1. Make the most of extra income if you have it
Having investing and savings goals makes it easier to know what to do with extra income if you have it. Whether you get a raise at work, or want to make the most of your tax refund, there are a few ways to direct additional money, such as:
- Add to your emergency fund
- Pay off debt
- Add to your retirement savings
- Contribute a little more to your long-term investing goals
You could also divide additional money among more than one goal. Your choice might also be different one year to the next.
Learn more about managing cash flow and making a budget.
2. Let compounding work for you
You can make your money grow faster if you also invest the money you earn (your return) along with the money you started out with. This is called compounding. Compounding works for both guaranteed and non-guaranteed
investments.
Reinvesting your returns helps grow your savings faster which can help you meet your financial goals.
Learn more about growing your savings with compound interest.
3. Have a financial plan
Having a financial plan can sound complicated, but basically starts with a few simple questions:
- What goals are you investing for?
- How much will you need to put aside each month to reach your goals?
- How much debt will you need to pay off, and when?
- How much room do you have in your budget for saving, investing and paying off debt?
- What kind of advisor support will you need to reach your goals?
Creating a plan will help you reach your financial goals. Set a regular time to review it. And if your financial goals (the reasons you are investing) change, your plan can change too. Having a plan will also help you choose your asset allocation for short- and long-term goals.
Your plan should be specific and realistic. It should include your risk tolerance, investment strategy, asset allocation, and when and how your portfolio should be rebalanced. Learn more about creating an investment plan.
Learn more about creating an investment plan.
4. Invest within your means
As an investor, it’s always good to have a long time horizon on your side. This means that the earlier you start investing or saving, the more you can benefit from compounding. This means that anything you can put aside at the beginning will build that much more towards your returns.
The flip side of this is that it can be tempting to start out too aggressively. Consider if you contribute large amounts to your investment accounts or RRSP, for example, but haven’t left enough of your cash flow to put towards your day-to-day spending or short-term savings. In this case, you’ll end up having to dig back into your savings to cover expenses or rely on credit cards or loans which you’ll have to pay back later.
Keep your investing goals in sight while also investing within your means.
5. Be reasonable about your investing skills
Many investors overestimate their ability to “beat the market” by trading frequently. This can leave them with lower returns than if they just held onto a broad set of investments.
Overconfidence can include looking at information in a way that confirms our prior beliefs and assuming we know more than we do. For example, during a bull market when investments generally perform well, we might decide that it’s actually our trading decisions that are getting us higher returns. And during a bear market when investments perform poorly, we might blame the market, and hold onto our belief that we’re still good traders.
Learn more about overconfidence and how it can affect your ability to reach your financial goals.
6. Shop around for an advisor
New investors often use the same advisor as their parent, partner, friend or relative. But the advisor that’s right for someone else, may not be right for you.
Before you choose an advisor, consider your needs and how involved you want to be in your investing decisions. It’s also useful to know the types of clients a potential advisor normally works with. For example, some advisors only deal with clients with a particular net worth. And if you find out later that your advisor it not working out, you can change advisors.
Learn more about working with an advisor.
7. A diversified portfolio can help you manage risk
Diversification means holding investments from a variety of different asset categories, industries, and geographies. It can help reduce the overall risk in your portfolio. Diversification is important because:
- Not all types of investments perform well at the same time.
- Different types of investments are affected differently by world events and changes in economic factors such as interest rates, exchange rates and inflation rates.
If your portfolio is not diversified, it will be unnecessarily risky. You will not earn a higher average return for accepting the unnecessary risk.
Learn more about diversification.
8. Think twice before choosing a trendy investment
Some investments become popular through the media, celebrity endorsements, or just because they are new. You may have started investing because you saw something popular or because of a tip from friends.
While it might be tempting, and comforting, to go along with decisions of a larger group, be cautious about following the herd. Just because an investment opportunity is trendy, doesn’t mean it’s the right one for you.
Learn more about herd behaviour and how to avoid it.
9. Remember to check the fees and read account statements
Understanding the fees you pay when you invest is important because they reduce your return. Ask questions before you invest and consider your options. For example, two investments may carry similar risk and expected return, but one may have higher fees — all else equal, the fees would affect your returns.
You should receive monthly or quarterly account statements. They show the activity in your account and provide an update on your investments. You might receive statements in the mail, email or view them online. When you receive your account statements:
- Check that the investments bought and sold are correct.
- Check that the fees and commissions charged are correct.
- See how much your investments have gained or lost.
Contact your financial representative if anything in your account statements is unclear or seems incorrect.
Learn more about reviewing your account information.
10. Be guided by your long-term plan rather than emotions
Although it may be easier said than done, try to let your investing decisions be guided by your goals and your budget, rather than your emotions.
When markets tumble, it’s easy to let fear start taking over and be tempted to sell. Likewise, when markets are strong, feelings of overconfidence can lead you to take more risks than you might otherwise.
If you’re feeling stressed about your investments, that’s often a sign to:
- Check in with an advisor
- Consider your level of risk tolerance
- Check your long-term plan
