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financial planning

For many reasons people delay making decisions. Occasionally there are extra steps to the decision process that need to be completed. Sometimes key decision makers are out of town or caught up in other priorities.

Having said that, many delays are simply that. They are waiting for something, a comfort level, the fear of making the wrong move, a certainty, divine intervention. The thinking is that "there is no pressure, I can always wait, I can put it off."

What I have seen is that there is often a real cost to procrastination. Here are three examples:

1) Insurance decisions: The older you are, the greater the cost of annual premiums. The older you are, the greater the chance of getting an illness that might make you uninsurable. These days, insurance pricing is going up regardless of your age. For all of these reasons, there is a real cost for procrastination.

2) Setting up a will: This is something that often gets delayed by families - usually because they can't decide who would get custody of the children if both parents pass away. Fortunately, the odds of this terrible event happening are extremely low. However, procrastination can put families in a position where the courts and Family Law will have to decide on the caregiver. If you die without a will, keep in mind that others will determine how your assets are split, when children will have access to funds, and will not allow for any tax-efficient planning.

3) When to start investing again: There is definitely a timing component to investing. The problem is that it is very difficult to get it right. As a result, you want to look at history to determine the odds of being better off invested than leaving funds in cash.

If we compare the TSX Composite Total Return Index to the 90-day Canada T-Bill rate, you see a pretty consistent picture.

Since 1950, the TSX annual return is 10.1 per cent, while the 90-day T-bill return is 5.8 per cent. This is an annual gap of 4.3 per cent.

By decade, it looks like the following:

TSX vs. 90-day T-bill (%)

1950s 12.7 vs. 2.0 = 10.7

1960s 10.0 vs. 4.5 = 5.5

1970s 10.4 vs. 7.3 = 3.1

1980s 12.2 vs. 11.9 = 0.3

1990s 10.6 vs. 6.4 = 4.2

2000s 5.6 vs. 3.1 = 2.5

2010 17.6 vs. 0.3 = 17.3

If we factor in fees and taxes using the 60-year period, we still see a large gap. If we assume a 2-per-cent investment fee (which is often tax deductible for non-registered assets), a top tax bracket, and one-third of a portfolio in non-registered assets, the stock return is 2.38 per cent higher a year.

Every individual decade has seen stocks outperform 90-day T-bills, with the 1980s being the only close period. Keep in mind that in the 1980s, you could get T-bills that paid 11.9 per cent: the highest rates ever. Looked at another way, the worst-performing decade for stocks still had a return of 12.2 per cent annually. Most of us would be happy to have those returns.

Today we have the lowest rates ever. They are guaranteed to pay you under 2 per cent - in some cases as low as 0 per cent. With the knowledge of low returns on cash, you can be pretty confident that being invested in the markets will do better in most cases. If we can agree on this, then on average, procrastinating on investing will hurt your wealth.

On a $500,000 portfolio, if we use a 2.38-per-cent average gap, there is an annual gap of $11,900.

Because of taxes, for non-registered assets, this percentage gap would be much higher.

I believe there is a way to improve your financial situation by minimizing procrastination. Here are two key steps:

A) Before you go into a financial discussion or decision, make a list of what you would need to know to feel comfortable making a decision. Include items like why you need to make the change. What is it that you are hoping to get from this decision? What is the downside risk of making the wrong decision, and how can you decrease the chance of this (but not completely eliminate) downside happening?

B) Using the list as your guideline, ask the questions needed and take the time to get the list complete. Not all answers will be black and white. There will be some more emotional "gut check" items on the list that you need to get a degree of comfort with. Once this list is complete, it is time to act.

I have seen many cases of people being stuck in limbo - especially on the investment front. I have shown that on average, it will cost you between 2 per cent and 4 per cent a year to sit in cash. This is not to say that cash is always the wrong investment choice - especially when it is set aside for short-term needs. However, there is a real cost over any longer period of time. It is always possible to get the timing correct on cash, but know that you are betting against the odds in normal times, and likely against long odds today given the historic low cash returns.

If you are sitting on a financial decision today, understand that there is likely a real cost to putting it off. Time to make the decision!

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