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Money management rules

by | Oct 26, 2021 | SELF-PUBLISHED

Learn the basics of securing your financial future

If you’ve taken sensible financial advice and are committed to a regular savings and investment program, you might have already built up a substantial nest egg in your RRSPs and TFSAs. If you are, in fact, in this mid-life group, your biggest worry is probably not finding funds to save, but in saving the funds you have. 

Capital has many enemies, and among the biggest are systemic factors. By “systemic,” I mean capital-destroying factors that you don’t directly create yourself, such as inflation, taxes, and macro-economic events. They’re part of the wider world over which you have no control. Your approach to these realities will determine how your portfolio performs through to when you plan to retire. 

When you’ve built up (or been handed) a tidy nest-egg, preserving it is job one. Here are a few tips on capital preservation.

Stay in for the long haul

For saving and investing, the principle is the same. It’s all about staying in it for the long term. For younger savers, I always recommend opening a Registered Retirement Savings Plan and a Tax-Free Savings Account. The reason is simple. In these plans, your money will compound tax-free. 

Over the long haul, that can really add up! And you can start off with small amounts, gradually increasing as your salary rises. For example, a $500 monthly contribution compounded monthly at a relatively conservative annual rate of 6% will grow to $500,000 in 30 years

Know yourself

Don’t try to be something you’re not. Most of us tend to overestimate our capacity to deal with risk, investment volatility, and market losses, especially when we’re younger. Be realistic about your own tolerance for risk (and ignore what friends, neighbors, family, and hyper-Tweeting strangers say about their “successes” in the market – most exaggerate and many just outright lie). 

Then allocate your assets accordingly. If you have determined that you’re a conservative investor, for example, you’ll want to tilt your investments towards a more defensive allocation, with perhaps 60% to cash and fixed income, and 40% to equity. More aggressive investors might consider reversing that ratio.

Make it grow

To preserve your wealth and keep it working and producing for you, you have to make some key decisions about your tolerance for risk and from there how to allocate those assets in the most tax-efficient way possible. 

Switching large lump sums in your portfolio to so-called “risk-free” vehicles as a capital preservation strategy during times of market volatility (as we’re seeing right now, with stock indexes pushing to record highs) is essentially an exercise in futility. First off, it’s impossible to consistently call market tops and bottoms. That means in your efforts to get “risk free,” you may miss out on further gains if the market’s momentum extends for any length of time beyond what you though was a “top.” Ditto for getting back in at the bottom. Novice investors typically buy back in after the biggest gains off a bottom have already been made. 

And in the meantime, your “risk-free” assets (cash or liquid cash-like instruments such as savings accounts, Treasury bills and money market funds, and GICs) pay next to nothing in interest.

Instead, for larger nest-eggs, it’s important to diversify assets over a number of asset classes (including fixed-income, equity, and alternative investments) to ensure both capital preservation through diversification of assets and tax-efficient growth to keep that income stream coming. 

Control spending

The best laid savings and investment plans often founder on the investor’s inability to set money aside regularly. The complaint I often hear – even from higher net worth clients – is, “I just don’t have any money left over at the end of the month for saving.” In my experience, that frequently boils down to a spending problem. Whether you’re a bazillionaire or a just plain high earner, uncontrolled spending will – not “can” or “might,” but “will” – make you feel like you’re always broke.

Having trouble reconciling your net worth with your gross spending every month? Get back to basics with a budget. For many, that’s the ultimate six-character four-letter word. But it need not be. The basic building block of financial literacy is the personal budget. Too many people think of a budget as a constraint on their activity or lifestyle and therefore avoid ever making one. In fact, a budget is more of a bird’s-eye view of your income and expenses that can highlight areas of possible trouble and help you avoid financial difficulty.There are plenty of resources available to help you get a fix on your monthly income and outgo. These include the Financial Consumer Agency of Canada, which offers an online budgeting tool, downloadable budet apps, your local bank branch, and fee-for-service financial planners.

© 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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