You should by now have spent some time as a couple prioritizing your goals and using the appropriate savings vehicle for your short and medium term goals. How far you need to go (your goal), and how much time you have to get there will determine the most suitable vehicle within your level of tolerance for risk. For your retirement goals you need to consider long-term investing.
Make sure your financial house is in order first
1. You have created a budget. How will you know how much you can invest if you don’t know where the money is coming from and how much you can consistently save?
2. You have eliminated your “bad” debt. If you are still paying off credit card debt that’s carrying high double-digit interest rates, it makes no sense to begin investing until you have at least brought it down to a manageable level.
3. Do you have an emergency fund in place? If your furnace breaks down and needs replacing, you don’t want to have to raid your investment accounts to buy a new one. Make it a priority to put aside some money in a high-interest savings account that you can tap into.
Where do you start?
Start with learning all about equities and fixed income products – stocks, mutual funds and ETFs; investment strategies, diversification, risk and fees. Are you comfortable picking your own investments, or do you prefer to let a professional manage your portfolio? Even if you rely on an investment advisor, one of the most important rules about investing is to understand what you own and why you own it.
The more knowledgeable you are about your investments, the less likely you are to make irrational decisions by letting your feelings get in the way of your common sense.
What is your risk tolerance?
Investing success also means identifying the level of risk you’re willing to take. There are lots of risk tolerance questionnaires online, such as this one from Get Smarter About Money (this site is also a great source for financial education) – or pick one up from your bank. Sit down with your partner to identify your individual attitudes towards risk.
You may not have similar risk profiles and you might think you can just invest according to your own tolerances. However, even though your RRSP, TFSA and pension accounts are only registered in the owner’s name (not joint ownership), the ultimate goal is a shared one, i.e. providing you with future retirement income.
If you are too divergent in your risk tolerances – one is super conservative only investing in HISAs and GICs, and the other the total opposite gambling with leveraged and high risk stocks – you may benefit from having a discussion with an investment advisor who can advise on a more balanced strategy.
How much should you invest to start?
Your objective should be at least 15% of your gross income, using the pay yourself first principle. You can certainly start with a lower amount that you know you can easily put aside and then adjust as you go along. By reviewing your budget and getting your priorities straight you can make headway on increasing your savings rate.
Make time your friend
The earlier you start investing, the more time works in your favour. Procrastinating turns time against you. It’s easy to put your retirement goals on the back burner for more pressing shorter term needs. You don’t want to end up working in your seventies because you spend too much today.
On the other hand, attempting to time the market is a foolish proposition. Investing when the “time is right” is a great strategy if you can see the future. Even professionals rarely get it right.
What are the right investment products for you? What strategy should you use? Everyone is different and what is comfortable for one investor makes another lose sleep at night.
When you open a RRSP or TFSA you often have a range of investment options to choose from – stocks, bonds, mutual funds, and exchange-traded funds – and it can become confusing. This is where your investment knowledge comes into play.
You have the choice of making and monitoring your basic investments yourself with an online brokerage account. If you don’t like research and analysis, you’ll want to keep things simple with a low-cost “couch potato” strategy. You may want to hire a financial advisor to help you, especially as your portfolio grows.
There is no “best” investment strategy except the one that works for you.
Further reading in the Financial Planning for Couples series: