How Canadians Can Maximize Investment Options
Diversifying your investments helps buffer your portfolio from being sunk by one or two poor performers. Though no hard-and-fast rules dictate how to allocate the percentage you’ve ear-marked for specific investments, like stocks and real estate, here are some general guidelines for Canadians to keep in mind:
- Maximize contributions to retirement plans. Unless you need accessible money for shorter-term non-retirement goals, why pass up the free extra returns from the tax benefits of retirement plans?
- Take advantage of a Tax-Free Savings Account (TFSA). The capital gains, dividends, and interest you earn on money inside these accounts are tax-free, as are any withdrawals. Put short-term money such as your emergency funds into a TFSA. Also consider sheltering savings in a TFSA if you’re already contributing the maximum to your RRSP.
- Don’t pile into investments that gain lots of attention. Many investors make this mistake, especially those who lack a thought-out plan to buy stocks.
- Have the courage to be a contrarian. No one wants to jump on board a sinking ship or support a losing cause. However, just like shopping for something at retail stores, the best time to buy something is when its price is reduced.
- Diversify. The values of different investments don’t move in tandem. When you invest in growth investments, such as stocks or real estate, your portfolio’s value will have a smoother ride if you diversify properly.
- Invest more in what you know. Over the years, we’ve met successful investors who have built substantial wealth without spending gobs of free time researching, selecting, and monitoring investments. Some investors concentrate more on real estate because that’s what they best understand and feel comfortable with. Others put more money in stocks for the same reason. No one-size-fits-all code exists for successful investors. Just be careful that you don’t put all your investing eggs in the same basket (for example, don’t load up on stocks in the same industry you believe you know a lot about).
- Don’t invest in too many different things. Diversification is good to a point. If you purchase so many investments that you can’t perform a basic annual review of them (for example, reading the annual report from your mutual fund), you have too many investments.
- Be more aggressive inside retirement plans. When you hit your retirement years, you’ll probably begin to live off your non-retirement plan investments first. Why? For the simple reason that allowing your retirement plans to continue growing will save you tax dollars. Therefore, you should be relatively less aggressive with investments outside of retirement plans because that money will be invested for a shorter time period.