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New Year's do's and don'ts

Wednesday December 28, 2011


Everything we do in life moves us closer, or further away, from our goals. The fiscal goals we set for ourselves (for example, comfortable retirement, early retirement, a vacation home in a warmer climate, etc.) all cost money – in some cases lots of it. Most of us will not have the luxury of a huge inheritance or lottery win to save ourselves from a lack of planning for our future. Those of us over 40 realize the years creep up on us much faster than we expected, so it’s imperative to get moving forward towards your goal, because without action, nothing will happen. Here is my common-sense list of do’s and don’ts for 2012 that may help you attain your goals a little faster.

Do’s

Reduce or eliminate debt. That’s a major roadblock to retiring comfortably. Pay down the debt that carries the highest interest rates first.

Say, “No, I can’t afford that now” more often. And acknowledge that it’s okay to say that. All of us have to set priorities. The luxury wants (excess consumption) in our life slow us down later as debt and interest payments mount.

Start (or increase) monthly investment plans. The right plan depends on your income and personal situation. Steady investing is the way to go, and the sooner you start, the better, because compounding begins to work for you right away.

Take advantage of tax-saving vehicles. RRSPs, TFSAs, RESPs can help you reduce or defer the tax hit. Some plans, like RESPs, offer government grants to supplement your contribution (like those available through RESPs, which will help your children get through post-secondary studies without ending up with a debt burden while they are raising a young family).

Invest in emerging markets. These are becoming larger players on the world economic scene, with young populations and much less debt than Western economies.

Be patient. Don’t look at your portfolio too frequently, because the prices now are not your prices. Your retirement is still many years away.

Reallocate assets as you near retirement. An investment portfolio still close to 100% invested in equities near retirement is simply too risky. A portfolio must have some fixed income (government bonds, corporate bond, mortgages, and real estate for example) to reduce stock market risk. You can’t take the risk of losing 30% to 40% when retirement is five years or less away. You have worked hard to acquire and build a decent portfolio over many years. You can’t take a massive hit just before you start using the money.

Simplify your life and finances as you age. Understand what you are investing in and who you are dealing with. For example, giving a broker carte blanche on your account (i.e., full discretion) can be dangerous – and could result in a costly surprise when you get statements showing excessive trades with thousands of dollars in commissions. I have had many elderly clients coming to me with just that problem.

Don’ts

Don’t borrow money to invest. Borrow only if you are fully aware of downside risk, which too often isn’t shown. You may see graphs and charts showing 7% gains every year on levered investments. But when was the last time you saw annual 7% gains over the last 10 years? Enough said.

Don’t listen to your friends or neighbors on investment strategies. Usually they don’t know what they are talking about or fall into the category headed “a little knowledge is dangerous thing.” Your friend may have earned 10% last year because he was heavily invested in precious metals and natural resources (very volatile sectors) and is 10 years younger than you with different goals, a different risk level, and a longer time horizon than yourself.

Don’t sell an investment when it’s down without thinking it through. Do you want to buy high and sell low? Do you really need the money now? Are the fundamentals the same? Have you thought about adding to your investment by adding a lump sum or adding a monthly amount to take advantage of low prices? That’s what Warren Buffet, one of the world’s most successful investors, does. He buys a good company, and if it goes down two years later, he simply buys more. He does his homework and is committed long term.

Don’t lock in losses in the midst of a correction. Ride it through if possible, and if the volatility is too much for you to handle, wait until after a recovery to make adjustments.

Don’t buy investments that seem too good to be true. Guarantees of 8% to 10% per year would fall under that category. If those guarantees were indeed real, we’d all be jumping on board with our cheques in hand.

The past 10 years haven’t been terribly kind to investors. Today we have Europe’s sovereign debt problems and a slowdown in the pace of growth in the U.S. economy. Everywhere consumers and governments struggle to get their fiscal houses in order. Things don’t look too rosy just now, despite emerging markets picking up some of the slack. But I am hopeful that Europe will solve its problems and that confidence (very important for stock markets) will be fully restored.

I hope these tips help you throughout the coming year. Wishing you successful investing throughout 2012.

 

 

 

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