One benefit of starting a new decade is that it gives you an opportunity to do something essential for any financial plan: look at your current decisions from the perspective of your future self.
When it is January of 2030 and you look back on your current approach, what will you think?
This is a great opportunity. One of the most important things any of us can do to ensure we “win” the saving and investing game is to take the long view.
Short-term decision making is invariably short sighted. Alternatively, when we make decisions with a strategic and lifelong perspective, we dramatically increase our odds of achieving financial independence.
With that in mind, here are ten things your future self will be glad you kept in mind in 2020 – and for this whole decade.
1. Reduce your bad debt as quickly as possible
Lenders love it when you carry credit card debt, a line of credit, a mortgage, a student loan, a car loan, or any other kind of loan. Why? For exactly the same reason you want to avoid it. Paying interest on a loan creates a reliable stream of your income leaving your account and going to a lender.
I know it can be daunting to face the facts about your debts, but it’s step number one for getting your financial house in order. Make this your number one priority so you can stop money flowing away from you today and toward your future self.
2. Ensure your personal savings rate is sufficient
I recommend to clients that they save between 20% and 30% of their income each month. I also advise them to use strategies like “pay yourself first” to ensure that no matter what else is happening with their expenses in a given period, their savings will always be there.
A substantial savings rate is critical because those savings are the base for every other strategy that will carry you to financial independence. You can’t invest money you don’t have. And your investments can’t grow over time if there isn’t enough money there to begin with.
Take a look at how much you save each month and then take measures to ensure your 2030 self is getting paid first.
Achieving the first two suggestions on this list relies on living within your means. So often, when our businesses have some success or we begin to have confidence that there will be a steady stream of income coming in, we begin to live an increasingly expensive lifestyle.
What’s more troubling is that this creep often happens without us noticing. Suddenly, our car, our house, our vacations, our clothes, and our ongoing habits are all much more expensive than they used to be.
Take some time to think about your ongoing spending and assess the ways those expenses may have crept up over the years. Then reset to a level in line with your income by finding cost-effective ways to do the things you enjoy in life.
4. Have an investment strategy
To get where you want to go with your money – which is all the way to financial independence – you don’t want to make major decisions on the fly. You also don’t want to be making decisions in isolation from your life goals, financial circumstances and risk profile. Instead, it’s best to be strategic so that the decisions you make today move you toward your long-term goals, and your 2030 self is happy with you.
What’s the best way to be strategic? Create an Investment Policy Statement. (In the industry, we call it an IPS.) It’s a strategic plan for your investments that can be an anchor for every decision you make. Whether you are a DIY investor or working with a professional who manages your portfolio, get some help from professionals like the Dri Financial Group team with writing an IPS. That will enable you to be consistently strategic about your investments.
5. Let companies do the future projections for you
Wouldn’t it be great if you had access to the inside scoop about a company’s financial future so you knew whether or not to invest? I don’t mean insider trading. I mean finding a way to look at the publicly available information and figure out what it means for a company’s future.
One way to do that is to look at a company’s approach to dividends.
Companies that pay dividends are sharing their profits with shareholders. Companies that increase their dividends do it because they are confident their profits are going to increase.
Historically, the stocks of companies that pay an increasing annual dividend provide above-average returns, as evidenced by the returns of the Richard Dri Canadian Dividend Model. We only invest in companies with growing dividends, and we sell if their dividend growth momentum begins to slow. That way, we help our clients benefit from the future projections companies are making about their own growth.
6. Don’t make decisions based on current market conditions
One of the most problematic approaches to long-term investing is consistently reacting to what is currently happening in the market. What’s more, when investors react to the hype generated by the business media, things really get messy.
Smart investing relies on keeping track of leading indicators and making decisions in advance of changes. That’s the basis of our models. Each day, the team at the Dri Group receives an electronic feed from our supplier, Morningstar, which ranks about 800 Canadian companies and about 2,000 US companies according to how well they fit the filters set in our models. If a stock falls out of the top 33% in rank, it is sold and replaced with a stock in the top 15% of the rankings.
This approach keeps the stock positions in our models fresh by eliminating companies that are not able to increase their dividends and replacing those stocks with companies that have a stronger probability of continuing to increase dividends. Without sounding like a broken record, we will not buy a stock that is not recommended by the model nor will we override a buy/sell signal from the model. And that enables us to make sure our clients are proactive rather than reactive.
7. Be guided by evidence – not emotion
All three of the preceding guidelines about investing will fall on deaf ears if you are susceptible to the biggest trap of all – making decisions on emotion rather than evidence. I have written at length about the ways that investing based on emotion or personal bias is a disastrous strategy that makes investors buy high and sell low.
The best investment approach isn’t just to have a strategy, be guided by dividend growth, and pay attention to leading indicators. It’s also to be rational and informed about your decisions. That’s why I built the Dri Group investment models based on 30 years of data about stock market performance. It’s also why our clients enjoy consistent returns.
8. If things go south, don’t deviate from the plan
All these guiding principles about investing feed into a principle that your 2030 self will definitely be glad you followed: if the markets drop, don’t panic.
No matter how stressful it is when the markets regress – even if a dreaded Bear Market arrives – it’s critical to maintain a strategic and long-term perspective.
Sometimes, the best thing to do in a market downturn is to do nothing and wait for the markets to recover. (That strategy was exactly how an investor who didn’t panic when the market hit a low on December 24, 2018 went on to benefit from markets rising to record highs.) Also, there are a range of techniques you can use to turn a market downturn to your favour, like Tax Loss Harvesting.
Regardless of the exact approach you and your investment advisor choose, don’t fall into the trap of panicking. Make decisions based on your strategy, the best available evidence, and a long-term perspective.
9. Technology is a complement – not a replacement – for human insight
More and more, technological options for investing and financial planning seem like the greatest new thing. The challenge is that no matter how much technology appears to help or make our interactions more efficient, tech isn’t a substitute for insights from an informed human being. There is simply too much nuance and complexity in your financial planning and investment profile for a machine to give holistic and insightful advice.
That’s why I put together the best team I have ever worked with to serve clients of the Dri Financial Group. Grace Gomes, Ashley Land and Lora Shapiro are exceptional. They are fueled by a passion to provide our clients with excellent investment advice and comprehensive answers to financial planning issues. And they provide insights and service that far exceed any technological options.
Put simply, technology is changing the way we interact. But it will never eliminate the value of our interactions with our clients. (And I bet your 2030 self will agree!)
10. Learn all you can about financial planning and investing
Whether you are a DIY investor or a client who works regularly with us to make decisions about your financial future, your future self will want you to be as educated as possible about financial planning and investing. There is just no substitute for enhancing your knowledge and expanding your understanding.
This is why the Dri Financial Group offers so many forums for learning and knowledge. We have a weekly blog that you can receive via email or read on our website. You can listen to our podcasts. Or you can contact our office for a complimentary copy of one of my books, The Ladder to Financial Independence or Introduction to the Investment Mindset.
That’s it.
Apply these principles to your financial approach in 2020 and your 2030 self will thank you.
Did this article resonate with you? What did I miss? Send me a note and let’s start the conversation.
The process of finding a financial planner can be overwhelming. Our proprietary financial planning process is designed with you in mind. Its simple framework helps you make an informed decision about hiring the appropriate advisor.
Call me if you want to map out how you can Never Retire. You can also subscribe to our Never Retire newsletter, contact us to Order a complimentary book, register for one of our events, and call us to meet with a Certified Financial Planner. We offer you a range of services from a wealth plan to investment advice or help you take advantage of our investment models. Call me at 416-355-6370 or email me at richard.dri@scotiawealth.com.
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