When you should take a break from investing

Q. For the last three years, I have been investing with a Couch Potato portfolio using ETFs. I’m about to get married and hopefully start a family. Would the Couch Potato still be a good strategy during what I know will be high-expense years, with a mortgage, children and so on in the near future? Or should I invest some other way? There’s only so much money to go around these days.
– Eric

A. Congratulations on your upcoming marriage, Eric. It sounds like the next few years will be exciting, but also financially challenging. As you anticipate, you will have a number of competing priorities.

You have asked whether the Couch Potato strategy will still be appropriate in light of the major life changes ahead, such as starting a family and buying a home. But that’s not really the right question. Indexing is theoretically appropriate for investors at every life stage, whether you’re starting your first job or you’re 20 years into retirement. The basic virtues of low cost, broad diversification and disciplined rebalancing never change. The issue is whether it makes sense for you to focus on investing at all at certain times in your life.

Many people preach the virtue of starting to invest at a young age, and for good reason. Not only does starting young allow your money to compound for more years, it also establishes healthy habits early in your career. It’s a lot more difficult to become a successful investor if you don’t start until midlife. But young families juggling childcare and big mortgages are unlikely to have much left over for TFSA and RRSP contributions, especially in a city with a high cost of living. And that’s fine, as long as you make good decisions around the other aspects of your financial life.

If you have a mortgage and children, your first financial priorities should be making sure you have adequate life insurance and a cash cushion for emergencies. Don’t even think about investing until these necessities are looked after.

Even then, for most people with a significant mortgage, I generally don’t recommend investing in a TFSA, and certainly not in a taxable account. If you do have some surplus cash, additional mortgage prepayments are usually preferable: they provide you with a risk-free, no fee “return” equal to the interest rate on your loan.

If you have a relatively low interest rate on your mortgage and you are in a high tax bracket, it might make sense to prioritize your RRSP. Unlike the TFSA, the RRSP gives you an immediate tax benefit, and if you earn a high income this is often more valuable than making mortgage prepayments.

I would also encourage you to take advantage of whatever employer-sponsored retirement plans might be available to you. Many companies have group RRSPs or pension plans in which the employer matches your contributions, up to certain limits. This is free money you shouldn’t forgo. Group plans are also a great way to save painlessly since contributions are deducted from your paycheque and you may not even miss them.

Whether you’re investing in a self-directed RRSP or through an employer plan, the Couch Potato approach is the most cost-efficient way to build a diversified portfolio. Major life changes will affect your financial priorities and the amount of risk you can afford to take, but they should have no effect on your fundamental investment strategy.

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