Your Money: Keep calm and carry on (with your plan)

By Medicine Hat News on June 23, 2018.

In the run up to the Second World War, “keep calm and carry on” was the phrase used on a motivational poster produced by the British government. The objective of this phrase was to raise the morale of the British public who were living under threat of widely predicted air attacks on major cities. While it would be trivializing to suggest that we are under a similar threat, the underlying message is useful to keep in mind. In capital markets, the threats we face are loss of capital and a resultant inability to meet our retirement, or other financial goals and so investing becomes a very emotional environment full of potential “land mines.”

Media headlines filled with doom and gloom or chatter about the next best opportunity can be a distraction and may tempt investors to allocate their hard-earned funds to inappropriate investments. One of the keys to successful investing is to develop a plan that includes a strategic asset allocation suited to your investment goal(s) and your ability to tolerate risk. When the noise in the marketplace becomes too loud, referring back to your plan can help reassure you that you are following the right course of action and help prevent you from going down the wrong investment path.

Determining the correct asset mix for your individual investment objectives and risk tolerance is one of the most important outcomes of the planning process. Asset mix refers to the combination of cash, fixed income and equities. When determining which asset classes to include in a portfolio, consider the desired outcome: Does the investment goal require capital preservation, income, or growth? It is equally important to understand your risk tolerance. The “textbook” definition of risk typically refers to volatility of returns. However, for most individual investors, risk means a loss of capital. For others, risk is associated with not meeting an investment goal, such as achieving a required level of income or saving enough for retirement or a child’s education. When designing an asset mix strategy, it is important to prioritize not only your investment goals but also the risks you are willing to take to achieve them.

For example, an investor whose priority is to generate income, may be willing to tolerate the market fluctuations associated with equity investments in order to capture dividend income (and potential dividend growth) which may be more attractive than today’s current low bond yields.

Investment time horizon should also be considered when determining which asset classes to include in a portfolio. In general, if the investment goal has a short time horizon, the portfolio should focus on capital preservation. For example, someone planning to purchase a cottage within the next two years should invest the funds in instruments that are not susceptible to short-term market swings. This investor will want to minimize the risk that the market value of the “cottage fund” is lower than expected at the time the funds are required. In general, the longer the time horizon, the higher the proportion of more volatile asset classes, such as stocks, can be included in a portfolio. Consider two individuals investing for retirement: A 40-year-old and a 62-year-old. The investor with more than 20 years until retirement will most likely be pursuing a strategy that maximizes long-term growth and can tolerate short-term swings in the value of the “retirement fund.” The individual with only a few years until retirement will generally have lower tolerance for fluctuation in capital, and may require the portfolio to begin to provide an income stream.

An investment plan is an essential part of the process and should outline your investment goal(s), risk tolerance, and the asset mix that reflects these investment objectives. Over time, you should compare the plan to the portfolio’s progress. If the portfolio is tracking ahead of the plan, you may want to redirect assets towards another goal or shift the asset mix to de-risk the portfolio. Finally, your investment plan should evolve over time to reflect changes in your priorities, investment objectives and risk tolerance. Your TD Wealth advisor can work with you to develop an investment plan and asset mix appropriate for your needs.

For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com

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