be coming in the next week, next month or next year. This decreases your flexibility.

Similarly, when it comes to investing, there is great value in having stable returns. The more consistent returns you can get, the less hard you have to make your money work for you.

Volatility depletes some of the value of returns. Again, it all goes back to the basic concept of compound interest: you get stable compounding when you get the same returns every year. In Figure 1 you can see that you don’t get the peaks in your portfolio value, but you also don’t get the dips. The bigger the swings, the more the power of compounding diminishes when you start taking losses.

Investment Planning Strategy

Before developing an investment strategy, you need to ask yourself: “What do I need to accomplish my goals?”

  • What do I need?
  • How long do I have?
  • What is my tolerance for risk?

 

What is more important to you? Not missing out on an opportunity in a really good market, or minimizing loss and preserving your capital? Or, is it somewhere in between? You have to have the emotional wherewithal required to have a portfolio designed to meet your objectives, so you have to come to terms with your own comfort for risk. This will help you find the right balance between an equity portfolio and a bond portfolio. (See Figure 2)

*Note: Please listen to our Webinar Introduction to Bond Markets for further details

Changing investment strategies is a money-losing event. There are hidden costs associated with it and we believe it takes at least a year to get a new portfolio fully up and running, to get traction and to reap the benefits of interest and dividends.   If you change investment strategies or financial advisors every few years, you will never really hit a good run rate and you’ll be constantly paying the cost of re-balancing.

In an increasingly complicated world, it’s important to talk to someone who understands the complex rules around the many different types of accounts, and can offer guidance with respect to effective tax management and cash flow.

Money is an emotional issue and a wise advisor can be of great value in helping you maintain perspective. This is especially important when financial markets go through extreme highs and the atmosphere is one of irrational exuberance, and extreme lows when there is a mood of deep fear and pessimism.

In the end, there really is no magic or special bullet to get you to financial security. It’s not about the quick win. It’s about doing a lot of little things well so that you use the money you earn as effectively as possible to maximize its value. It’s not easy, it’s boring, and it requires discipline and tenacity. But this is one of those places in life when boring can work very well.

View Good Habits for Financial Health Part 1 and Part 2

In February 2019, Julie Brough hosted our first webinar. The topic was Good Habits for Financial Health. Video of the entire webinar can be found here.

Please note this presentation was designed to provide general information only. It should not be construed as advice or considered a substitute for personal advice. Please consult your adviser to determine whether the information in this presentation is applicable to your personal situation.