By Angela Iermieri, Financial Planner
For many investors, "Where should I start" is a really tough question to answer. Investment advice abounds during RRSP season, but investing well means understanding financial vocabulary before making informed decisions.
Here are some of the basic terms to make things easier to understand:
How long will your money be invested: are you in it for the short-term or long-term? If you have a clear goal, the question will answer itself. Saving up for a trip and saving for retirement require different investment strategies.
Why are you investing your money? Are you taking a trip, buying a house, planning your retirement? You're more likely to save when you have a specific goal in mind.
Your brother-in-law gave you some investment tips, your neighbour told you about the investment of the century, your friend made an excellent return on an investment. Sounds great, but don't forget that their long-term investment strategy is theirs, not yours! What works for them might not work for you at all. Investing well means setting goals and sticking to them; knowing what to expect and knowing your limits.
What type of investor are you? You'll need to answer that question to invest wisely; think about your objectives, risk tolerance and investment horizon. Your advisor is there to help you.
A common phrase when discussing better returns is to ''diversify your portfolio,'' which amounts to not putting all your eggs in one basket. But what is diversifying, really? It means investing in a number of different asset categories, such as fixed-income securities (bonds, guaranteed investment certificates) or growth equities (shares or investment funds). Remember to be true to your investor profile! This is the best way to counter the ups and downs inherent to certain investments.
Investments should never be chosen simply based on their past performance, because yesterday's yields give no indication of how an investment will do in the future. Portfolio performance depends on certain factors, such as the current economic situation, stock market performance and the type of product. Keep this in mind so you can set a clearer target for your return on investments and have realistic expectations.
How well do you tolerate stock market fluctuations? Are you comfortable with volatility? Knowing what you can handle, having clear goals and being honest with yourself will help you choose products that will fit in well with your plans.
Generally, the yield you can expect depends on the type of investment product you choose. For example, returns on fixed-income products are based on interest rates (interest rates have been at almost unheard of lows for the better part of a decade). Returns on growth equities, however, are linked to stock market performance (with a higher long-term return potential).
Those are some of the basics to help you get started! When in doubt, contact a professional financial planner for guidance.
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