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Financial Planning 101 Chart – How Much Money to Put Where?

A basic course on financial planning will teach you a lot about how to be financially better off.  This item is but a tidbit of advice.  DO NOT let someone convince you to put all of your savings into the stock market (directly, or by use of mutual funds, exchange traded funds, etc.).  Before investing, you should have your debt under control, meaning all debt paid off other than debts that are acceptable and that have reasonable interest rates (such as your home mortgage, education loan, business loan and a car loan to get you to work).  Then, you should follow the chart in the attached PDF article, review my other investing articles, and meet a qualified investment advisor or do your own investment research for more specific guidance.

If you are drawing money regularly from your investment portfolio, for example, out of your RRIF or RRSP on a monthly basis in retirement, then consider this.  If you have money invested in the stock market, when the market is high, you are selling investments when they are doing well.  (The “stock market” may include individual stocks, mutual funds, exchange traded funds (ETFs), and other specialty products.)  Conversely, during a market set back, you are selling your securities at a lower price, and once sold, they are gone – you cannot recover your money when the market rebounds.  Furthermore, when the market is down, you are selling a higher number of securities than when the market was doing well!  Is this not backwards?  You should want to sell more when the market is up, not when it is down.  Therefore, if you are using your portfolio as a spending account, when prices are down, you should stop taking money out of your stock market portfolio.  You should start drawing from your fixed income account (term deposits, GICs, bonds, savings accounts, etc.).

Another option is to always draw from the fixed income account, and let the equity portfolio continue to grow (or allow it to go up and down as it always will).  Using this second option, you will need to periodically replenish your fixed income account, which should be done when the stock market is doing well.  Either method requires you to keep an eye on your portfolio – stop selling stocks when the market is down, but sell enough to replenish your spending account when the market is up.  This should be enough to keep you in spending money for 5 to 10 years, with the longer time being especially appropriate if you are retired.

In summary, click here for my chart on how I think your portfolio should be balanced – Financial Planning 101 Investing Chart

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum