An effective plan can guide you through all market conditions

An effective plan can guide you through all market conditions

This series of financial advice columns is provided by Philippe Pomerleau, F. Pl.
RBC Financial Planning

One of the fundamentals of successful long-term investing is regularly monitoring the progress of your portfolio to make sure it stays on track. However, sometimes focusing too closely on the wrong things can prompt overreactions, regardless of what the current market conditions are.

This type of short-term view can lead to decisions that actually impede your progress towards your goals. In fact, emotional reactions to short-term events are likely to result in selling when the market is low — the exact opposite of what you want to do. How can you prevent your emotions from influencing your investment decisions? The key is to keep perspective and focus on the long term. When you have a well-structured plan in place, you can confidently remain committed to it, knowing that day-to-day market news is likely to have little impact on your longer-term objectives or on the investment strategy that’s designed to get you there.

The importance of equities

Where your retirement portfolio is concerned, it’s essential to have not only cash and fixed income securities, which provide stable returns, but also equities. Although the value of equities may fl uctuate from day to day, they can help preserve your portfolio’s purchasing power. A diversified portfolio can provide the security and stability you require, while maintaining the growth you need to achieve your long-term goals.

And it’s time that makes all the difference. Yes, equity markets go down, but they mostly go up over time — a fact that goes under-reported by the media. So, while a decline in the S&P/TSX Composite Index will negatively affect a portfolio containing Canadian equities or equity mutual funds, it does not mean that your long-term strategy is off track and you need to immediately adjust your holdings.

The benefits of investing regularly

During periods of market fluctuations, many people are hesitant to invest, preferring to wait for better times. The problem with this approach is that better times usually become visible only after markets have already risen. Investors who have been sitting on the sidelines have missed a valuable opportunity to participate; in other words, there can be a cost to playing it too safe. A far more effective approach than trying to time the market is establishing a regular investment plan with proper asset allocation (cash, fixed income and equities) that will put you in the best position to achieve your long-term goals.

This approach will help you to establish discipline, take advantage of investment opportunities as they arise and keep your plan on track — no matter what the markets are doing.

Managing risk

When saving for retirement, it’s essential to have the secure, stable returns that cash and fixed income securities provide, but allocating too much to conservative investments may allow inflation to catch up with you over time. On the other hand, putting too much of your portfolio into equities may lead to greater fluctuations than you might be comfortable with. The key to an effective plan is to find the balance that’s right for you. At RBC, we can help you design a portfolio that has the mix of equities (for growth potential) and fixed income (for lower risk) that will help you look ahead to the future with confidence.

The impact of inflation

For more than 10 years, inflation rates have been less than 3% annually. As a result, many investors may tend to overlook inflation-related risk. But you need only look at historical price increases to understand how inflation can affect your savings over time. At an annual inflation rate of just 3%, an item that costs $100 today will cost more than $155 in 15 years. The bottom line is that the goods and services you enjoy today will cost more by the time you retire, and their prices are likely to continue rising over the course of your retirement. Today, thanks to advances in health care and changes in lifestyle, people are living longer and doing more in their retirement than they did in previous generations, which makes protecting your investments against inflation even more important. How can you protect your retirement savings from the erosion that inflation causes? Including the appropriate amount of equities in your portfolio can help you stay ahead of inflation over time. Historically, equities have outpaced inflation better than either fixed income or cash holdings on a long-term basis.

For more information you can get in touch with Philippe via the contact details below or visit his website.

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About Author

Philippe Pomerleau

Philippe Pomerleau has worked in the financial sector for years. He is based in Quebec City and speaks English and French.

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