How to take the confusion out of investing –
and instead make investing work for you and your future
Ciccone-McKay’s Goal-Based Investing approach plans for short-, mid- and long-term goals
The world of investing can be overwhelmingly stressful and confusing, with the result that many people never feel adequately informed about it. Not surprising, then, that they put off planning for their future. They figure that things are comfortable now, so why worry beyond that?
But the future tends to arrive faster than we expect. By planning now, you will make your future as comfortable as your present. To help with that planning, we at Ciccone-McKay have created a specific investment approach that demystifies investing – that takes the confusion out and replaces it with clarity. Our straightforward approach, called Goal-Based Investing, allows us to work with every client to derive the plan tailored exactly to that client’s unique, individual wants and needs. The fundamental key to our approach is ensuring that our clients allot the necessary assets to each time period of their planning, with a specific and unique purpose for all of their funds.
In the traditional model of investment procedures, an advisor works with the investor to identify certain goals, then lumps the investor’s assets into one single umbrella portfolio. These assets may be held in up to several accounts. At this point, the investor expects a given return, which takes into consideration historic or expected performance of similar portfolios. The investor anticipates drawing from this umbrella portfolio when certain lifestyle needs arise.
You yourself may have experienced this traditional way of investing when you’ve spoken to a planner or advisor at your bank. It’s an approach that leans on the advisor’s efforts to build up the total portfolio over time. You will have noticed that the advisor focuses most of their attention on two specific details about you: your risk tolerance and your time horizon.
Your risk tolerance can be simply defined as the amount of risk you, as an investor, are willing to take on in order to attain an incentivized return. Obviously, the higher the amount of risk that investors are willing to subject themselves to, the more volatile the returns may be – sometimes in their favor and sometimes not. While some clients can tolerate the equivalent of financial skydiving without batting an eye, others’ risk tolerances are quite low. Due to this, the risk-and-return tradeoff could easily be called the ability-to-sleep test.
Your time horizon is simply the amount of time you anticipate between your initial investment plan and when you will need to withdraw a portion or all of the funds. With traditional investing, investors are often hurt by the fact that, when lumping their assets under one umbrella, there is no distinction between goals with different time horizons. This may lead to exposing the investor to more risk than necessary as they withdraw from the portfolio and become exposed to market fluctuations.
No question these two pieces of information play a vital part in creating your specific financial plan. However, I feel that it is inefficient merely to identify your separate goals and then lump the corresponding assets into a single bucket. This is because there is a potential for a shortfall in the future. An investor’s returns may vary from what is expected. Or, there may have been an inaccurate prediction as to the true time horizon for the funds.
Ciccone-McKay’s goal-based investment approach aims to combat these inefficiencies. Our approach creates completely separate pools of money that act independently of one another. Each is created with the job of satisfying specific goals that also vary from each other. For example, if you’re an investor in your 30s looking to buy a home, you would not want to have your retirement assets in the same portfolio as your first down payment. For this reason, we use another factor in addition to your risk tolerance and time horizon. This other factor, the Why-Factor, allows us to identify what is most important to you as it pertains to your financial plan.
Your Why-Factor is what makes you, you. It is the reason you go to work in the morning; the reason you save a portion of your paycheque; and indeed the reason you have made it this far in this article. Simply defined, your Why-Factor is the motivation you have for everything you do. Understanding your Why-Factoris our first step in the process to creating your financial plan. We look to identify your motivation behind the plan because, as we peel back the onion, you and we can distinguish your goals together.
Once we’ve done this, our strategy then involves breaking down your goals into three separate buckets, almost as if you are three completely separate investors. These are the short-term, mid-term, and long-termpools in which assets are allotted – based on your Why-Factor-determined goals. Your goals may range from saving for a child’s education, to saving for a home, to building for a comfortable retirement.
When discussing personal wealth management, our approach is to ensure that all of our clients’ wealth management strategies gel so that, together, they fit into an overall, balanced financial portfolio. It is important to save and invest equally for the short-term, mid-term and long-term goals, and to do so in different ways, for different reasons, seeking different results.
The short-term pool can be seen as satisfying your predetermined upcoming needs that extend past your regular monthly fixed expenses. Depending on the person involved, examples may vary, but they generally tend to encompass down payments on homes, purchasing a new car and saving for a vacation. The key with the short-term pool is that the goals associated with it are very certain. Hence the assets we allot to these goals cannot be subjected to much volatility. Depending on risk tolerance for the funds, vehicles such as conservative funds or savings accounts are most appropriate.
The mid-term pool is usually the most unique of the three, in the sense that each individual’s goals can look very different. The goal may extend past the next year or so, but not usually as far into the future as satisfying retirement needs. From purchasing a second home to investing funds with the aim of extending your business, your mid-term goals should use an investment vehicle that strives for higher returns. These can obviously vary drastically, but the longer timeline – usually three to 10 or 15 years –allows for you to incorporate more risk into this pool than the last.
Finally, the long-term assets are used for just that: the long term. A desired retirement lifestyle is always a driving force when it comes to creating a financial plan – and this leads us right back to the Why-Factor. Especially for younger investors, this pool of resources can be subjected to the most risk. These funds are directly distinguished from the rest to allow for the creation of wealth over the years.
There is an additional pool of funds that ensures the first three are able to remain intact and achieve their predetermined goals. This additional pool is the No Touchy Money Account. By putting aside three to six months of fixed expenses into a savings account, you are not only safeguarded against an emergency, but you’re also allowing yourself the ability to take advantage of any opportunities/challenges that may arise. Say your washing machine breaks down or the lake house of your dreams goes on the market. With the No Touchy Money Account, you can buy a new machine or go for that lake house without depleting the other three pools – which would potentially put your future goals at risk.
Ciccone-McKay’s Goal-Based Investing approach empowers you to make the most of your present – while planning to achieve your future goals. We’d be glad to talk with you about how our approach can work for you and your future. Contact us at 604-688-5262 or email us at firstname.lastname@example.org
Read more blogs+