October 20/02

Financial Planning
by Marcel Chartier

This article is a general beginning on the topic of financial planning. The thing about financial planning is that it changes all the time. Planning depends on where you are in your life cycle. Somewhere, I read a description of how to evaluate your RRSP (201k/401k/IRA) in relation to a person's life cycle.

The example stated that from zero to your yearly income, consider your RRSP an infant growing to adolescence. Once it reaches your yearly income, it reaches young adulthood. Once your investment reaches a point where it makes more than you contribute yearly, it now reaches middle age. Again, when it makes as much as you make a year, it is fully mature.

When you first start out "investing", you aren't truly investing but rather are "saving" money. Until you reach about $50.000, you don't really have enough to make signficant investment income on that money. It does matter what you do with it, but not as much as later on in your investment life. So be conservative!

The tendency when people become enthused about investing is to act like you have lots of money when you don't. I did. I read all kinds of stuff that said diversify, both in sectors and geographically so I could weather all storms, blah, blah, blah. What this strategy does is to limit your growth, which is not what you want to do.

Overdiversifying also costs you money as you usually pay a transaction fee for each mutual fund or stock in some way. My advice, pick the best general equity mutual fund you can and put money into it until your have at least $25,000. No point in trying to split that into smaller amounts and paying fees for it. When you add another fund, shift most of your new money into it. That way you can build a core and then add in a planned and measured way.

Financial planning books, and financial planners love giving textbook outlines of how to invest. The problem with this approach is that they also make money off helping you diversify. The text book approach makes sense, its defendable, but not practical for the average new/fairly new investor as long as the new investor is in a good general equity fund to start with.

You need to build a core fund holding anyhow, the smartest time is when you are building your investments to begin with - then your core holdings will continue to develop as other funds are added later on.