The long-term investing portion of your financial plan provides higher volatility growth over a longer time frame. The purpose is to provide for inflation adjusted cash flow requirements 7 or more years from now. Review the account at least annually, but no more than twice a year unless you are picking your own stock investments. In this case you should dedicate a few hours a day to keeping up-to-date with the companies in which you are invested.
Reviews are both backwards and forward-focused. Review the annual performance and look for alignment with current long-term trends in the economy. In the review, you have 3 possible outcomes:
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your investments have done exceptionally well. Congratulations! You might consider transferring more money to the mid-term account - up to 60 months income instead of the normal 48. A larger transfer reduces the overall volatility of the portfolio, and "captures" the recent gains!
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your investments performed about as expected. Transfer the money needed to bring the mid-term account up to 48 months of cashflow.
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your investments performed poorly last year. Consider reducing or delaying the transfer of cash to the mid-term account. Make up the transfer amount once the markets have recovered.
Consider increasing the amount in the mid-term account whenever the regular press starts discussing the possibility of a recession. Taking money from higher volatility to lower reduces overall risk.
Selecting Investments
Our target should be to earn 12% or more on average from our investments in this account. This return virtually guarantees our cashflow from our investments can be indexed to inflation. The assumption is that the starting annual cashflow draw is less than 7.5% of the total of the 3 accounts.
Is this target realistic? Absolutely! As I write this, Canadians have a choice of at least 15 Mutual Funds in the Medium High Risk category with 10 year average returns over 15%, despite all of them having a disastrous year in 2022! Most of the fund managers of these funds follow the investment process outline in the Investing in Stocks article.
What if I want to Invest in Stocks Myself
If you have demonstrated the ability to pick the right stocks in advance, then you might already know that Nvidia's gain of 171% in 2024 is outstanding. There are examples of gains like Nvidia's in many prior years.
What types of investments should be considered for long-term investing? The key to this account is to pick investments that will benefit from the major trends in the economy. Some of the currently predicted long term economic trends include
- entertainment from any device at any time,
- working from home,
- big data, and
- increasing use of artificial intelligence.
If you are managing your own investments, then it is important to be properly diversified. Target to have 12 to 20 independent holdings in your portfolio.
What About Mutual Funds
For mutual funds the key is to find a good manager. Look for low turnover, and high commitment. The fund should turn over less than 40% in a year. This indicates the fund manager's confidence in the long-term growth of the stocks in which the fund is invested. High commitment means that the top 10 holdings of the fund account for at least 40% of the assets of the fund. Higher percentages are better.
Find a manager meeting these two criteria with a long term record of beating the market over 5 to 10 years. Their funds do not require significant attention.
Not every successful fund manager performs well in these two measures, but those who do almost always outperform the market long-term!
Tax Considerations
On average, this portion of your plan will have the highest returns. As such, this account should be contained in a registered plan such as a TFSA or RRSP, if you have one. If your mid-term plan is not in a registered account then consider doing the annual transfers from this account to your mid-term account in December. Withdrawals from an RRSP or RIF are subject to tax withholding mandated by the government. Doing the transfers in December shortens the time that the government withholds your money, should you get a tax return that year!
Suppose your long-term account is not in a registered plan. You will receive tax forms from the company holding your investments every year. Remember to plan for this potential tax liability. Talk with your accountant or tax advisor before the end of the calendar year to plan.
Please see Short-Term Investments and Mid-Term Investments for our recommendations on those portions of your overall portfolio.
