3 Questions You Need to Ask

It’s probably a good time to renew our faith in the basic principles of financial planning given the recent uptick in apocalyptic financial news. 

The three components to solve any financial planning goal are investment objectives, time horizon, and risk budget. If these principles are not properly aligned then you're not going to be successful in the long term.  So, let’s unpack these concepts, one-at-a-time, so that you have a game plan regardless of the economic climate.

• Investment Objectives: What is the purpose for saving?  Is it for a down payment on a new house, savings for a vacation, your children’s college education, or multi-decade retirement income?  If you can’t define why you are investing in the first place you will lose your way.  Keep in mind, that you can also have more than one investment goal because you can have more than one investment objective.  Objectives lead to time horizons, so that’s our next stop.
• Time horizon: What is the actual timeframe you have for the investment objective?  In reference to the above questions, are we saving for a new house next year, or in 5 years time?  When do you plan to take your vacation?  When are your children off to college? 10 years?  Finally, at what age do you want your last retirement cheque to end?  90? 95?  Clearly, timeframe gives us a context for the investment’s suitability.  An investment for one year is a lot different than one for 30 years.  The final piece of this puzzle focuses on risk.
• Risk Budget: A risk budget is your willingness to accept a degree of uncertainty for your investment. The greater the risk budget the greater the opportunity for you to make higher returns.  Some people have no risk budget and are unwilling to accept any fluctuation in their investment, while others are willing to accept a much greater level.  Because risk is a very personal thing, investors need to take emotional stock of how they will react when down days occur.  If not, they will make mistakes in saving for their investment goals.

What is critically important to remember is that you are in control of the Investment Objective, Time Horizon, and Risk Budget.  These are not static figures.  Their alignment is absolutely necessary or you will have an internal conflict with your financial goal.  Stated another way, you wouldn’t wait one year before retirement to start investing for the next 25 years worth of income any more than you would invest next month’s mortgage payment in the Canadian stock market.   

Finally, when these three factors are in harmony, the attainment of the financial goal is most certain, and the element of chance is reduced substantially.  This is precisely why financial planning matters.  This is also why proper analysis by a financial planner helps to maintain this balance. 

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete.  It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities.  The views are those of the author, Patrick A. Choquette, and not necessarily those of Raymond James Ltd.  Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision.  Raymond James Ltd. is a Member - Canadian Investor Protection Fund.