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Investment planning in your mid-40s

by | May 28, 2015 | SELF-PUBLISHED

It’s not too late, provided you follow five basic rules

Q – My husband and I are in our mid-40s, with two teenage children. We now own our home free and clear. Because we’ve been diligent about paying off our mortgage, with bi-weekly payments and annual pre-payments, we’ve had very little cash left over for saving and investing. But now we want to apply at least some of the funds we’ve been putting towards mortgage payments to invest and start really saving for retirement. What is your advice on how to start investing in the markets? – Asked by J.R., Calgary, Alberta

Congratulations! You’ve done the right thing in paying down this big, non-deductible debt first. Many people in your circumstances forget that mortgage interest payments are an after-tax expense, and even with today’s ultra-low interest rates, it makes sense to get rid of it as soon as possible.

As for your next steps in saving for retirement, my advice is to start an investing program immediately, using a combination of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans. But there are a number of caveats. Investing in stocks and bonds is a long-term proposition, and the longer the time your money has to grow and compound, the better off you will be.

Markets can be challenging

If you are novice investors, realize that financial markets and investment products can be highly lucrative and very rewarding, but also extremely challenging. So as a first step, you will need to assess your risk tolerance, investment objectives, and time horizon.

You’ll then need to put together a financial plan. Luckily, in your mid-40s, you still have perhaps 15 years to aim for at least some growth before shifting gears more towards safety and income in the pre-retirement phase of your lives.

Even before you start researching potential investments, such as stocks, bonds, exchange-traded funds, mutual funds, segregated funds, and so on, you have to start with the basics. First, remember that there is no free lunch. If you are serious about investing, then you will need to start from ground zero and build from there. Here are five rules I advise novice investors to follow:

Rules for investing

First rule: Live within your means and do not spend more than you earn. With a mortgage paid off, you might be tempted to blow that extra monthly cash flow on vacations or other “me” items. By all means. Use some of it to reward yourself. But then get down to business. You do not need to make a six-figure salary to become a successful investor, but you do need to set out a diligent savings goal and investment plan that will span decades.

Second rule: Understand the power of compounding. This is the principle that reinvested investment income will in turn generate more investment income. Compounding allows your original investment amount to grow faster when earnings are reinvested than when earnings are paid out. The principle of compounding works most powerfully in a tax-sheltered environment, such as an RRSP or TFSA or Registered Education Savings Plan (RESP). Each of these plans has its own twists, limits, and restrictions, but all are highly recommended for saving. Check with your financial planner for details on how these can be integrated optimally into your financial plan.

Third rule: Start now. The more years you have to invest, the more your plan will grow and the more manageable it will become.

Fourth rule: Always pay non-deductible high interest debt off (like credit cards) first before investing. If you’ve already paid off your mortgage, you might still be running a monthly credit card balance. If your credit card charges you 19% in interest and your expected market return is 7% to 9%, it only makes sense to pay the higher rate off first.

Fifth rule: Be flexible. A good financial plan is more like a roadmap than an inscription carved into granite. A good financial and investment plan will acknowledge this fact. Your life will change and evolve, and your savings and investment plan must grow with you.

Getting help in creating a plan

Once you understand the rules, the rest falls into place. Create an investment plan that matches your risk-tolerance level. For example, it makes absolutely no sense to say you’re a conservative investor and then jump into trading penny mines on the TSX Venture Exchange (and I’ve seen plenty of novice investors fall into that trap). Once you’ve set your investment plan in motion, you’ll be surprised how fast your investable assets can grow.

Unless you are avid do-it-yourself investors with time to allocate assets properly, research investments, monitor for risk, and rebalance your portfolio regularly, I would recommend that you retain a Certified Financial Planner or other qualified financial advisor. There are so many different types of investment products to choose from, all with varying degrees of risk, that you may need help to determine the types of assets that are most suitable for meeting your objectives.

© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

© 2021 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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