Money is definitely the biggest taboo these days. People never talk about how much they make or how much they owe. Nonetheless, the place where information leaks is probably when we talk about investments and when someone was successful with his latest trades. You will never get the full details of the trade, but you will surely be aware that your friend, neighbor or brother-in-law made 100% return on his latest trade (before losing 50% on his past 4 trades, but he won’t tell you that!).
The idea of making lots of money from investing is very seductive. You may dream of becoming the next Buffett but you won’t make it without a sound investing plan. As I’ve previously mentioned on this blog, this is my #1 investment advice for all investors: have a plan.
One of my readers, Gary, asked me how to write down such thing. I thought it was a terrific idea to share with you not only my dividend search criterion, but to share with you my complete investing plan. I’ll share with you my plan step by step as you can use my model to build your own investing plan. Remember, this is my plan, not yours. You can’t copy it and think it’s a good plan for you. An investing strategy is very personal and should be tailor made for one’s needs.
This article is the first of a series as I just started to write about this topic and noticed that if I want to give you a clear view of how to setup your investment plan, I should deliver it in segments.
I must also add, this topic covered in detail through a series offered to newsletter subscribers only. The good news is that the subscription is 100% free
Step #1: Why Do You Invest?
Today’s step starts with a four word question. This sounds like a simple question, but the answer is crucial for the rest of the plan. Why do you invest? Why not go on vacation, buy a new car, a home or pay off your debts? What is the rationale behind you putting money aside in an investment account?
I personally invest for many reasons
#1 I have an account to fund my children’s private school (the oldest one will start in 3 years)
#2 Another for my children future education (called an RESP in Canada)
#3 And my biggest account for my retirement plan (called an RRSP in Canada).
The focus of this article will be on my retirement account. It’s the biggest and probably the most common reason why someone invests. In order to answer the question why do I invest? I must give you a little bit of background:
#1 I have a defined pension plan, meaning my employer will pay 70% of my salary at the age of 65.
#2 I am turning 33 in 2014, therefore, I’m 32 years away from retirement.
#3 I have limited space (and budget!) to contribute to my RRSP.
The goal of my retirement account is to compensate for the 30% income loss at retirement. I’m already very lucky to have a defined pension plan that will allow me to retire peacefully. Technically, I could enjoy life, spend all my money and work until I am 65 and cash in my generous pension plan.
However, I never take anything for granted in life and would rather save some money on the side just in case. In the best case scenario, I keep my defined pension plan and stop working at the age of 65 without losing a penny. The worst case scenario is that I lose my pension plan security and I’m left with my savings. Saving money in my retirement account also creates another possibility: retiring earlier than 65. If I accumulate enough funds, I might be able to retire at 60, who knows?
Since I want to cover 30% of my income and have 32 years left prior to retirement, my investing strategy will be focused a lot more on growth and revenue creation. It would be a whole different story if I was 5 years away from retirement.
This is why it is so important to understand clearly why you want to invest
Some invest “play money” to make big gains but don’t expect to need this money any time soon.
Some invest for a future project like buying a home, retiring or children’s education.
Some have plenty of time in front of them to invest.
While others have only a few years left before their project happens.
When you ask yourself why you invest, it is also important to understand your own background. If I didn’t have such a pension plan, I would definitely focus on saving more and my investment strategy would definitely be different. The fact I have a pension plan clearly changes my risk tolerance.
Speaking of which, this will be our next topic in step #2: Understanding your risk tolerance. I will not only cover the classic investor profile, but also help you understand the underlying risk there is between two stocks. It’s a whole different ballgame to invest your next $5,000 in a junior mining venture vs buying shares of Procter & Gamble (PG)!