No matter how you feel about investing – whether you think it’s fun, a chore or you are totally indifferent – you can’t neglect it. It’s important for the financial well being of your family, to fund your children’s education, and of course to secure your future and restful retirement! Getting the “Where”, “What”, “How” and “Who” right, things like the most appropriate accounts to house your investments, the right mix of the different types of assets and how and who to implement your investment plan, are really important decisions. But the “Why” is most important.
Unless you can tie your financial situation and investment plan to goals that are meaningful to you it is unlikely you’ll care, and therefore unlikely you’ll stay on track, rendering useless all the work you put into the where, what, how and who! So the “why” is that it will help you achieve what you desire in life.
And why take the time to do it properly? If you do it properly, you’ll probably stay out of trouble. With investing, we’ve seen trouble manifest itself in some fairly tangible ways – high and hidden fees, poor diversification, inappropriate investments for your risk profile, under-utilization of tax-efficient accounts, conflict of interest between you and those who want to sell you financial products and, perhaps most importantly, your own behaviour. All of these can mean trouble to you as an investor and trouble can knock one, two, three percent or more off your annual investment returns and that can be the difference between achieving what you desire in life and not. It could be the difference between retiring when you’re fifty-five or sixty-fine, between travelling the world in your retirement or staying home and pinching pennies. It could mean hundreds of thousands of dollars!
We like to make this a bit more tangible by using a hypothetical TFSA account as an illustration. If you are forty years old and you and your spouse have decided to start contributing to a Tax Free Savings Account (TFSA), you would have built up $41,000 each of available contribution room through 2015. Let’s assume you’ll stay disciplined and continue to invest the new maximum annual contribution of $10,000 each. Assuming annual investment returns of 7%, twenty years down the line at age sixty you’ll have more than $1.1 million (that’s tax-free by the way). If you could carry on until seventy you’ll have more than $2.5 million (tax-free). Compounding is a blessing. On the other hand, if trouble gets in the way and knocks 2% off your annual investment returns you’ll have more than $250,000 less by the time you’re sixty or more than $800,000 less by the time you’re seventy. This is the why! These are significant amounts of money.
To give yourself the best chance of achieving what you desire in life, take time up front to understand your own Why and then do your best to stay out of trouble.