Three things to consider before you invest
“The successful person has the habit of doing things that others don’t like to do.” – Thomas Edison
When it comes to investing, the financial services industry has done a great job of making people feel as though they need a degree in finance and an intimate understanding of the markets in order to manage their own investments effectively. It’s just not true. I believe that a person’s ability to manage their own investments has less to do with their education and more to do with whether or not they have the time and interest. Regardless of whether you want to manage your money yourself or work with an advisor you trust, there are three things you should consider before you invest.
Related article: Is investing logical or emotional?
What are your goals?
The first step in the investment process is to decide on your goals because they determine what type of account you’re going to invest your money in. Just as there are different ways to invest your money (cash, GICs, Mutual Funds, ETFs, stocks, etc.) there are also different places that you can hold those investments (savings accounts, TFSAs, RRSPs, RESPs, Non-Registered, etc.).
Related account: What are you saving money for?
Sometimes the purpose of your savings will lead you to the best savings vehicle (for example an RESP is usually the best place to save for a child’s education). Sometimes the best vehicle varies depending on your situation (for example using a TFSA to save for retirement instead of an RRSP). Identifying your savings goal allows you to choose the best account to use for saving for your personal circumstances.
Are you an active or passive investor?
One of the main reasons that people are often hesitant about the idea of investing is that they are fearful of losing everything. While it’s true that plenty of people have experienced huge losses from investing, it’s also true that many people have seen significant increases in their investments over time. What you choose to invest in should be influenced to a certain extent by whether you’re an active or a passive investor.
Related article: Active vs Passive investing
Active investors love everything about investments and the stock markets. They take a great interest in selecting, monitoring and managing their investments. Passive investors, on the other hand, prefer to take a more “hands-off” approach to invest. Whether you are an active or a passive investor, there are investments to suit you and it’s worth taking the time to select the right type.
What’s your risk tolerance?
Risk is a word that often conjures up feelings of fear and apprehension. In investing, risk can mean different things.
Related article: Risk tolerance vs Risk Capacity
For a speculative investment, it might mean the chance of getting no return on investment whereas for a mutual fund it might reflect the amount of volatility an investor can expect to see in the changing value of the fund. When you’re choosing investments, it’s extremely important to make sure that the investment you choose is in line with your personal tolerance for risk. In theory, the further away you are from needing your money, the more aggressive you can afford to be in your choice of investments.
Realistically though, even if you’re 30 years away from needing your money, if you know that you don’t have the stomach to ride through the lows of a volatile investment, you’re better off choosing something more stable.
Whatever it is that you’re saving for, there are investments that will help you reach your goal. Just as goals are individual, so too is the path to achieving them; there is no “one size fits all” approach. Taking the time to consider which savings vehicle best suits your needs, which type of investments suit your investment “personality” and which are most in line with your tolerance for risk helps ensure that you will reach your goal and helps you feel more comfortable with your choices.