You’re now on the final step of your investment approach: choosing the investments that best meet your investment objectives and your investor profile.
When it comes to investments, diversification is the golden rule. Diversification consists in having a portfolio with investments with different features. These are:
- type of investment (e.g., stock bond)
- maturity date (e.g., 1 year, 5 years)
- issuer (e.g., governments, private corporation)
Let’s say you have $20,000 to invest. If you put it all in an international equity fund, your portfolio then becomes vulnerable to foreign market fluctuations. If, on the other hand, you spread the amount out among several types of investments—term savings, bonds, dividend funds, Canadian and foreign equity funds—you increase your chances of obtaining a good overall return no matter what the market conditions.
It’s important to understand that the major investment categories (liquid assets, bonds, shares) do not all earn value the same way, nor at the same rate. That’s why it’s wise to diversify and have a wide variety of investments. This way, you always make the most of market fluctuations.
If you’d like some help
A financial planner can provide a structured action plan to help you meet your personal and financial objectives. To find out if a financial planner is trustworthy, get the answer to 3 specific questions. See: Choosing a financial planner.
Did you know?
Leveraging consists in borrowing to invest. You can, for example, borrow to invest in your RRSP. If you can get a higher return on your investments than it is costing you to borrow, then leveraging can be to your advantage. On the other hand, high-yield investments have a higher level of risk. Consequently leveraging becomes riskier. Before you borrow to invest, be sure to discuss it with your financial planner.
See article: Borrow to contribute to an RRSP