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Julie & John: Principles of Financial Management

Author: Julie and John Fitzpatrick

Posted on Jul 20, 2020

Category: Insights


UNB Saint John graduates and siblings, Julie Fitzpatrick CPA, CA (BBA'10)and John Fitzpatrick CIM (MBA'12), are both Investment Advisors with TD Wealth. The two young alumni share their insights into the important principles of financial management. 


Prior to the COVID-19 pandemic, the stock market had been on ten-year plus rally.  While experienced investors have lived through several recessionary and volatile periods, until early 2020, many millennial investors had only encountered smooth sailing in the financial markets.

Whether you are a seasoned investor, new to investing or looking to begin your investing journey, there are several important principles of financial management to apply to help you weather any storm.

Recognize & manage human behaviour.

Traditional financial theory assumes that all investors are rational and well-informed.  This theory ignores the psychology of human behaviour.  Emotions are a significant part of everyday life, impacting many decisions we make.  As investors, it is important to understand the emotions we are faced with and how our response can have an impact on overall investment success.

We are sensitive to information around us.  News headlines, health concerns and dismal economic forecasts are a few 'noise' factors that have aided in inducing fear and panic during the COVID-19 pandemic.  It is human nature to react to this noise, which can prove challenging in remaining committed to a disciplined long-term investment strategy.  Although challenging, successful investment portfolios are built on long-term investment strategies. 

Remember, although we have encountered many periods of volatility, the market has consistently risen over the long-term.

Have a plan and stick to it.

A savings strategy encourages you to pay yourself first.  Set up an automated savings plan, so you aren't forced with the temptation of immediate satisfaction when it comes to excess funds after bills are paid.  This promotes a balance between treating yourself now and being able to treat yourself in the future. 

An automated savings plan allows for savings to be invested at different prices, which can be successful strategy over the long-term.  Trying to time the market to buy at the low and sell at the high can be a futile effort; the proof is in the analysis - a Fidelity Investments study found that missing just 5 of the best days of the S&P 500® Index between 1980 and 2018 would have resulted in 35% lower returns1.

Investing is only one component of wealth planning. Your plan should incorporate a realistic budget, debt repayment strategies and savings.  An investment professional can help you incorporate all these aspects into a plan that is comfortable for you.

Have a plan for emergencies

The COVID-19 pandemic has taught us that we need to be prepared for the unexpected.  A rule of thumb is to have an emergency fund capable of covering 3-6 months' worth of expenses should you find yourself in a situation where you experience a job loss or reduction.  Emergency savings should not be invested in risk assets, as the purpose of these funds is for immediate access to cash, rather than wealth accumulation or retirement planning. Talk to your financial institution about high-interest savings options for such accounts.

While having an emergency fund is the best way to fund financial emergencies, it is also prudent to have access to a personal line of credit, should your emergency fund not suffice.  Plan ahead by applying for a line of credit when you're not in an emergency situation to ensure you have immediate access should you be faced with unexpected financial hardship - but don't draw on it unless you need it for an emergency.

Mitigate risks.

Investing risk cannot be eliminated, but it can be managed.  Having a well-diversified portfolio – investing across countries, asset classes, industries – is key to mitigating risk.  This limits your exposure to any given area. 

For example, as at the time of this article, the S&P 500® energy sector was down 37% year-to-date while the broader S&P 500® was down only 4.5%.  If your portfolio was overexposed to the energy sector, your overall return would have suffered.

Invest like an owner. Know what you are buying.

There are a lot of companies and products in the market, which can prove overwhelming, particularly for new investors.  Before buying any product or shares in a specific company, understand what you are buying.  You wouldn't make a purchase of a new laptop without understanding its features and reading reviews.  Apply the same principles to your investments. 

For companies, this goes beyond their financial statements.  Investors should understand the company's products, market, strengths and weaknesses – the factors that drive their ability to generate future cash flows.

Factoring in a company's Environmental, Social and Governance (ESG) should result in better long-term performance.  According to an article published by TD Wealth, "Companies with higher ESG scores have better controls in place and are less susceptible to the kinds of scandals that destroy shareholder value and stall growth.  They also benefit from access to less expensive capital and lower earnings per share volatility."2 Portfolios invested in such companies tend to have lower risk and higher, sustainable, long term returns.

Though periods of uncertainty and volatility will always exist in the market, sticking to these financial principles will help you to achieve long-term success.  Although you cannot control the movements in the market, remember to focus on what you can control – disciplined wealth planning.

 

1 https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/dont-miss-best-days.pdf
2 Brad Simpson, What now? Into the Great Unknown, TD Wealth Monthly Perspectives, June 2020
 
The information contained herein has been provided by Julie Fitzpatrick, Investment Advisor, TD Wealth Private Investment Advice, and John Fitzpatrick Jr., Investment Advisor, TD Wealth Private Investment Advice andis for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
Index returns are shown for comparative purposes only. Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
The information contained herein is current as of June 29, 2020.
Links to other websites from this document are for convenience only. No endorsement of any third party products, services or information is expressed or implied by any information, material or content referred to or included on, or linked from or to this Website.
TD Wealth represents the products and services offered by TD Waterhouse Canada Inc., TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).
TD Wealth Private Investment Advice is a division of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank.