Saving and Investing With Confidence: The Simple Plan Podcast Episode 6

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Today’s Tools and Freebie:
Quickstart Guide to Investing in Canada

How can we save and invest with confidence? And what do we mean by inevitable wealth?

Well, what we mean is that there are things that you can do, steps you can take that if you follow them, if you build yourself a plan and follow it using these principles, you will inevitably build your wealth where you need it to go for that goal that you have set.

Having a written plan is the surest path to the financial actions and habits that will bring us the confidence and success we’re looking for. When you write those plans you answer questions about RSPs and TFSAs and all that stuff–that is a complex tax planning question not just a minor “where should I put my money question”.

Here are your steps to success:

  1. Cash flow. Build your cash flow plan.
  2. Set your goals.
  3. Live debt-free.
  4. Build your financial security
  5. Follow your plan to build your inevitable wealth.

Transcript:

How can we save and invest with confidence? So, what do we mean by inevitable wealth? Well, what we mean is that there are things that you can do, steps you can take that if you follow them, if you build yourself a plan and follow it using these principles, you will inevitably build your wealth where you need it to go for that goal that you have set. But let’s start again with a bit of a reality check, all right.

32% of 45 to 64-year-olds have nothing saved. Let’s just think about that for a moment. 45 to 64 years old is the key time where you need to have accumulated your wealth and be growing your wealth rapidly so that you can get yourself lined up for retirement. And all that retirement is is that moment in time where we switch from living off the income we earn from working to living off the income that we generate from the assets that wheel. So, if you’re 45 to 64 years old and have nothing saved, you’ve got a lot of work to do. You’ve got a very steep hill to climb.

Now, 53% of Canadians don’t know if they’re saving enough. I’m going to assume they’re separate from those 32% because I assume if you’re of the 32% who have saved nothing, you know that you’re not saving enough, so 53% don’t know if they’re saving enough, and here’s what that results in.

Canadians believe when they’re asked–This was just them surveyed. They believe that they need $756,000 to retire and, in many situations, currently right now, that might well be the right amount of money for them. However, they believe that but they actually only save $184,000 for retirement. So they get to retirement, they don’t have that 756,000 they believe they need. They only have 184,000 that they need and those 32% of the 45 to 64-year-olds that don’t have anything saved yet, they’re going to have a heck of a time even getting to 184,000. So that’s kind of the state of a nation.

The last one is that 43% of women nearing retirement don’t have a plan. Why do we single out women? Well, the number one reason is because women if they’re married, are going to outlive their husbands and so, they need a plan even more than their husbands do. Of course, they should have a plan together but we need to have a plan and we encounter people all the time who are in their golden or elderly years, who are in either dire straits or a state of real difficulty and confusion because now, they’re managing their finances which they’ve never done before because their spouse passed away and they have no plan to do so. How can we not be among these people, how can we build inevitable wealth?

[01:01:42] Well, just as Mike was saying earlier about cash flow and about debt and about setting goals is that our behavior and habits are the surest path to success in all of this. We need to be planned, we need to have a plan that we’re following and we need to be consistent. Canadians used to be pretty good at that in terms of savings but now, Canadians save less than 1% of their income, less than 1%. Your behavior and habits are surest path to your success. So, what are those behaviors and habits? Well, the first behavior is to get started, and the place to start is to save systemically. So just as with debt in saving and investing, time can be your ally or it can be your enemy. If you’re waiting till you’re 45 to start saving and investing, just as an example. If you’re 45 and just starting, you’re going to have to save three times as much money than if you had started when you were age 25, so that’s why getting started is essential.

The second principle is to invest simply. What do I mean by that? A lot of people, they hold back or they’re concerned about investing because they’re confused, they  don’t quite know what to do, it all seems very complicated. And it can be but it doesn’t have to be. We can invest simply. So for example, the stock index called the S&P 500 which is a measure of the stock market. The broad stock market in the United States has consistently over long periods of time averaged nine and a half to ten and a half percent. Over the last 60 years, that numbers been 9.85%. Over the last ten years because we’ve been in quite a long stock boom, that numbers been 14.2% rate of return on the S&P 500.

Now, the nice thing about the S&P 500 is it’s highly diversified. If you’re investing in US, the US stock market like that, you get diversified. Canada for example only has three main economic sectors. The US has 10, and so this is why we want to be a global investor not strictly investing in Canadian stocks and mutual funds, so we want to be diversified. That’s an underlying principle but it’s easy to do now. We can do it simply and we’re going to talk about that a little bit more in just a second.

[01:04:45] The third step that we want to follow is we want to have a plan and we want to review that plan, we want to follow that plan. Research shows that people who follow a financial plan do three hundred to four hundred and fifty percent better than those who don’t, so it’s absolutely critical to have a plan, and there is just all sorts of research that supports that. Now, we know that the stock market rises four out of five years and it shrinks in one out of five years. Now that doesn’t happen in five-year cycles unfortunately. It’s not neat and tidy like that. For example, we’ve been in a consistently rising stock market for the last ten years. We’re on a real tear and there’s lots of ups and downs. But because of that, we know that some time is going to come not too long from now when there’s probably going to be a market downturn and so, the question is, “How do we address that?” Well, the way we address that is by having a plan and not by reacting to what goes on all around us. So inevitable wealth is built by saving systematically, investing simply and having a planner of reviewing that plan.

What do we mean by investing simply? It means don’t try to pick winners. For example, a lot of people, the talk so much of the talk around investing is always about what’s the rate of return on this stock or this fund or that kind of thing. Well, here’s what I can tell you. If you save the right amount of money and as a baseline, let’s call that 15%. If you’re saving 15% of your money and you got the long-term rate of return that the S&P 500 has returned that is 9.85%, you would have saved far more than enough money to ensure that you were set up fine in retirement provided you had started early enough.

When we’re looking at investing, don’t get bogged down and confused by trying to pick winners. What’s the right mutual fund, what’s the wrong mutual fund? All that stuff. There are simplified ways to do this. You can use index investing for one but if you want to  look at picking actively managed mutual  funds, we’re going to take a quick look at some of the results that you can get  from that as well because there’s a lot of people have questions about that.

[01:07:29] Here’s an example right here. This is since 1954. This is the return that has happened on the Templeton Growth Fund. Probably the most well-known mutual fund in the world and so, you can’t see the fine print there but essentially, if you had invested, if you would simply put $10,000 in the Templeton Growth Fund in 1954 when that fund first opened, and yes, $10,000 was a quite significant amount of money then. But if you had put $10,000 in that fund in 1954 and just left it, never touched it, that would now be worth about $11.1 million. So $10,000 to $11.1 million. This is what we mean when we talk about inevitable wealth. It’s following tried-and-true principles, making wise choices and letting the market do the work for you.

If you like actively managed funds here’s one example of an actively managed fund. If instead you’re gonna go with the index investing, well, this is what the S&P 500 has done over a long period of time from 1950 to 2016. This is what your 9.85% rate of return likes looks like over a long period of time.

One other thing I want to touch on because it’s such a hot topic right now is fees. People are kind of obsessed right now with fees on investments and it’s partly a good thing. There’s behaviors that are being compelled to change in the investment industry and reporting what’s going on. And yes, fees do matter but they’re not the most important thing and it’s not the right question to ask. The right question to ask is, “Am I getting value for my money?” So, what kind of fees am I paying when I’m investing? That’s easily found out if you ask the question of wherever you’re getting your investments and then you ask yourself, Well am I getting value for that money?”

And so, here’s how you go about answering that question. Do you need assistance and support in making a plan and putting a plan into action and following the plan or are you comfortable as a do it yourself or doing it on your own? We live in a time where it’s easier than ever to do it on your own but it does require quite a bit of self-education upfront to make good decisions and understand those decisions and you have to focus on it going forward. For example, if it’s January 2009 and the stock market is crashed badly and it’s been horrible for the last six to ten months, there’s been big losses, they’re continuing to mount up, you might have lost 30% of your investment already, do you sell?

Well, I can tell you it was a very scary time and it’s easy to answer the question in retrospect, it’s easy to answer the question in theory but when your investments have dropped from 150,000 to 100,000, you start asking yourself, “Should I be selling?” And if you have a wise advisor that you’re working with, they’re gonna help you answer those questions and get you through those periods. The answer to that question was if you stayed in the market, it not only all came back within the next six months, it now began the biggest tier, the biggest growth, stock market growth in history that we’ve been in for the last 10 years, but nobody knew that in January 2009. So that’s why focusing on fees is not the right question. It’s value for money and what do I need and am I getting what I’m paying for in doing this.

[01:11:34] ————————————–We’ve looked at your behavior and habits are the surest path to success. We want to be systematic, we want to be simple we want to be a planner and review and it’s really important that you take ownership of your financial future. You can’t just set it and forget it. You can’t hand it over to an advisor and it’s not that you can’t trust them, it’s that they can’t run your life for you. You have to take ownership. You need to always understand what’s going on and what you’re doing. Use them for wise counsel, use them to help you build plans and work numbers if you need that kind of assistance. But you need to be the person who fully understands and owns what’s going on in your finances for your financial future, and you need to be the one who understands and follows your plan.

Having a written plan is the surest path to the right behaviors and habits and that’s, it’s when you write those plans that you answer questions about RSPs and TFSAs and all that stuff, that is a complex tax planning question not just a minor where should I put my money question. So, let’s review what we’ve looked at, your steps to success.

Number one, cash flow. Build your cash flow plan. Number two, set your goals. Number three, live debt-free. Number four, build your financial security, and number five is follow your plan to build your inevitable wealth.

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