What steps should I take before I invest?
Consider your savings project a voyage—your goals are the destinations, and your balance sheet is the starting point. Having a budget allows you determine what you can realistically do, and your profile will help you establish certain limits. You’ll need to know all of this before planning your itinerary, a.k.a., your investment strategy.
Why do I want to invest?
Before thinking about how to invest your money, be aware that the best investment choices should serve to achieve your goals.
Start by determining whether your goals are:
- Short term (less than 2 years): Saving for a trip, leisure activities, sporting equipment, appliances, artworks, etc.
- Medium term (2 to 10 years): Down payment on a house, renovations, car, etc.
- Long term (more than 10 years): Secondary residence, retirement, etc.
Your goals will serve as a guide to determine how much you wish to save. The objective of your investment plan and strategies is to achieve this.
How do I draw up my personal balance sheet?
A balance sheet is an overview of your financial situation at a specific point in time. It’s like a photo of your finances. It lists your assets (what you own) and your liabilities (what you owe).
To determine your net worth, subtract your liabilities from your assets. This exercise will reveal how much you can invest. You might also decide to prioritize paying off certain debts.
Need some help with putting money aside? You could opt for systematic savings. You can choose how much and how often you set money aside (e.g., every pay cheque). The money is then automatically transferred into whichever account you choose.
How do I make a budget?
Your usual income and expenses will help you determine how much money you can regularly save. It’s your savings that will serve to power your investments.
If your budget (income minus expenses) shows that you have a:
- Surplus: Invest part of it
- Balance: Make sure you’re already saving some money
- Deficit: Start by determining how much you want to save and make it a priority. Next, attempt to identify the non-essential expenses that you could reduce or cut out to balance your budget.
Want some new tips to help you save? Read this article: “35 tips to help you save.”
How do I determine my investor profile?
Determining your investor profile will help you to adapt your investment strategy and choices to your needs. Your profile is based on three main factors:
1. Your personality and level of comfort with risk
If you’re concerned about how your investments perform, you could choose a more secure investment profile. If you’re more focused on long-term returns and aren’t too concerned about daily fluctuations, your profile could involve more risk.
2. The time you have to achieve your goals
The more time you have to achieve your goals, the more risk you can take. For example, if you’re young and have a long-term goal, you’ll have more time to recover from temporary market drops and benefit from market increases.
Markets fluctuate without warning. But over the long term, they tend to see gains.
This table shows that over the long term, the Canadian market has generated positive returns:
3. Your experience and knowledge
Is your knowledge about investing fairly minimal? If so, you may want to adopt a strategy involving less risk. On the other hand, if you have a solid understanding of the risks and are confident that you can compare potential risks and gains to make informed choices, you may want to adopt a strategy that involves more risk.
What accounts or plans should I choose?
The accounts or plans you use are a bit like boxes that you put your assets in.
You could choose accounts or registered plans to take advantage of certain tax benefits or government contributions.
There are also many non-registered accounts with their own specific features. They don’t offer the same type of advantages as registered accounts, but they do offer more flexibility.
The right option is the one that best meets the parameters of your project, e.g., its timeline. The specialists at your financial institution can help you choose the plan or the account that’s the right fit for your project.
Should I do self-directed investing or get support from an expert?
The approach you choose should suit your:
- Level of involvement
- Timeline
- Level of knowledge
- Confidence in your abilities
The self-directed approach will require more from you on each of these fronts.
Here are the two main approaches and what they signify:
Self-directed investing: You could use an online platform to select and trade securities yourself. You could choose funds or shares on the stock exchange or opt for existing portfolios that fit your investor profile.
Investing with expert support: Specialists will search for the most suitable investments to help you achieve your goals. You can also decide to be involved and make decisions.
What are the key points to consider when choosing my investments?
Diversification
Diversifying your investments is a way to protect yourself from market fluctuations. Not all securities are affected by the same events or to the same degree.
When you place your money in different types of investments in various fields or activity sectors, a part of your portfolio that’s performing well could help to offset another part that’s performing less well. Geographic allocation is another factor to consider because shares in different markets are not always affected by the same events.
Good to know: Don’t confuse diversifying your investments with scattering similar types of investments around at several different financial institutions. This doesn’t offer any advantages.
You may even have to pay more fees and you won’t benefit from economies of scale or be able to access products requiring a minimum investment.
Fixed income or growth—a question of balance
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A good way to diversify your investments is to invest part of your money in products that provide a fixed income (interest or dividends) and capital gains (increase in a security’s value). Balancing the stocks and bonds in your portfolio is a good way to diversify it.
Flexibility
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Some investments are more flexible than others. A flexible investment can be accessed (cashed in) quickly without having to pay a penalty. This is extremely useful if you need the money to deal with an unforeseen event.
Be aware, however, that flexibility is often associated with weaker growth potential. For this reason, it’s important to choose the right investments right from the get-go.
Some investments also have a predetermined term. You’re required to leave the money invested for several months or even years. If not, you might not receive certain returns and in some cases, you may even lose the initial capital you invested.
Return or risk
An investment that involves higher risk is often associated with greater growth potential. This said, it’s important to always choose investments with risk levels that align with your investor profile.
Principal protection
Some investments offer no guarantees, while others guarantee a return after a predetermined period of time. Still others guarantee that you’ll at least keep the principal you invested, while your return will depend on the performance of the security or the market.
If you can’t even entertain the possibility of a loss, learn about these options.
Canada Deposit Insurance Corporation (CDIC)
The Canada Deposit Insurance Corporation (link to an external site) protects the money you deposit at member institutions. In addition to securing your assets, it allows you to feel confident about doing business with a financial institution.
Your values
Responsible investment options are growing in popularity and the number of these investment products is increasing too. Finding investments that support clean technology or renewable energy is getting easier all the time.
When it’s time to decide how to invest your money, remember that your investment strategy should be adapted to your situation, needs, profile, and values. It’s up to you to choose whether you want help from specialists or prefer self-directed investing. We're here to answer your questions.