5 Things to Know Before Investing
When it comes to investing, most people will make mistakes along the way, which is part of the learning process. There is a lot to know before investing – choices to be made, successes to be had and lessons to be learned. With investing, there are some things you want to be cognizant of and further detail to be given to them. This is your hard-earned money you are investing, and knowing a little more before starting and taking your time at the start can have great impacts in the future.
Explore your options
Your investment account options include a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). When looking to open your investment account, the first place you may think to go is a bank. However, there are other options available outside of the traditional bank route. An independent financial advisor can work with you to open all of the same accounts that a bank has to offer. In addition, an independent financial advisor can offer other valuable services, such as life insurance, critical illness and financial planning. There is also DIY investing that is completed digitally through robo-advisors, which have been growing in popularity because people want to invest for themselves without dealing with a bank.
Effects of risk and return
Many investors want to generate the highest return possible and therefore only focus on which funds could generate the highest return based on previous results. It should be noted that the higher returns on certain funds also have a higher risk of fluctuations in the market place. These funds carry a high standard deviation, meaning they can fluctuate greatly from one year to the next. One year they could generate a 20% return but the next it could be -10%. Lower risk funds can carry a more stable return without large fluctuations in the market place but tend to have a more conservative rate of return compared to the higher risk funds.
Researching the funds
You are in charge of where your money is being invested and what funds you are buying, so you should look into the funds and which companies they are invested in. Similar to the effects of risk and return, some funds are in speculative funds, meaning their performance may vary each year, whereas other funds are in more stable, long-term growth companies that you may be more familiar with. There can also be a big difference in your returns if you are invested in the Canadian, American, European or Asian markets, as each market has their own performance and they play off of each other. We see this same interplay between sectors, such as finance, energy, and health care.
Reviewing your investments
Your investments should be reviewed at least once a year to ensure that your portfolio remains properly balanced. As your investments earn money and are reinvested, over time your portfolio can shift and possibly be weighted towards a high-risk sector that you may not want to be in. Reviewing your investments each year ensures that your investments are still balanced to your risk tolerance and aligns with your changing lifestyle. If things change in a given year that could affect your investment style, your portfolio should also be changed to reflect that.
Similar to paying off debt, there needs to be a specific goal in place when investing. Regardless of whether your goal is retirement, vacations, or a house purchase, the way you invest your money should align with it. For example, if you are hoping to have a down-payment for a house in 5 years, the amount of money you should invest monthly needs to support reaching that goal.
Having an understanding of these items will help make your investment journey a successful one. Take your time, do your research, talk to friends and financial professionals to get a better understanding of what is out there. Don’t feel rushed into opening an account, take your time to review everything and make sure your opinions and goals are being met. A financial professional will take all of these items into consideration, present the best options available, and give you time to reflect. Ultimately you make the decision when you are ready.