At Evermore, we always talk about “goal-based” investing. It’s what we do here. If you are are looking to learn more about what goal-based investing is, watch our video below, or read on!
Goal-based investing refers to the concept that your investment decisions are driven by your goals. Not vice versa.
For example, history has shown us that over a long time horizon, investing in the S&P 500 has provided a larger average compounded annual return versus a regular interest-bearing savings account at a bank. But this doesn’t mean the stock market is “better” than the savings account. Why? Because the S&P 500 might have a better return over a long time horizon, but in any given year in can be lower than the year before, it is not built for short term investing.
Say you and your partner have a goal of saving for a down payment for a house, and you really want to purchase your home next year. You need your money to be somewhere safe with virtually no chance of losing any value, like a savings account, or a short-term GIC. If you lose value, you might not be able to make the down payment. You’ll miss your goal. Your goal has determined the best course of action.
The down payment example shows a goal that has a fixed timeline and a fixed and singular spending requirement. The down payment is needed on a specific date in the future, in a specific amount.
Not all goals are like this.
Let’s look at saving for your child’s education. Ideally, you are starting to put away money into a Registered Education Savings Plan (RESP) each year from the moment your child is born (and trying to maximize the federal credit!). For those that pursue a post-secondary education it usually begins around the age of eighteen. Post-secondary programs typically can last four years. So, you are saving and investing for eighteen years, and then you need to spend those savings over a period of four years.
Here we have a goal where the realization of that goal is more fluid. Your child may not end up pursuing post-secondary education, or their start time could be delayed a few years. But if they do go further in school, they will have tuition to pay over four years or so. And there is no wiggle room, tuition is fixed and if you wish to attend, you pay the amount. So the spend is fixed but also spread over time.
For a goal like this, in the first ten years you may want to consider a basket of low-fee, highly diversified, equity based ETFs. But after those first ten years you probably would want to consider rapidly introducing more guaranteed, interest-bearing investments like GICs. The goal here is to pay for school. Not to attain some arbitrary annual return number or “beat the index”. You invest according to your goal.
Now let’s talk retirement. It’s the goal many of us work towards…not having to work.
This goal has a very flexible start time and an even more uncertain spending pattern. We don’t know how long we are going to live. We have an idea of what we might need in retirement, but this could go up or down. However, we have some limited control over it. We can tighten the purse strings if the need arises, and we can splurge a bit if we find we have more saved than we need.
The goal of retirement is really a double goal. First, to actually be able to retire. Accumulating enough savings through prudent investing that allows you to hit the links, beach, safari, whatever you dream of. Part two of the goal is to not run out of money during your retirement.
In order to achieve this goal, a lot of responsibility lies on your shoulders. You have to put aside money every year. This can be a challenge with everything life throws at us. We need to balance our short-term needs and desires and long-term needs and desires. We shouldn’t be expected to live like misers just so we can enjoy a long retirement (which you unfortunately might not be around to enjoy). We also need to enjoy life right now. Take a trip. Go back to school. Reno the basement. But we also need to do these things with prudence. You have to take care of your future self as well.
If you’ve taken this step of budgeting and making contributions to your RRSP and TFSA, then you have done a lot of the heavy lifting. Saving properly is challenging. But once you have got yourself on a budget, how should you invest retirement savings? Many of us get thrown off at this point, usually because we have either been misinformed about our options, or we’ve been too intimidated by the process and lingo of investing that we’ve haven’t taken any action at all.
Most of us need to see overall average long-term returns greater than those provided by “guaranteed” or less “risky” investments in order to meet the goal of having enough money in retirement. We need our savings to work as hard as we do.
Luckily, for this goal, we have time on our side. We start working in our early twenties, and most of us look to retire in our mid-sixties or so. We have around forty years before we need to start drawing on our savings. Our retirement period is unknown, but could be ten, twenty, thirty plus years. Still a very long time.
As the stock market moves while you are saving, when it goes into dips, you benefit from continued investment in the overall index provided your time horizon continues to be long.
In retirement however, you are withdrawing money. So when the stock market dips, you can’t benefit from “buying low”, you are always selling. So although your retirement period is still long, you need to introduce stability.
The goal of retirement is not straight-forward, there are many moving parts, and finding the optimal solution is elusive. You want to pursue a prudent approach. You take advantage of growth opportunities when the timeline and cash flow conditions are in your favour, and start to move towards preserving your accumulated wealth as you approach and move into your withdrawal period in retirement.
The goal of retirement is the goal we focus on here at Evermore, and it’s why we created the Evermore Retirement ETFs.
Evermore Retirement ETFs take the guesswork out of asset allocation while investing for retirement. Designed using low-fee ETFs from Blackrock, Vanguard, and BMO, the Evermore Retirement ETFs start out focused on growth, then move along a “glide path” that has been engineered to apply an optimal mix of equities and fixed income at any particular point in time along your journey towards and during retirement.
Evermore Retirement ETFs are low-fee target date funds available to anybody with a direct investing account. Direct investing accounts can be opened online or with the help of somebody in your local bank branch.
If you are looking for more information on how target date funds work, here is an excellent video from our Chief Investment Officer, Brian See, that provides a straight-forward explanation.
Whether your goal is long-term or short term, remember that it is your goal that determines the best course of action to get your money working for you.