Building an investment portfolio to match life goals

By Kurt Rosentreter
Apr 29, 2022
Photo credit: jeffbergen/E+/Getty Images

It’s easy to walk into a bank branch or contact a discount brokerage, open an investment account, deposit money and buy investment products. People buy stocks, mutual funds, GICs and bonds every day in investment accounts, but the question is: what’s your plan?

Long before you buy any investment product, you need to create a goal-based plan first.

Let’s look at two of the most popular goals for Canadians:

Using a RESP to save for a child’s education goal

Having a child is a big financial responsibility over their first 30 years of life. In a financial planning context, start by setting the goals of how much money you want to put towards financing your child’s post-secondary education. Research the cost of school now – for example, it can cost $125,000 for one child to complete a four year university education out of town. Once you determine your level of support for your child, work backwards using basic math to determine what you need to save annually for 18 years and the average rate of return you need to achieve to reach the desired money level.

For example, saving $4,000 a year requires a 6% average annual rate of return in the portfolio. Once you know the target rate of return, buy investment products that produce an average return target of at least 6% return per year. This can consist of a combination of stocks and bonds, an ETF, or a mutual fund. Annually compare the rate of return you achieve against your target to assess if you are progressing appropriately. If you are not hitting your target, increase your savings accordingly to keep you on plan.

If you like to invest in the stock market where the investment returns can average 8% or greater over time, remember that you need at least five years for stock market products to weather any short term volatility. That means the portfolio mix should be increasingly more conservative (more fixed income) as the child approaches 18 years of age, or when they need to start using that money for post-secondary education.

Most parents use a Registered Educational Savings Plan (RESP) as the type of account for their children’s educational savings. Plan an annual contribution up to $2,500 per year per child to maximize the 20% government grant you will qualify for. Additional savings required to reach your goal can be achieved using your own Tax Free Savings Account (TFSA) or an in-trust-for account for your child.  

Overall with children’s savings: define the goal, quantify the goal, calculate the annual savings, open an investment account, buy the investment product, track results, and adjust over time. 

Retirement savings

While retirement goals and savings needs are more complicated than saving for your children’s education, the process of building a common-sense plan is similar.

Determine your end need first – how much money do you need in savings, pensions, rental properties, etc. to fund your desired retirement spending (after-tax) at the start of retirement until end of life – to be conservative, plan to age 100.  Then, once again, you should work backwards to where you are today, factoring in pension growth, annual savings targets (vs actual), desired investment returns (vs actual), the role of real estate in retirement, debt elimination timing, tax rates today and in the future, estate goals, employer savings contributions and more, to assess what you need to save each year, starting now, to achieve the end result for total income generating savings at the start of retirement.  

Once again, what will result will be annual savings targets over your working career and a required target investment return to achieve your total savings goal required at the start of retirement. Use your target annual return, for example 4% per year, to consider how aggressive your investment portfolio should be over time.  Fixed income products (e.g. GICs) offer a low return but appeal to investors seeking a lower risk, stable ride through investment markets. Equity investments (e.g. equity mutual funds, equity ETFs, stocks) offer much higher average investment returns over time but with the potential for sharp drops periodically in the short term.

Assessing the right mix of fixed income vs equities is the responsibility of a financial advisor if you choose to engage one. Often, investors take a more high risk approach (more equities) when the retirement goal is far off and more conservative approach when the retirement goal is closing in. Make sure to adapt your asset allocation (fixed income vs equities) over time as you near retirement and as personal life events (e.g. job loss) may warrant it. A big part of the role of a financial advisor is to monitor for changes in your life and your goals and adapt the investment plan accordingly over time. If you are a do-it-yourself investor, then you are tasked with making these same changes.  

In conclusion:  Remember to have a master plan

When you build an investment portfolio with a clear picture of the end goal (children’s savings or retirement), you become more conscious of the progress towards the goal. You are in a better position to measure annual returns against the annual goal requirements to determine progress or lack of it. You should become more aware of the level of risk you can assume to achieve your goals. Pay attention to how fees erode your progress as well. This mathematical transparency and annual measurement will make you more confident about achieving your goals, make you more informed about progress, make your financial advisors more accountable, and help you to understand how you are investing and why.

Kurt Roesentreter, CPA, and a certified accountant, as well as a certified and independent financial advisor, and instructs sessions for CPABC's professional development.