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The best laid plans

The financial world is full of plans: Retirement plans, investment plans, estate plans, and financial plans

They are offered as the solutions to all your problems, the keys to your successful, happy life. Problem is, they’re only a tool, a way to organize your thoughts, goals, and actions. It’s a roadmap, if you will, of a journey we all must make. Any plan is better than no plan, unless of course it’s a bad one.

Think of the way you planned your last trip

You didn’t simply go online, pick a good review and order your tickets. No, if you’re like most people, you probably had conversations with friends, compared destinations that were within budget (and maybe tempted by a few that weren’t). 

You narrowed it down to a couple of locations, then started doing your research. Maybe you called someone who had been there, or you signed up for a forum and started a conversation, or you went to Tripadvisor and started clicking through other people’s experiences. 

Whichever way you went, your goal was to gather as much relevant information as you could, so you could make an informed decision. 

Now you’ve sketched out the bones of the trip. You know where you’re going, you know when – now it’s time for the details. You’ve narrowed the flights to a couple of options that will get you there in reasonable comfort and without spending 12 hours in Denver Airport. You’ve selected a hotel based on price, location, and proximity to the beach. You’ve written down the rough price of everything, and have a pretty good idea what the trip will cost you. Now it comes down to availability and pricing. 

The next step is the tough one, committing your hard earned cash

So, now you’ve done it. You paid the deposits, booked the airfare, arranged ground transport, booked a couple of side tours or shows, and chosen a few restaurants. You’ve printed all the confirmations, and before you sits a great stack of papers outlining your journey. The question is, will this stack of papers guarantee you a great trip? 

No. What makes the trip great is the time you put into the planning process, the accuracy with which your choices reflect your desires, the timing of the different parts of your journey, and your ability to know what to give up and what to hold onto. Without all that, it’s just paper.

A financial plan, like a travel plan, is only as good as the time put into it

To be effective, a financial plan must reflect what you really want out of the rest of your life. It must balance your needs and wants with the funds and assets you have. 

When there are shortfalls, you must either make adjustments to your life or look for creative solutions and work-arounds. Your plan must be up to date and, most importantly, must reflect your reality. 

The nitty gritty

Don’t leave your future to chance - or to some company’s software program. 

Make sure your plan is what you and your family want. 

Make sure it covers surprises along the way, and leaves you with enough wriggle room to ride out the bad times. 

Make sure it addresses the things you really want to accomplish, the places you want to go, and the things you’re hoping to do. 

Most of all make sure it’s based on reality, not historical forecasts, pretty charts, and generalizations. 

If you are doing this hands on, be thorough, and be honest with yourself. 

If your using a professional, make sure they take the time to ask questions, gather facts (both good and bad), weigh options, and ultimately put forward a plan that doesn’t confuse or confound you. 

Make sure it’s a plan you can live with, because you may not have a choice once the plane has taken off.

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Will I have enough?

One of the top concerns of retired people is wondering whether they will outlive their money. With medical advances increasing our life expectancies and the changing nature of markets, employment opportunities, and predictable benefits like defined benefit pensions and healthcare, it’s no wonder people are concerned. 

In days gone by you retired at 65, took your company pension, Canada Pension, what savings you had, and the extended health benefits that continued on, and you comfortably enjoyed the golden years. Today more and more people are self employed, the defined benefit pension has been replaced with the defined contribution pension, and health benefits often don’t exist when you are employed, let alone after you retire. 

The world is in the midst of dramatic shift. The age of technology is rapidly changing our habits, our downtime, and our working life. All this change, while it may be bringing about a great new world, is creating a lot of uncertainty, fear, and anxiety in people as they look to their futures. 

There are hundreds, if not thousands, of strategies and solutions out there designed to improve people’s financial lives, each with the implicit promise of being the one solution to all your problems. 

Truth is, there are really only three things you can do that will affect your financial life: Make more money, spend less money, or change your expectations.

Make more money
For those still working, the potential to increase income is a real one. They can manage their employment careers, work more, or create additional sources of income. For some, that may be a small business, for others a real estate investment property. For others still it’s the long term performance of investment portfolios.

Spend less money
Spending less money is the more painful choice for many. It involves budgeting, understanding where the money goes, then making hard decisions on what expenses will stay and which have to go. It’s unpleasant and involves discipline. 

For some, though, there is an element of humility. Too often our self-worth is tangled up in our lifestyle and our possessions. Wants and needs become blurred, the definition of necessity has become increasingly vague. Food, shelter, love and safety used to be the needs, everything else was optional. Today, everything is a need, the lines are blurry at best and for many non-existent.

Changing expectations
Managing expectations is more complicated, and requires us to question the things we think we need versus the things we actually need. For some it can be difficult, after a lifetime of comfort and convenience. 

Revaluating things in your life is always hard, but when it is forced by a lack of financial resources, it makes the task that much more challenging. 

Minimalism and back to basics movements are growing, though, and people are questioning their lives and the material desires that drive them. The generations following the baby boomers are in the process of reinventing the world their parents created. The world whose movie antihero, a man named Gordon Gekko, famously extolled, “Greed is good”.

Creating a successful retirement will always be more than just about the money. Often solutions to our financial challenges are the ones that make us happier people in the long run. Working hard and building successes, cutting out the things that neither make us happy nor fulfilled, and keeping a grounded perspective: These are some of the building blocks of a good life. They also happen to be the keys to a balanced financial life.

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So long as it's black

Most people misunderstand marketing. It’s usually thrown in with sales and assumed to be just another way for a company to sell you whatever it is they’re selling. 

The truth is, marketing is the natural evolution of the standard sales approach. Henry Ford, when referring to colour selection on the Model T, said, "Any customer can have a car painted any colour that he wants, so long as it’s black." 

Today the consumer is king: The sheer number of possibilities is mind boggling. If you go into a retail clothing store today to buy a pair of jeans, you quickly realize the days of single wash Levis 501s are over. You have a selection of washes from faded out to almost black. You have straight cut, boot cut, tapered fit, and skinny jeans. 

Go to a restaurant today to order a burger: Whole wheat, regular, or gluten free? How would you like it cooked? Fries, salad, or half and half?

In virtually every industry, the range of selection, and ability for people to have an active role in the process, has increased exponentially. 

Financial services is no exception. The delivery systems, investment choices, fee or cost options, and service levels are all part of the decision making process, or at least they should be. 

For many in the full service side of the industry though, there is still a desire to offer clients not necessarily what they want or need but what is best for them to offer. This attitude tends to go with the cookie cutter approach to wealth and financial management. The one size fits all solution. 

As clients become more knowledgeable about their options, they begin to ask more questions and want a more detailed, transparent approach to help them make decisions. They want to know all their options, and the best solutions for them.

Unfortunately, taking time to do the back work and produce a proposal that helps clients make decisions eats into the profitability of the old practice models. As they say, time is money. 

I remember a conversation with a friend of mine after the 2008 market meltdown. We would often debate the industry and the markets, and while she was only involved as an investor, she enjoyed the conversation. 

Her comments have stayed with me. She said that prior to 2008, we were willing to pay an advisor fees because we believed he could protect us from an event just like 2008 event. 

After going through the correction, we realized that no one has the ability to protect us, it’s just a question of managing the risks, not avoiding them. This begs the question - why should we pay these fees if advisors can’t protect us from the markets?

The short answer is that managing your financial future is about more than absolute returns. Certainly there are steps one can take to minimize the downside of the markets, but the price is lesser upside. 

Having a successful retirement isn’t only about money. It’s about lifestyle, health, accommodations, personal legacy, social networks, and interests. It’s about the peace of mind that comes of knowing you have yourself on track.

There are many people in the industry who understand this shift, and they have created processes to make sure that not only are their clients well informed, they are also comfortable with the solutions. Clients have become part of the process, and understand why they’re investing their money the way they are. 

The discussion should start with, “What is it you’re looking to achieve? What kind of lifestyle would you like to live? What are your hopes and dreams?” 

These are all legitimate questions when planning your financial future. It doesn’t guarantee you’ll get to where you want to go, but it does increase the likelihood. It also gives you a clear picture of what it is you need to do.

Selecting the right investment products shouldn’t centre around, “What was the best performer last year?” or “Which fund has the lowest MER?” 

Don’t get me wrong, those are important factors, but they must be taken in context with considerations such as your time frame, risk parameters, income needs, the amount of participation you want to have, reporting expectations, and financial situation. 

There is a right solution out there for everyone. The key is to understand that it isn’t the same solution for everyone. It’s different for each client, and if you’re being told that it isn’t, what they’re really saying is that you are welcome to any colour you want, so long as it’s black.

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Real estate vs stocks - a tie

In this corner, real estate. In the other corner, stocks

This is always a lively debate. I’ve been in the investment business since 1993, so my default has been to argue in defence of the stock market. There have been times when it’s been an uphill battle: The tech crash of 2000, the great recession of 2008, and 2011, which was just plain bad. 

While the markets have come back considerably, the beginning of this year was a disaster for stock owners, particularly if you were in energy or metals. 

Moves in the equity markets, as we like to call stocks, tend to be faster and more volatile. Watching house prices is a bit like watching paint dry. There’s nowhere to get daily values. Unlike your stock account where you can check at all hours of the day and get an up to the minute valuation, you must order an appraisal to determine the value of your property. Alternatively, you can apply the rule of thumb method using your assessed value, or the guesstimate: Comparing your house to the most recent sale in your neighbourhood, and adding or subtracting where you think you’re better or worse.

At best, real estate vs stocks is not an easy comparison to make, as they often serve different purposes. A stock portfolio can be for investment purposes or a means to generate income. A home, while also an investment, is a place to live, a vehicle to generate income, or a means to grow your investment dollars.

That said, let’s try comparing some of the obvious differences between the two. I’ll stick to the ones we can measure, and leave the intangibles to someone else.

Stocks win this one hands down. You can liquidate a position immediately, and have the cash in three days. Selling your house is a whole different process. Unless you’re in a market like Vancouver, you’ll need to hire an agent, get an appraisal, list it, market it, show it, and after all that hope that someone agrees with you on the price you’re asking. It’s all trial and error really, because if you set a price and get an offer right away, you’re concerned that you listed it too low, if you get no showings you’ve probably listed too high. 

Stock market - 1
Real estate - 0

Here’s where real estate starts to blossom. If it’s your primary residence, you don’t pay any tax on potential gains (assuming you’ve lived there longer than 12 months). If it’s an investment property for which you’re collecting rent, it gets more complicated. While repairs, taxes, interest, maintenance, and utilities may be tax deductible, rents and capital gains are usually taxable. 

With stocks, unless you’ve purchased the investments in a registered account, all deemed dispositions other than at your cost base are considered gains or losses for tax purposes. Most equity distributions are taxable unless they are returns of capital (dividends, interest, or in the case of some mutual funds, capital gains). 

Interest on loans for investment purposes is generally deductible whether it’s real estate or stocks. If we’re simply assuming that your choice is to put your capital into a stock portfolio or your principal residence, real estate takes the round. 

Stock market - 0
Real estate - 1

Let’s face it, while stocks represent a proportionate ownership in a company, there’s not much else you can do with your share certificates other than follow the price and vote at the annual general meeting. If you doubt that statement, think about the box your old Nortel certificates are in. Real estate on the other hand is a tangible investment. You can live in it, grow vegetables in your back yard, raise your kids in it or rent it out. One way or the other it exists in a form that can be used for something other than investing. Stocks for the average investor simply represent the opportunity to grow their initial investment, to earn a dividend from the company, or both. 

Stock market - 0
Real estate - 1 

Ease of ownership
Owning stocks cost you nothing once you’ve made the initial purchase. No property purchase tax, no strata fees, no property tax, no new roof, and no insurance. You don’t have to get up at three in the morning to fix your tenants plugged toilet, and nobody’s going to set up a grow-op in your stock portfolio. 

Stock market - 1
Real estate - 0 

Rate of return
So let’s look at the bottom line. What are the real rates of return, all other issues aside? Let’s leave out the specifics of anomalies like the current Vancouver real estate insanity, the US meltdown in 2007 and 2008, the dot.com bubble leading up to 2000, and all the other deviations from the long term rates of return that we’ve experienced.

“National price data from the Canadian Real Estate Association shows an average annual gain of 5.4 per cent nationally from 2004 through 2013 for resale homes. The comparable average return from stocks was just under 8 per cent. If we go back 20 years, we get an 8.3 per cent gain from Canadian stocks and an increase of 4.5 per cent in the average national house price. Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent.” ~ Rob Carrick, Globe and Mail, Friday, Apr. 04, 2014 

The difference is timing. Depending on the period over which you choose to measure your returns, you could make a case for either investment. For those of us not arguing the relative value of these two investments, the advice is always the same: The best way to protect your investments is to diversify them. 

So the answer, as convenient as it might sound, is that if you’re able: Own both.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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