|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.
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
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
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’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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Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.