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Investment Planning Component Three: Investment Planning

Over the last few months, we’ve introduced you to two of the six components that contribute to a successful investment plan.  Today, we’ll introduce the third component, investment planning.

With all that we know, and all the research that has been done over the last century or so, you’d think that we’d have investment strategy all figured out.  But we don’t do we? Why do we worry so much about our investments, when those things that we invest or put our money in (mutual funds, GICs, savings accounts, etc.), have a very long history of fairly consistent and even predictable behaviour.  Is it because there have been times when we have been taken advantage of by investment professionals who haven’t been entirely honest with us (or worse)? Is it because we don’t always behave appropriately when it comes to investing (i.e. we tend to want to “chase last year’s winners”, or to “buy on the highs and sell on the lows”)?  Or is it possibly some combination of both of these issues? Perhaps it’s simply because we don’t have a plan.

When you choose investments based on your larger investment planning goals, they will make a lot more sense.  You’ll be more likely to stick with them during times of uncertainty, and they will be uniquely designed for you and your current and future needs.  

When you’re considering your investments, in light of your larger financial goals, there are several factors to consider.  Those factors are your investment objectives, time horizon, risk tolerance, past experience, and attitude towards investing.  Let’s consider each one in more detail.

Your investment objectives are typically broken down into three categories; your need for safety, your need for income and your need for growth in capital.  Your objectives will depend on a whole number of factors that are unique to you. For example, if you have some money set aside with the intention to make a down payment on some property, your objective should be safety of principle.  If you’re in your thirties, have no need to use your money until you’re retired, and you want to maximize your portfolio’s long term value, your objectives will be towards growth in capital. If you’re retired and need to use the money to finance your retirement, then you have an income objective.  Many young retirees maintain a growth objective as well, because they may live a long time making growth not only beneficial, but important as well.

Yet, your investment plan needs to go beyond your investment objectives.  It also depends on your time horizon.  By looking at when you’re going to need your money, and for what length of time you’re going to need it for, you can build a portfolio that is suitable for the period you’re looking at.  Consider the individual who is going to make a down payment on some property. Let’s say he’s planning on buying that property in a year. His time horizon is therefore one year, and his investment objective, as a result should be safety.  The thirty-something likely has 30 or so years until retirement, and then potentially another 30 years to live on his money. Sixty years is a long time horizon, therefore, he can afford to invest for growth. Our retiree’s time horizon is unclear; however, as people continue to live longer, a longer time horizon for retirees will influence their investment objectives.

Of course no discussion of investing would be complete without covering your tolerance for risk.  Risk, as it is defined by Investopedia, “involves the chance an investment’s actual return will differ from the expected return.  Risk includes the possibility of losing some or all of the original investment.” Your tolerance for risk can depend on a number of factors; however, knowledgeable investors tend to have higher risk tolerance than investors with less financial education.

Assessing your risk tolerance is not as simple as looking at your level of financial education.  Past experience also plays an important role in determining your tolerance for risk.  Those who have had previous investment success will tend to have a higher tolerance for risk than those who have not.  Did you become an investor during a bull market or a bear market? Did you get caught up in any of the recent bubbles (Dot Com, Credit Crunch)?  Were you taken advantage of or misled by a financial professional who made promises he couldn’t fulfil?

Your attitude towards investing has an impact too.  Do you believe that investing in equity based mutual funds will provide you with a higher return than investing in a portfolio of GICs?  Do you feel that buying equities is simply taking unnecessary risk? Is investing something that is very important to you and you set a certain amount aside every month for investing?  Asking the same question a different way; is saving something that is very important to you and you set a certain amount aside every month in a savings account?  Simplifying those questions further, are you the type of person who “invests for the long run” or “saves for a rainy day”?  How you answer these questions demonstrates your attitude towards investing, and will have an impact on the investment plan you create.

Here at LGK Wealth Management, we consider all of these factors when building your investment plan.  These factors are all unique to you, and therefore your portfolio will reflect that. And remember, the investment plan is not something that is created on its own.  It takes into consideration all of the other investment planning components. Financial Management, Retirement Planning, Insurance and Risk Management, Tax Planning, and Estate Planning are all considered when creating your investment plan because your goals in each of these areas can and will guide us in the investments we recommend to you.

Next month, our article will focus on the fourth investment planning component, Retirement Planning itself.  Stay tuned.

Regards,

Gary M. Koss
Senior Mutual Fund Advisor
Manulife Securities Investment Services Inc.
gary.koss@manulifesecurities.ca
780.426.2400

Call 1-780-426-2400