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Investing Pitfall #3: Being Unaware of the Mathematics of Sustainable Portfolios

Canadians remain unaware of or unable to appreciate the significance of the mathematics of sustainability, despite the fact that numbers don’t lie. We’re not living sustainable lifestyles. Sustainability means taking proper care of our resources so we can continue to use them in the future. In financial terms, it means setting aside enough money for financial independence and a fiscally healthy retirement.

In 1989, Canadians were introduced to David Chilton’s The Wealthy Barber, which suggests investing a percentage of what you earn in long-term growth. Be it 10, 15, or 20 percent (perhaps even 30 percent if you have neglected your savings), you should set aside an annual percentage of your earnings for your retirement. The amount you save affects how much you will be able to draw down after you retire. Sustainable portfolio draw-downs must be used throughout retirement.

For 60-, 65-, and 70-year-olds who want to have thirty years of inflation-protected retirement funding, prudent and conservative amounts to withdraw each year are just under 3, 4, and 5 per cent, respectively. Yet many Canadians reach the age of retirement with the impression that they can draw down 10, 15, or even 20 per cent of their portfolios. Once again, this is a case of people misunderstanding, or simply being unaware of the mathematics of financially sustainable portfolios.

Sustainability is the key word when it comes to planning for retirement. Ask yourself, “Is the life I live now going to be sustainable in the future?” The answer should always be a resounding “yes.” Today’s challenge, unfortunately, is that you almost need to be an actuary in order to appreciate the consequences that arise from not living a sustainable lifestyle.

At a bare minimum, Canadians need to become aware of the math involved in a sustainable lifestyle and the factors that affect its outcome.

By not adhering to a sustainable financial lifestyle, investors often fall into the trap of looking for solutions that will recover the ground they’ve lost due to their lack of necessary savings. This emotional reaction causes investors to have unreasonable expectations of their investments and costs them in the long run. Instead of staying the course laid out by their IPS, (assuming they have one), the desire to remedy their lack of savings and ensure their retirement well-being may lead investors to gamble, speculate, and chase performance.

It is impossible to overstate the importance of understanding the mathematics of sustainability.

TAKE THIS QUIZ/DOWNLOAD THIS FACT SHEET TO SEE WHAT YOU KNOW ABOUT SUSTAINABILITY

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