Setting Investment Objectives

First things first, what are your investing goals? What will you want to spend on in future and when? The big chunks of money matter most, naturally. Think of big life events which have financial implications.

1) Retirement - retirement is an inevitable voluntary or involuntary point when investment build-up turns to withdrawal (an exception perhaps is the richest man in the world, investor Warren Buffett, going strong at age 78). To figure out the investment nest egg – your objective - estimate your retirement spending, subtract pension income sources, then obtain the lump sum objective by multiplying the missing income by 25, which assumes a conservative 4% withdrawal rate that should avoid ever running out of money. (e.g. in the simplified chart below, the green amounts are what might be required for a current $75,000 salary). The estimation process can get more sophisticated, and a future post will get into more detail. Given the large lump sum that most people would need, this is, or should be, investing priority one.



Resources:
InvestorEd Retirement page on How Much? - unbiased advice, includes downloadable budget spreadsheet
FiscalAgents Tools - have fun with four different retirement calculators
The New Retirement Book by Sherry Cooper - especially chapter 9, How Much is Enough? - summary at BMOIL, review, buy

2) Education - an undergrad university program costs over $6200 a year on average according to a Stats Can press release. Add in books, possibly residence and the total can climb to $15,000 p.a., or $60k for the degree. The wildcard is how much you plan to have the kids finance themselves through summer or part-time jobs, or loans.

3) House - the investment target usually will take the form of a down payment, no less than 5%, better 10% or more (see The ABCs of Mortgages at the Financial Consumer Agency of Canada). The amount you will need (house price booms excepted) and when you will need it is under your control.

4) Inheritance/Legacy/Charity - as people get older, consideration often turns to what they will leave behind. Our friend Mr. Buffett decided not to die first and announced a few years ago that he was donating $31 billion! to charity. Giving is perhaps the easiest investing goal to handle since the amount - whatever is left over - and the timing - whenever you kick the bucket - can be completely passive and flexible.

5) Vehicle, Sabbatical, Wedding, Funeral or other significant future expenditure. Smaller and more controllable amounts but they can enter the mix.

What does the above imply for the Investor?

You should consider:

• a mix of types of investments with faster growth over the long haul, like equities and those with stability, like bonds or cash, for shorter term objectives;

• use of retirement accounts, like RRSPs, education accounts like RESPs and flexible accounts like the new TFSA.

• setting priorities and possibly deferring some items, as total spending may exceed your saving capacity and the maximum realistic returns on investments

A Process to Build a Sound Investing Plan

"If you don't know where you are going, you might end up someplace else." Legendary baseball player and manager Yogi Berra's words (and other delightful quotes here) apply perfectly well to DIY investing. A bit of simple and straightforward planning will yield significant benefits - having the right amount of money at the right time in one's life. It will also provide the confidence and peace of mind to withstand the inevitable shocks along the way.

Following a certain sequence of steps or a process will make it all seem natural and will avoid going down the wrong path, saving the DIY investor time, effort and money. This blog will therefore go through a series of posts illustrating and explaining these topics:

1. Setting Investment Objectives: why are you investing? retirement, education, sabbatical, inheritance/legacy, house, vehicle, other significant future expenditure; or perhaps even gambling / speculation / entertainment; this determines, or helps determine, target amounts, time frame, types of investments / portfolio mix, type of accounts (RRSP, RESP, TFSA etc)
2. Taking Financial Stock: what do you have now and what is available to invest? assets vs liabilities; income vs expenses; effect of job stability and work pension or stock purchase plan; human capital; investing monthly cash or a lump sum
   
3. Investment Building Blocks: the Range of Securities & Products Available: "the ingredients", such as stocks, bonds, cash, GICs, T-bills, CSBs, Income Trusts, preferred shares; mutual funds, ETFs, REITs, ETNs, PPNs, seg funds
   
4. Investing Principles: what are the important rules for success in the investing world such diversification, risk vs return relationship, taxes, inflation
   
5. Risk - How Much Can You Afford and How Much Can You Put Up With?: risk as loss and volatility
   
6. Diversification and Avoiding "Diworsification": the difference between many holdings and different holdings; non-correlated assets and asset classes
   
7. The Written Investment Policy, Don't Invest a Cent Without It: asset classes to hold and in what proportions, under what conditions and/or how often to buy or sell; benchmarks for tracking and how often to review
   
8. Account Choices: Regular/taxable, RRSP, TFSA, RESP, Informal Trust, Formal Trust, Mutual Fund, Wrap/Discretionary
   
9. Broker Choices: comparative factors - trading costs, admin fees, range of accounts, research tools, service and telephone support, foreign exchange in registered accounts; convenience or fee reductions for family holdings, links to banking

Hopefully, we can thereby avoid later saying as Yogi did, "We made too many wrong mistakes" and instead become competent investment players who hit for a decent batting average.

Why Be a DIY Investor and What Does It Take to Succeed?

As the inaugural post on this blog devoted to DIY investing, a good question to answer is why do it in the first place, why not just leave it to an adviser? Another pertinent question is what kind of personality is needed to succeed?

Why DIY?

• 100% focus on your own interests - most financial advisers are honest and conscientious about catering to your financial needs but DIY offers you the unlimited opportunity to tailor your investments to your own needs and circumstances with as much fine tuning and departure from standard solutions as you wish.
  
• cost savings - the DIY approach using a discount broker such as BMO Investorline and others that only execute trades and provide no advice can save you money and boost returns; one of the objectives of this blog is to find and discuss those ways. Even a small savings compounded over many years can have a dramatic effect. The attached chart shows that a seemingly insignificant 1% extra return per year boosting returns from 7 to 8% can create a one third greater end amount after 30 years - $10,000 grows to $100,000 instead of only $76,000.

• pride of self-reliance - just as business owners often remark on the satisfaction they receive from being in charge, a DIY investor can gain satisfaction from the feeling of being in control of his/her own destiny; it's the "I did it my way" feeling.
• intellectual challenge and fun - there's no need to play Monopoly when you have the stock market; it's real money and the thrill is all the greater. Not only that, if you play the game properly - another aim of this blog is to show how that is done - you can minimize the chances of losing. Successful DIY investing can be done quite simply, but it also offers to those who get hooked, a wonderful world where you need to read, to learn and to think. For many people with more free time, such as those reaching retirement, it offers an enticing way to keep the mind active, broadening and deepening knowledge in an ever-changing field.
• community and socializing - there are many DIY investors around; most are happily passive, reading news, websites and blogs such as this one but for those who wish, the web welcomes all comers with comments, questions and opinions. Hang around a while, participate and you get to know others and enjoy the pleasure of a shared interest.

What Kind of Personality is Suited to DIY?

Your personality and behaviour is the crucial issue. From the early days of investment giant Benjamin Graham in his book The Intelligent Investor, through all the academic research that has detailed it since (summarized neatly by Richard Deaves in his book What Kind of Investor Are You?), all agree that the key to success is how you handle yourself. You must avoid the errors of over-confidence, impatience, procrastination and being too emotional. If you are among those who are naturally planners, who look forward and are willing to defer immediate gratification and wait for longer term results, who are self-controlled and self-disciplined, who can accept that not every investment will turn out a winner and who are able to bounce back from setbacks, who do not assume they automatically know better than everyone else and are willing to learn, who tend to keep an even keel and not have excessive reactions to losing or winning, then you are among those most likely to succeed as a DIY investor.