Tag Archives: Investment Strategy

Investment strategies and using full service Investment Advisors

Investment strategiesI recently had a conversation with my kids around what the MERs mutual funds charge and also what sales commission is charged when you buy or sell an equity (I use equity and stock interchangeably). Mutual funds charge from 1% to 3%. The norm being around 1.8% whether you make money or not in any given year. Investment strategies for many consumers never considers these costs. However over the years, the approach you take can add considerable costs to your plan.

Trading directly in equities (stocks) with a firm like Edward Jones result in high trading fees compared to other online no service trading accounts with the banks etc. Over the life of your RRSP savings, a significant amount of money could be saved and reinvested. Consumers can make even more money by using discount traders and staying away from mutual funds. So why not invest directly in equities instead of mutual funds? The devil is in the details.

My own personal strategy is to use Edward Jones  to bounce ideas off of and for them to keep me abreast of changing legislation that could impact me. There have been two major ones over the past 15 years which has saved me quite a bit of money. The amount I pay Edward Jones for MER and trading fees has been well worth it. If I was trading more often then using a discount broker is definitely the way to go.

Investment Strategies

These are some of the rules that I try to follow with regards to my investment strategy.

  • Set goals related to when you want to retire. focus on how much you will need to maintain the standard of living that you want to have when you retire. Your income will come from pensions, CPP, OAS, and Savings. Life will throw curve balls at you so you need to be prepared for whatever comes your way.
  • Your investment advisor works for you and should provide you with guidance however only you understand your investment goals and direction and requirements over your lifetime. You need to pay attention and learn as much as you can to make well informed decisions, just like your job.
  • Treat investing like a project as part of your job. Apply the same approach to investing that you would to do your job. This means you need to pay attention all the time to your investments. Set a time twice a year to do a full review. Are you meeting your goals?
  • Diversify your investments between high-risk, moderately conservative and ultra conservative. Your investments should be roughly 10% high risk 85% moderately conservative and the rest in cash or money market waiting for opportunities.
  • Always diversify your investments across industries, banking, energy, communications, goods and services.

More Strategic Ideas

  • Invest in high-quality stocks for equities, that are paying regular dividends, and have a history of increasing their dividends at regular intervals.
  • Minimize trades to minimize costs for trading commissions, only rebalance when absolutely necessary.
  • Mutual funds should be part of your plan but only 10 to 15% of your total investment strategy. Although you are paying MER, investing in a dividend focused mutual fund gives you additional diversification.
  • Many people use the DRIP approach, dividend reinvestment plan, offered by many companies to avoid paying advisor fees when they buy stock. This is a great way to increase your investment in the quality stocks that your own, without additional advisor fees.
  • If you invest in high risk stocks, that appreciate considerably, lock in profits by selling a minimum of 50% of the shares you own. High risk stocks can go up and down very quickly. Remember until you sell you have not locked in any profits or losses.
  • The stock market goes through minor corrections of 10% every year. Be prepared to ride out these volatile situations, since history has shown the stock market will appreciate 10% and more after a correction within six months. Major corrections such as 20 to 25%, example 2008 and 2009, take longer to correct. You only lose money if you sell at a loss, the market corrected itself and has more than doubled since 2008.

Summary

With this strategy in mind, utilize your investment advisor as a consultant. They can help you adjust your investment strategy over the years. They will try to get you to make trades to rebalance your investments etc. But if you’re comfortable with your strategy there should be no need to sell and trade equities very often.

If you follow this approach, the commission you pay on mutual funds will be minimal. The trading costs associated with trading through someone like Edward Jones or another full-service investment company will also be minimal.

 

 

Retirement Investing Myths

Retirement Investing MythsThere are studies and reports that the average person begins saving for retirement at the age of 32! In addition over 25% of consumers have not started saving for retirement at all which is a huge concern to them and to people who provide social services and to governments who are interested in their citizens enjoying their retirement years. If you think the government will look after you, think again, it is unlikely that there will be sufficient income for you to maintain the quality of life that you desire. Retirement Investing Myths are discussed in the following.

There are lots of misconceptions and myths about retirement and saving for retirement. However more and more people seem to be getting the message that they need to begin saving for their retirement and follow a regular savings program to ensure that they have the quality of life they are looking for when they retire.

Retirement Investing Myths and Reality

Market volatility will keep a lot of people on the sidelines. They want to buy low. But are afraid that the instant they get in the market it is going to drop. This does happen from time to time. However if savers adopt a long term strategy, and use dollar cost averaging, their investments will grow over time. These investments will provide them with the money they will need in retirement.

Some people feel they need a large amount to invest for retirement and specifically for mutual funds and stocks. The reality is that with a regular savings plan, your money slowly builds and compounds over time. Many investors are pleasantly surprised at how much their investments have grown over time with a regular savings plan.

I can catch up on my savings when I am older. This myth is followed by many people. The reality is that they have missed out on all of these years of compounding interest. This is income which by the time you retire is providing more funds than what you can save. Start early prior to age 25 and watch your money grow.

Investing is complicated. Stick with straight forward savings plans. Use a financial adviser to guide you through a balanced well managed savings plan. Maintain a balanced portfolio. Make sure it is diversified to protect your investments over the long term.

Rich people are the only ones that benefit from tax deferred accounts. Rich or middle class or below middle class, everyone receives a tax refund when they invest in a registered retirement fund. They also benefit from the tax protection from all income within the savings plan when it is a registered retirement plan. Regular savings and compounding can build a really nice retirement plan, especially if you begin early.

Discuss Finances with your Spouse

Discuss Finances with your SpouseMy friends in the financial planning business routinely tell me about couples who do not share information with each other about their finances and how one spouse or the other has no clue about what would happen to them financially if the other spouse were to suddenly pass away. A car dealer also told me that routinely many guys will come in and purchase a car, which is a major purchase. They do not even tell their spouse about it before completing the deal. Another friend of mine was looking for some advice about investments. So I sat down with him to go over what his options were.

I expected his wife to join in and at least listen. She not only did not join in the conversation, she said she had no interest in the subject and felt that her husband would make all of the right decisions. What a mistake in my opinion. In fact now he has been diagnosed with short-term memory loss and probably does not even remember the conversation that we had with each other. This is another reason both spouses should be involved and at least know what the other is doing. Now she has no idea of what he is doing or has done and must investigate at some point. all of this could easily be prevented. It does not mean that she has to make the decisions in this case, but at least know where everything is, how much money is involved and what the investments are.

Discuss Finances with your Spouse – Get in Involved

Even my own wife will not get involved in the details, although I have introduced her to our financial adviser and I routinely discuss investment changes with her, I know she is only half listening.

It is a well established fact that women live longer than men. Chances are that your wife will have to deal with the aftermath of your investment planning. Doesn’t it make sense that she should know what is going on? I purposely used these genders in the previous sentence, since this appears to be by far the norm. With baby boomers retiring in droves it is even more important that everyone take more interest in planning their retirement years.

Men and Women have Different Goals and Objectives for Retirement

It should not be surprising that men and women have different ideas about retirement. Even though you have been with your spouse for many years your plans and opinions about what you would like to do in retirement may be quite different.

The only way to get at this is to start talking about your finances and your plans. Using a financial plan as the catalyst is a good way to start. A financial plan requires assumptions to be made about your needs for retirement. So discussing these assumptions will go along way to getting each other engaged in planning your finances.

Two Heads Better than One

Two heads are better than one anyways and I have definitely found that with my own spouse. Some of her desires are different from mine. She has come up with ideas and suggestions that I would not have thought about.

Sometimes when you state an assumption and someone asks you to justify that assumption, you are going to find out that you cannot. This challenge is good in that it makes you think things through better. So take challenges in a positive light and not as an affront to your planning skills.

Who Is Dominant

This subject may seem archaic. However in every relationship one spouse will be more dominant than the other in various areas. If one cares more or has more expertise, let them take the lead. However never relinquish the topic solely to the other spouse. You need to stay involved for the reasons I mentioned earlier. Make a contribution to the discussion.

Your dominant spouse will appreciate your input and thoughts. Keep a mature attitude about the subject. Do not let your emotions get the better of you.

It is not easy to do a financial plan emotionally with your spouse. But it is well worth the effort. Once you have all of your assumptions made and the facts about your current situation identified, developing the financial plan is pretty simple! Use a third-party to assist in developing the plan. They can act as the common sense expert to help you through this emotional process.

Ten Financial Steps

Ten Financial StepsNo one wants to think about their death, however part of financial planning is to take this scenario into account so that your family is well protected and looked after in case you do die. Financial planning is also important to ensuring that your quality of life meets your objectives and that your family has a quality of life that is satisfactory.

This is the time of year to put everything in order and complete one of your new Years resolutions.

Without a will, what happens to your kids? to your wife ? How will they support themselves? What will they do when the bank will not release your assets, because there is no will? How will they pay the bills and buy groceries? These are just a few of the reasons why you need to have a will and what can happen if you do not have one. Basically you need to assume that all of your assets will be frozen until a government bureaucrat decides how your assets should be distributed.

Ten Financial Steps

Your will

When you pass away, your family should look after the funeral or memorial first, however the will should be consulted in case there are any special circumstances concerning the memorial that are mentioned in the will, but then they’ll have to focus attention on finding a copy of your will. Make sure your will is up to date and make sure your executor knows where to find the executed copy, and knows which lawyer prepared it for you. Having this information available makes their job much easier in an already stressful situation.

Your assets

Your executor will have to gather information on what assets you owned at the time of your death. Prepare a complete list  and update it annually. Tell your family who your financial advisers are since they will likely need them for help in dealing with your assets after you’re gone.

Funeral costs

Your family will be in a fragile state emotionally when you pass away. It will be difficult for them to negotiate funeral costs at that time. Solve this issue by planning your funeral today or delegating someone who can carry out the families wishes. You can even prepay for your funeral if you want. Visit a local funeral home to discuss it.

Bank accounts

If your spouse shares a bank account jointly with you, they will be able to access the cash immediately after you pass away. Joint bank accounts make sense for this reason. Consider making the bank account(s) used for day-to-day expenses joint accounts. Also, ensure that any corporation bank accounts have more than one signing officer so that those accounts can be dealt with efficiently.

Life insurance

Make sure your family knows who your insurance adviser is. Further, make sure at least one insurance adviser knows about every policy you might own, and ask him to keep a record of this information for you.

Government benefits

Three types of benefits may be available to your surviving family members. If you’ve contributed to the Canada Pension Plan, there will be a death benefit (a one-time payment, to a maximum $2,500), a survivor’s pension (a monthly pension paid to your surviving spouse, averaging about $300, but which can be as high as about $560), and a children’s benefit paid to a surviving child (a monthly benefit of about $215 a month per child under age 18 or up to age 25 while still a student). Your family must apply for these benefits after you’ve gone.

Registered plans

Any registered retirement savings plans  or registered retirement income funds owned by you at the time of your death can generally be transferred on a tax-free basis to a registered plan in your spouse’s name (or to a dependent who is a minor or has a disability). Simplify things for your heirs by reviewing your named beneficiaries on these plans today. Ensure the right people will receive these assets when you’re gone.

Employment matters

Your family should call your employer to determine whether there are any amounts owing. Such as salary, vacation pay or bonuses. They should also inquire as to whether the employer can pay any amounts as a tax-free death benefit. For example up to $10,000 can be received tax-free where it is considered a death benefit in recognition of an employee’s service. Let your family know  who they should contact at your office in the event of your passing.

Your debt

Have you purchased insurance to pay off your debts in the event of your death? If you’re insurable, make life easier for your family by doing this. Term insurance (the cheapest) is just fine. Especially if the debt has a term to it and is expected to be paid off in the future.

Summary of information

Much of the information you’ll want to provide about assets, contact names, and so on, should be summarized in one document. If you do not have a document template, search for one on the internet. Or ask your lawyer or funeral home if they can provide a document for gathering this information.

Ten Financial Rules to Follow

Ten Financial Rules to FollowWhen you are in control of your finances, your income and your debt the feeling is truly empowering. Now is the time to get control. Interest rates, which have been low for some time, will begin to rise in late 2017 or 2018 and that usually means inflation is not far behind. Now is the time to focus and make sure your financial game is in perfect working order. Here are Ten Financial Rules to Follow for your investment plans.

Ten Financial Rules to Follow

Take control of your finances

Take the time to develop your  financial plan that meets your personal goals. Brush up on your financial know-how through courses and seminars. Whether you are a small investor or have a large investment base, getting in control will truly be empowering and it will set you free from worry about your finances. Map out a plan and follow it. Adjust it as the financial landscape changes. Review it regularly and fine tune it as needed.

Pay down your  debt

Paying your own debt first is an obvious kind of thing to do, however there is a priority in terms of which debt to pay. Store credit cards carry the highest interest rates, sometimes upward of 28%. This debt is what you should focus on and pay off first. You will and must meet all of your obligations at the same time. Make sure you pay all of the monthly installment payments on your other debt to avoid bad credit ratings. Once you pay the credit card debt, focus on the next highest interest debt that you have until it is paid off .

Spend less

Once you decide to pay off your credit cards, you will have less to spend, however you want to make sure you are not racking up new debt at the same time. Set a budget that allows you to live within your means. Spend less at least for a while . You will find that the extra money you gain will be useful in reducing debt and also saving for the future.  This is a life changing habit to form and it is important to spend less so that you can reduce debt as well as not create new debt.

Save more

Most Canadians save on average less than 5% of their personal income. We used to save about twice that and the folks in the US save even less than we do on average. Try to get into the habit of saving 10% and have it taken directly off your pay check so that you do not even need to think about it. After while it will be just another deduction on your pay check and you will benefit by building your savings that will come in handy if you are laid off or better still for retirement.

Develop a personal investment policy statement

Large companies do this because it is a professional way to manage money and manage a business. Why should you not do this as well? Write out your goals and review them at a minimum of once per year, more often if the market is volatile or you have additional money to add to your portfolio. Take into account your tolerance to risk and also decide between growth of stocks vs. income from dividend stocks and bonds/GICs.

Re-balance

As part of your investment plan review, review the balance of investments that you have between bonds, stocks and mutual funds or other investment vehicles that you may have. Try to diversify your investments and strike the right balance of stocks, bonds and mutual funds. Does your current investment mix meet your investment goals and your investment plan? As the markets increase and recede, you may need to re-balance your investments to keep the right balance in your investment account.

Get tax efficient

Being tax efficient is just good business sense. Take advantage of all of the programs to defer or decrease your taxes. Can you increase your deductions, or defer taxes to another year or share your taxes with your spouse? If you do not have the time, if you are uncomfortable, if you just do not want to do your taxes, hire an accountant to review your taxes to make sure that you are getting all the tax deductions you are entitled to. Even if you do your own taxes every year, you might benefit from having an accountant to review your taxes for one year to see if you missed anything.

Get insured

Most people have car and house insurance. Many do not have life insurance or disability insurance. If you have this kind of insurance through your job , review it to make sure that your family could continue to live comfortably without your income. If you do not have life insurance or disability insurance, consider purchasing this type of insurance. You do not want to leave your family destitute and poor.

Don’t give up

If you are investing in high quality stocks, bonds and mutual funds, chances are you can weather any storm. In 2009, we saw one of the largest drops in the stock market in history. Watching your investments drop in some cases up to 40% is very hard to take. Staying true with your investment plan and sticking with high quality investments will usually bring consistent returns as well as withstand financial shocks over the long term.

Ten Financial Rules to Follow – Review, adjust and enjoy

Consumers really need to take responsibility for their own investment plans and their own retirement. Continue to review your plan. review your investments and make adjustment as  time goes on and the markets fluctuate. Maintain diversity and maintain a balance with your investments . Stick to blue chip and remember the golden rules of investing.

Diversify, never put all of your hard earned money in one stock etc or even with one investment adviser.

If it is too good to be true, then it probably is not true.

Take control of your investments and learn what you need to know to make informed decisions.

The recent economic and stock market downturns have taught people the need to spend responsibly, within the context of a financial plan and their lifestyle. Having a solid financial foundation in place frees you up to do all those things that give your life more meaning. These Ten Financial Rules to Follow could make the difference for you in terms of quality of life.

Consolidating Investments

Consolidating InvestmentsI believe quite strongly in diversification to avoid jeopardizing your total investment and possibly loosing your entire portfolio.  There have been recent examples of people who have placed their nest eggs with one person  ( recent ponsi schemes ) and lost everything. The returns sounded good and these people wanted to consolidate their investments in one place so it was more easily managed.

Consolidating Investments

I read several articles recently were the writer indicated that there were some reasons that you would want to consolidate your investments. I will repeat them here for your consideration and then discuss them in a bit more detail.

  • It is easier to track and re-balance  your assets
  • Lower Fees
  • Fewer dead trees
  • No more orphan accounts
  • Peace of mind

There is always a balance between diversification and consolidating accounts under one investment adviser or one set of investments. The fundamental rule is that you do not want to risk everything you have with one adviser or one investment. If the adviser is not what he purports to be or if the investment goes south then you have lost everything.

There is a case for having a reasonable amount of diversification and there is a case for consolidating many accounts and investments into several to avoid a financial meltdown while making it easier to manage over all. Never put all of your eggs in one basket. Lets look at a few of the suggestions in more detail.

It is easier to track and re-balance  your assets

There is no question that it would be easier to track your assets and re-balance them as needed if all of your assets are in one place. One of the benefits of having everything in one place is monitoring asset allocation and  making sure you are investing following the guidelines appropriate for your risk assessment.

Still, our belief is that you really should diversify across several accounts with different advisers to avoid all of the eggs in one basket syndrome. A benefit of this approach is that you now can get advice from two advisers and compare their suggestions and strategies to then make the best decision for your personal investments. This takes more time and effort, however it is the best long term strategy by far.

Lower Fees

There is no question that if you have multiple accounts, you are going to have to pay multiple fees , one for each account. It may be $50 an account, but that is $50 you do not have. Consolidating accounts can certainly save you money in this area .

Compare the advantage to diversification. You have $100,000 to invest. You can place this all in one account and have it managed by a single adviser with a $50 fee each year for the account. All o your eggs are in one basket and if that adviser does not do what he or she is supposed to do, then your full $100,000 is at risk.

Diversifying across advisers certainly means you will probably pay $50 twice, but at least if one adviser goes bad, you still have $50,000 of your money. We just have to look at the recent ponsi schemes that even sophisticated investors got caught up in.

Fewer dead trees

Consolidation of accounts certainly means less paper and less mail to your home with account statements. That is an advantage for sure. But all you are doing is reducing a bit of paper.

Compare to receiving paper for two accounts with diverse investment advise and guidance that allows you to compare and make more informed decisions. Sure you get more paper m but won’t you feel better and worry less if the advice from two advisers match up?  I think again the diversification angle is much more valuable than saving a couple of pages.

No more orphan accounts

This is a weak benefit at best. True there are less accounts to worry about should you move and forget to advise the institution about were you are moving to . The institution does not know were you are , cannot find you and the account becomes orphaned. This does happen, however if you are dealing with a credible investment adviser, you will be discussing your investments on a monthly basis.

This will occur with any account. The solution is to make sure that you always update the company with your up to date contact information. Also you should be providing next of kin and back up contact information for every account. Again a little more attention on your part will also make sure this never happens.

Peace of mind

This is one of the weakest points anyone could make. I would be more worried if all of my investments were invested through one adviser. Or even worse in one investment. There is certainly no peace of mind in locking everything you own in one investment.  There are various schemes that are going on and have been in the news recently. I would be lying in bed awake at night worried if I had done the right thing. Even so called friends of the family have been found to be as corrupt as anyone when it comes to money. Protect yourself and make sure that you are well diversified at all levels.

Hopefully this post makes sense to readers. If you agree or disagree, I would like to hear your thoughts on what you think about consolidating investments vs. diversification of your life savings.

Tax Efficient RRSP Investing

Tax Efficient RRSP InvestingWith the March 1st Registered Retirement Savings Plan (RRSP) contribution deadline for Canadians now past, the 2013 RRSP season has come to a close and time has run out, now is a good time for investors to save on tax now while saving for the future they want and plan for this year. While this post focuses on the Canadian system, Americans can follow the same general guidelines to maximize their retirement benefits as well.

When investing for retirement, no other registered plan offers tax advantages as compelling as the RRSP. Your annual RRSP contribution not only goes toward reducing the amount of tax you pay on income but your qualified investments grow tax-deferred within the plan until withdrawal, when you may be taxed at a lower rate after you retire. If you are a member of a company pension plan, you will even be better off by also having an RRSP. If everything goes well you will be able to collect your pension and your RRSP as well.

Tax Efficient RRSP Investing

Your RRSP can also be an insurance plan. More and more people are either losing their jobs, retiring early or finding out that their companies have gone bankrupt with no provision for the retirement benefits. Don’t depend on anyone else but yourself. Put a plan together which is diverse and plans for emergencies and unforeseen conditions. An RRSP is one of the building blocks for this plan.

The following tips may help investors invest efficiently and maximize their savings for retirement to ensure a retired life that is comfortable and allows you to do the things that you plan to do.

Know your contribution limits

As RRSP contributions are 18% of an individual’s earnings from the prior year, the amount of income needed in 2009 to generate the maximum contribution room of $21,000 is $122,222. Looking ahead, the RRSP contribution limit for 2010 has been increased to $22,000. If you were unable to maximize your contribution in previous years, you may be able to contribute even more than $22,000 for 2010.

In recent years, RRSP contribution limits have been increasing by $1,000 per year. 2011 will mark the first year that the RRSP limit increase will be indexed to inflation, at $22,450, generated when 2009’s income is at least $124,722.

Leverage a Spousal RRSP

Higher-income earners can take advantage of their spouse or partner’s lower tax rate once they begin withdrawing from their RRSP in retirement. Contribute to a Spousal RRSP now. Higher-income contributors receive a tax deduction for contributions made to their spouse or partner’s plan. Spousal contributions do not interfere with the other spouse’s or partner’s own RRSP limit.

Remember that a Spousal RRSP does not allow an individual to exceed their personal RRSP maximum contribution threshold. Which can be allocated between the individual’s own account and that of their spouse.

Remember RRSPs are for more than retirement

RRSPs can be used to invest in financial goals other than retirement, such as education or a first home. First-time homebuyers can withdraw up to $25,000 tax-free from an RRSP under the Home Buyers’ Plan (HBP). They can repay the funds, interest-free, over a 15 year period. However, failure to repay will cause the amount to be included in income.

Under the Lifelong Learning Plan (LLP) investors can also withdraw up to $10,000 in a calendar year. And up to $20,000 in total from an RRSP to help pay for training or education for yourself or your spouse or partner. The LLP withdrawal must also be repaid, over a 10-year period to avoid having it included in income.

Even though early with drawls generate taxable income, sometimes you will have no choice but to with draw early to replace lost income. This is not something you should plan to do, but it can be part of your income insurance plan.

Contribute early, contribute often

If you can afford to contribute to an RRSP, do so. It’s never too early to start contributing. But you might regret not doing so sooner. As with all investments, the more time you can give your plan to grow, the better.
Many investors find it much easier to make small but regular contributions than to come up with large lump sums annually. Consider setting up a regular investment plan to help make contributing to your RRSP a priority all year long.

After making your RRSP contribution, apply to the CRA using Form T1213 for a reduction of payroll tax at source. By doing so, you can benefit from your tax reduction throughout the year on each pay check, instead of waiting until you file your tax return in the spring of 2011.

Discuss your plans with your adviser

Make time to discuss your options with a professional financial adviser.
Remember, you’re building a long-term plan. Take time to sit down with an advisor. Get their help in choosing the right solutions. Get started today in saving for the retirement lifestyle you want. Also discuss your plan with your spouse. Make sure that he or she knows where you are invested and what your contributions are. Involve your spouse in discussions with your financial advisor. Both you and your spouse should have joint financial plans with similar goals, practice diversity. Avoid investing in too good to be true investments. Before you leap, talk it over with someone and think about it for several days.

Ten Percent Investment Plan

Ten Percent Investment PlanMany of us are like the ostrich with the head in the sand when danger is around. Especially when it comes to thinking about and planning for our retirement.  For the young it is so far off that there is no need to think about it . While for people in the middle of their lives, they just have too many other financial pressures to give it much thought. By the time we are in our 50’s and 60’s, panic has set in . We realize that we will not have the kind of retirement that we had all planned since our savings are just too low.

This usually means working a lot longer, in some cases well past the age of 65. Some people want to work, while others never want to work again. let’s at least have a choice.

How Can we Avoid this Panic

The answer is actually quite simple. It does take some will power and some perseverance. However if you start early enough saving for your retirement, it can be quite easy to have a large retirement savings at the time you retire. The best part is that after a short while you will not even miss the money that you are saving each week from your paycheck. Just take 10% and put it in a savings account. Somewhere you cannot touch it for any reason until you retire. Let’s illustrate by a couple of small examples.

If you were to start setting aside $100 a month until retirement at age 60, at an average of 7% interest rate you would have $239k set aside in your savings for retirement. If you retired at age 60 and lived until age 80, you would receive $22k per year. Not bad for just setting aside $100 per month!

We use this example to illustrate just how easy it is to build up a retirement plan by saving a small amount each month. In fact we go a bit further by suggesting that a person should set aside 10% of their salary every year for retirement.  Ten percent is certainly affordable and once you get used to being without the money, you do not even think about that 10% you are setting aside.

The Ten Percent Investment Plan Solution

Lets assume that you make $50 thousand a year and you are disciplined to set aside 10% or $5000 per year in your retirement savings plan.  $5000 per year sounds like a lot , but it is only $416 a month. You might have done with out a car or some other convenience, but that should be an easy sacrifice to make your retirement comfortable.

So with our example, you are going to set aside an average of $5000 a year into a savings plan at an average of 7% interest rate until age 60. By the time you are age 60 you will have $998k or almost a million dollars saved. If you live for another 20 years until age 80, you can afford to draw $94k per year from your retirement plan. Wow that is not too shabby! All for just setting aside 10% a year.

Some Issues to Consider

Now some people will say that there is no way I can afford to set aside %5000 a year in my early 20’s . True our best earning years are later in life. However if you always invest 10%, you may end up only setting aside $2k a year initially, but in later years as salaries increase you may find that 10% means you are investing as much as $10k a year. This will more than make up for the difference in the beginning years.

Can you make an average of 7% return every year ? Probably over the lifetime of your savings plan. Some years you will make significantly less while other years you will make significantly more. It should average out to around 7% over the 40 years or even a bit higher based on past statistics for the markets.

But the government will tax me and take a lot of my earnings. This is true and that is why you need to invest your money in a tax free savings account ( Canada) or an RRSP ( Canada ) or a 401 K ( United States ). These accounts will let you build up your nest egg without being taxed by the government while you are saving for your retirement. When you do retire, and begin with drawing funds, you will be taxed at the tax rate commensurate with your total income at the time of retirement.

This is Your Life, Take Care of Yourself

We have seen over the past decade that a number of really big companies have suffered badly or gone out of business. Also the volatility of the markets have caused many people who are retired or are pre-retirement to wonder if they will have enough money to be comfortable.

The message we have all learned is that we must look after our selves and not depend on our company or our government to look after us.That means we must take responsibility for our own savings investments and practice good savings techniques as well as good investment strategies. This means we need to be involved with our investments.

Diversify

Be extremely careful and invest wisely. Avoid placing all of your investments in one place. If it is too good to be true then it probably is. Just think about the recent ponsi schemes that have come to light as of late. Investors lost millions of dollars when the invested in something that was too good to be true.

Diversify investments across multiple companies, and diversify investments across multiple advisers and then pump them for information to make your own decisions about what the best approach is for your investment strategy.

Summary

Invest 10% of your income every year into triple A investments, inside a tax free account, diversify your investments and avoid investments that sound too good to be true. Start early in your life with your 10% plan and in not time at all you will have a retirement nest egg that will help to ensure your comfort during retirement.

It takes discipline , to place the 10% in your investment saving s plan every year. It also takes discipline to not touch this nest egg when you are short of money or need to buy a house.

Investment Diversification

Investment DiversificationImagine the sinking feeling you get when you open your statement for your RRSP or your 401k. The market has tumbled and your investments have tumbled with it. What could be worse? At least you were invested across blue chip stocks in a variety of industries and when the market turns around these blue chip companies will be firing on all cylinders and your investments will surge. This is a good news scenario since you are well diversified and this is just a blip in the long term investment strategy. You sit back and relax.

Meanwhile your neighbor also just got his investment statement. Instead of the tried and true diversification, he put all his investment into GM or Enron. Not only is it down, it is gone. Sure you had some in GM as well and lost a fraction of your investment. But your neighbor had it all in, sure that the company would pull out and the share price would rebound. The lesson we have all learned in the last two years is that investment diversification is key to a long term strategy that will yield financial returns for our retirement.

What Do They Really Mean by Investment Diversification

There are numerous ways to interpret diversification. The most simple and straightforward approach is to invest across a wide spectrum of companies, healthy companies with good balance sheets and a proven business plan. The fly by night companies simply cannot pass the business plan test so stay away from them.

You might also pick one company, the one with the best balance sheet and revenue in each industry. Choosing companies across industries is a great idea to diversify and also protect yourself if one part of the economy takes a dive for a short period of time.

Another approach is to also add to the mix mutual funds that meet your investment strategy. Today you can choose from mutual funds that invest in bonds to precious metals to foreign to dividend stocks and more. This gets a bit more complicated. You will need to decide how much risk you want to take, whether you want income generating funds or growth type mutual funds. There are many different types and it is easy to diversify, however you should pay attention to the risk of each type. Bond mutual funds are considered the least risky , while precious metals might qualify as the most risky.

Bonds, both corporate and government represent another area to invest in. Bonds are rated from junk bonds to triple A. For most investors A , AA and triple A are the way to go. Essentially there is a good chance you will get your money back when the bonds mature.

Spread Your Money

Many of the banks have good tools to help you decide what type of investor you are. Can you tolerate risk or do you need something really secure? Do you want income for your retirement or do you want to take more risk and focus on long term grown? There are a few categories that I have found that they do not always talk to investors about.

First of all they are only selling their own investments. Some banks for example will only sell you mutual funds run by their bank. Some will not offer investments directly in bonds. Instead you can invest in a bond fund. My suggestion is that you spread your total investment between two different investment advisers. This way you will get advice from more than one source and you will build a little competition between them.

Set Diversification Limits

Another area that investment advisers may not necessarily discuss is setting limits of how much you have invested in a given area. Someone nearing retirement might lean towards bonds and income generating investments higher than others.  You might aim for 50% in bonds, 30% in stocks or mutual funds and 20% in GIC’s for rainy day needs. If the market starts to swing significantly, then only 30% of your portfolio is exposed. With proper bond laddering, interest rate changes will not have much impact on your bonds.

Bond Laddering

Bond laddering is simply splitting the maturity of your bonds across several years so that even if interest rates are low in the year your bonds are maturing, you only will need to reinvest a small portion of your investments.  Bonds are a great vehicle providing you stick to A rated bonds. Generally they pay reasonable interest rates, however most have what is called a “Call Option” . This means that the bond issuer can decide to recall the bonds. They will pay back the principle to you plus any accrued interest. Corporations will do this to reduce debt load and also if interest rates are now lower than the original bond value.

Investment Maximums

Another area to think about is the amount of money you will invest in any individual investment. Even though the interest rate on a bond is fantastic, or you are buying into a stock that is very low relative to its overall value, do you really want to place a large percentage of your investment at risk.Some people will set a limit of 10% of their total investments for each individual investment. Others will set it between 5% and 10%.

Many Ways to Diversify Your 401K or RRSP

As we have discussed there are many ways to diversify. We will list them here for your consideration:

  • Across investment vehicles e.g. bonds, mutual funds, GIC’s and stocks
  • Diversify across investment advisers
  • Across industries
  • Foreign and domestic
  • Set limits on the amount of any single investment
  • Set limits on the amount of any investment type

Depending on the size of your investment you may want to develop this model over time for your personal needs. What ever you do, never put all of your investments in one basket. If it sounds to good to be true then it probably is too good to be true.