Question e-mailed in by a Globe and Mail reader:“I have been managing my investments for almost 10 years. For the past two years, I’ve been waiting for a crash and accumulating cash. I keep hearing that it’s coming. Should I keep waiting? Should I invest now?”
Answer from Darryl Brown, an independent investment consultant and founder of You&Yours Financial in Toronto: For the past decade, since the financial crisis, the stock market has been on a tear. Yet, for at least the last four years, everyone and their mother has speculated a correction or crash is right around the corner.
The truth? Nobody knows. Honestly, nobody. No matter what someone’s investment expertise is or what they may claim in ads or locker rooms, no one can predict the future. My advice? Predictions are BS. They attract attention and that’s about it. If you have long-term cash to invest, invest it. But, you must do it with intention and do it with awareness.
Intention means understanding why you are investing in the first place. What your goals are and how they fit into your broader financial plan. Awareness means understanding the risks. The only guarantee in investing is that the market will fluctuate. What can you tolerate and what are realistic expectations for you personally?
If you haven’t heard of an Investment Policy Statement (IPS) yet, now is the time to get familiar. Think of the IPS as the link, or communication, between your broader financial plan and the investment(s) required to achieve those goals. You can seek the help of a professional, or create one on your own to ensure you are investing with both intention and awareness. Roughly, an IPS is made up of the following elements:
1. Return objectives. How much money do you need to make in order to accomplish your goals.
2. Personal risk tolerance. A good IPS digs in here and goes beyond just circling a number between 1 and 10 to truly identify how much financial and emotional risk you can bear to determine your asset allocation.
3. Your investment time horizon. Understanding the timeline for your investments sounds straightforward but I find that, for most folks, life doesn’t go in a straight line and we have to consider the circumstances that create multiple, congruent and sequential investing timelines.
4. Liquidity requirements. What else is happening in your life that may require cash on hand.
5. Taxes. Are your investments going to be held in registered accounts or not? Consider contribution room for your registered retirement savings plan (RRSP) and tax-free savings account (TFSA) and how to most effectively use different types of accounts to your benefit.
6. Unique circumstances. These can vary in that they are unique to you. For example, you may have personal or business interests or compensation structures that create areas of exposure. You may want to invest in companies that align with your personal values or exclude those that don’t.
Creating your IPS is essentially creating an investment road map. One that considers your individual circumstances and the foreseeable twists and turns that life may take you on. Be wary of investment managers and supposed investment plans that feel one-size-fits-all.
The key to investing with intention and awareness is to make a thoughtful, honest plan for yourself and to follow it. A plan like this will keep you from making emotional decisions and reacting to loud attention-seeking predictions, the true Achilles heel of most investors.
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