Let your plan guide investing decisions

People make investing decisions for all kinds of reasons, but the best guide is a comprehensive financial plan that keeps you focused on your goals.

Behavioural economics has identified many biases that work behind the scenes to influence our choice of investments and the timing of when we buy or sell. Examples include anchoring (relying on first impressions), confirmation (favouring information that reinforces existing beliefs) and loss aversion (feeling losses more deeply than gains). The trouble is that all of these biases can push us to make investing decisions that go against our best interests.

That’s why a financial plan is so important. It provides a clear and direct path forward that helps keep investors from being sidetracked by unhelpful biases. Your plan should be informed by an in-depth discussion of your personal situation, including your short-term, medium-term and long-term goals, needs and priorities – and every one of these six common elements in a financial plan should map to your unique objectives.

1. Financial management

Your spending, saving and borrowing choices will affect your current and future financial position. Financial management can help you better understand your cash flow (how money moves into and out of your household), as well as create strategies to build savings and repay debt.

2. Investment planning

Investment planning focuses on building a portfolio of assets that work well together and that are appropriate for your risk tolerance and objectives. A financial plan’s investment planning should not be done in isolation, but should occur in coordination with planning in other areas.

3. Insurance and risk management

Insurance and risk management is all about dealing with the unexpected, including property damage, health issues, disability and death. Often, a risk assessment will “stress test” your situation to make sure you’re not overexposed and vulnerable to a reduced lifestyle if a negative surprise comes along.

4. Tax planning

Many strategies can defer, reduce or eliminate taxes on investment earnings and growth (for example, holding assets inside registered plans) and other income (for example, pension income splitting). Minimizing current and future tax obligations frees up more money to meet your objectives.

5. Retirement planning

Retirement planning projects your future income and assets and recommends any necessary adjustments (for example, boosting the amount you set aside each month) to ensure you have enough to finance your desired lifestyle after you stop working.

6. Estate planning

Estate planning helps you ensure your wishes are carried out and you leave the largest possible legacy to loved ones. It includes estimating what your net worth will be and evaluating strategies to minimize taxes due on death. Your advisor can connect you with the services provided by Raymond James Trust or you can speak with a lawyer who can take care of the legal aspects of estate planning and any other legal issues that come up in your financial plan.

Putting it into action

A financial plan describes the route to your objectives – it isn’t the destination in and of itself. Once you have a financial plan, your Raymond James advisor can work with you to set priorities so you can implement the most urgent recommendations first and set out who needs to do what when. Your advisor will also discuss with you how your plan will be monitored and adjusted as circumstances change.

With an all-encompassing financial plan, you can select and evaluate your investments in the context of what you want to achieve across the different plan elements. This takes the focus off individual investment choices that can easily be swayed by biases, and keeps it firmly on how best to achieve all of your objectives.

The cost of poor investing decisions

To measure the impact of making the wrong investing choices, financial research firm DALBAR compared the returns of the average equity investor and average fixed-income investor to the returns of relevant market indexes. In the 20 years ending on December 31, 2020, average annual returns were:

• 5.96% for the average equity investor, but 7.47% for the S&P 500
• 0.57% for the average fixed-income investor, but 4.83% for the Bloomberg Barclays U.S. Aggregate Index. Assuming an initial investment of $100,000, the average equity investor would have ended up $104,118 behind the index, and the average fixed-income investor would have ended up $144,830 behind the index.

Sources: www.capitalgroup.com/advisor/literature/detail.htm?lit=324271 Statistics and factual data and other information are from sources Raymond James Ltd. (RJL) believes to be reliable but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP