How Do I Achieve My Financial Goals?

Christine Benz: Holly, it's great to be here.

Cook: So, we've got kind of five steps, right, that we can try and talk our users towards getting to their financial goals. Why don't we start with the first one? You talked about quantifying your readiness. Can you explain a bit more about?

Benz: What I mean by that is that a lot of investors proceed straight to security selection. So, they start picking stocks or individual funds or whatever it is without taking a step back and saying, 'Here is how much I need to save in dollars and cents, and here's how much I need to save on an ongoing basis to get there.' So, quantifying your actual savings rate is an important first step for all investors. I would say that this is such an important component of the investment process that it really is beneficial to sample an array of opinions on this important topic, and this is a place where a financial adviser can also be a great help. If you're not saving enough, that adviser can show you exactly how much you need to save to hit that ultimate financial goal.

Cook: So, irrelevant of exactly what your goals are, how you allocate your assets is important whichever field of thought you adhere to. How do you actually go about defining which pots you should be putting your money in?

Benz: It's such an important question, Holly, as you know, but it really hinges on how close you are to needing to put your hands on that money. So the longer your time horizon, the more you can put up with the volatility that tends to come along with stocks. The shorter your time horizon, the more you need to have that money more or less battened down in safer and steadier investments. So we could devote hours of video to this topic, I'm sure, but a good starting point is to think about your years until you need that money. One rule of thumb is that you subtract your age from 100 and that is approximately how much you'd want to hold in stocks. I think that's a good starting point, but here's another area where a financial adviser can help. There are also a lot of tools out there on the web to help get your asset allocation in the right ballpark. And I would also point out, Holly, that it's a really individualised set of circumstances that dictate asset allocation. So, for example, if you're someone who knows that in retirement you will have some safe and steady source of income—so maybe you own rental property, for example, or you plan to continue working part time—for someone like that they could afford to have relatively more in equity investments, which are more volatile because they'll be putting less near-term demands on that portfolio. They don't need to have that entire portfolio in cash and bonds.

Cook: This comes back to the idea of human capital, right? If you have a career in which your salary is very stable and you can predict what your income is going to be year in and year out perhaps you can take on a little bit more risk. But if you have a career whereby your salary might fluctuate according to the market, for example, like if you work in financial services or investment banking, for example, then actually potentially your portfolio needs to be in kind of slightly safer assets to try and balance that out.

Benz: That's absolutely true. So, you do want to create a balance in your overall financial picture, and I think the examples you gave are great, someone in the financial services industry would have a more volatile earnings stream, or maybe a commission salesperson, for example. For such people they would want to have a greater share of their portfolio in safe income-producing securities to counterbalance that risk that their own earnings stream could be volatile.

Cook: So let's assume that our imaginary person has got their portfolio kind of in a position that they are pretty happy with. What should they be doing on an ongoing basis to make sure that they are actually still on track, they've got those goals in mind and they are on the right course?

Benz: Well it pays to periodically check up on the portfolio. Morningstar has a tool called X-Ray that helps you look at the composition of your total portfolio, and the thing that I think is quite unique about X-Ray is that it doesn't just take, say, a large-cap equity fund and put it all in the large-cap equity bucket. It actually looks at the holdings and sees, aha, that fund has some cash, for example, and it has a little bit of bonds. So, it apportions those funds and other holdings accordingly. It actually drills into what's in their portfolio. So, I think tools like that can be helpful to see whether you are on track with the targets that you've laid out in terms of your overall asset allocation.

Cook: How about when it actually comes to rebalancing? With so much market noise, it's very hard to actually tune that out, but what would you recommend as a decent frequency to be looking into your portfolio?

Benz: I would definitely say less is more, when it comes to rebalancing. I like the idea of doing an annual or maybe a semi-annual check-up of the portfolio. But truly, making changes to rebalance to get that stock-bond cash mix back into sync with your target, only rebalancing when you see divergences of say five or 10 percentage points versus those targets—maybe five percentage points if you want to be a little more hands on, 10 percentage points if you're a little bit more lazy—and the benefit of being hands off is that you will incur less trading costs as the years go by, and I think that you will also tend to be less reactionary. So the market has been very volatile. It sometimes spurs people to action or to taking actions that they shouldn't necessarily take.

Cook: One of the things that I think is very interesting is that we have a tendency to think of your kind of investing career, if you will, in certain life stages, and what we have a tendency to forget is that once you retire, let's say, that you're 70, you could potentially still be – you still have 30 years of life yet left in you. So that's a whole other 30 years and you may have already invested for 30 years. So at that actual point of retirement, you're potentially only halfway through your investing career. Retirement is kind of those years when you perhaps want to start changing your asset allocation a bit more. What would you recommend investors [should be] looking at when they are getting towards that stage, and they are actually in retirement as well?

Benz: That's a great point. I think the traditional prescription for people retired was that they did want to have just a portfolio strictly composed of safe income producers and that prescription in my view is off the mark given the longevity that today's retirees can expect. You absolutely do still need that growth component in a portfolio as the years go by to protect yourself against inflation, if nothing else. So, that standard prescription of having just a truly safe secure portfolio during retirement isn't going to cut it. You need some growth potential particularly given how low bond yields are globally right now. It's very tough to subsist on income from bonds alone. You absolutely need the long-term growth potential of equities.

Cook: We've kind of been talking about returns as the way of measuring a portfolio but what about the costs, because they obviously eat into your returns in a big way?

Benz: They absolutely do, and so I would say you need to be mindful of costs on a couple of different fronts. Transaction costs can be very impactful, so you want to try to limit those as much as possible, limit your own trading if you are incurring transaction costs; also watching in terms of fund expense ratios what you're paying.

Cook: I guess we should mention if you do employ an adviser then obviously that's an additional cost as well, but that's also an invaluable advice. An adviser can really kind of keep you on the straight and narrow to a certain extent, can't they?

Benz: Absolutely. So, a good adviser can earn his or her keep many times over, if they do help you with some of those behavioural modification issues, if you're someone who maybe sets out an investment plan but has a tendency to override it at the worst possible time. If that adviser helps rein you in at those times, I think that that can prove invaluable. So I don't think you want to be overly parsimonious if you find that in hindsight you are a person who really could have benefited from a professional's advice.

Cook: Well Christine, thanks very much for outlining those for us.

Benz: Thank you, Holly.

Cook:  Thanks for watching.