Make your financial plan fit your needs

The Soviet Union was once famous for its constantly evolving five-year plans. Maybe they were onto something.

At times like these, when stock markets bump up against new highs and investors wonder whether it’s time to get out, a review of basic financial planning principles may be in order. For many whose plans have been poorly conceived or executed, it’s never too late to set your finances on a better course.

Plan your cash needs in advance

Underlying any strong financial plan should be a serious attempt to foresee significant cash needs several years in advance. After all, ultimately being able to turn long-term investment into spendable cash in timely fashion is perhaps the most important aspect of any personal financial plan. Isn’t future spending what today’s investing is all about?

The future, of course, can be anything but clear. But your significant cash needs, those you consider most important, should stand out fairly clearly. For most investors, these include purchase of a house, education expenses, retirement income and possibly, should fortune smile, purchase of such luxury items as a cottage or sailboat.

Plan for at least five years

If you’re accumulating money for these or other major expenditures, we suggest beginning a gradual shift in asset allocation at least five years in advance. Think even longer in the case of aggressive investments such as cyclical manufacturing and resource stocks. That means putting money so earmarked into guaranteed securities such as government bonds or GICs that mature when you need the money.

Note we don’t include mutual funds that hold these investments. That’s because mutual funds offer no control over maturities of such securities. You can actually lose money in a bond or mortgage fund if you have to redeem at an inopportune time—like now.

So, if you have planned your finances in this way for cash that you need now, you would have started selling stock in 2016 or earlier. This, of course, would have meant missing out on the market gains that have occurred since. But had your need for cash occurred during the market low of March 2020, when COVID-19 was just bursting on to the scene, you may have ended up selling your stock at a loss.

Behaving the way we suggest, of course, is more easily said than done. That’s because the all-too-human emotions of greed and fear get in the way. In late February 2020, it may have been easy for many to hang on amid the euphoria of the all-time highs that North American markets were making. And, of course, the reluctant sellers that February would have regretted their action just a few weeks later, when markets made multi-year lows.

And those investors who responded to the market plunge by selling their stock in a panic would have had reason for regret as stocks rebounded in the following months.

Take a rational approach

Successful investors, those who get both in and out of the market at advantageous times, resist these raw emotions in favour of more rational thinking. Stocks increase in risk as their prices rise. And they decrease in risk as prices fall.

When we see risk, we suggest investors take a lengthened time frame. And vice versa. In a roaring bull market, such as we’ve enjoyed for more than a year now, five years may be too short. But in an aging bear market, you can reasonably hold for a shorter period and sell closer to the timing of your cash needs.

In other words, don’t mechanically redeem everything five years in advance. Rather, start the process by looking for an advantageous exit point from stocks—such as now, maybe. We also hasten to add that the five-year criterion we’ve suggested should by no means be considered absolute. Rather, relate it to the urgency of your plans, and your tolerance for risk.

This is an edited version of an article that was originally published for subscribers in the July 2, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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