You need to spend some time figuring out how to get the most out of your savings. Here is a “back-to-basics” primer.
Time is Money
Time is the key to long-term growth. Look for investments with long-term growth potential within your risk tolerance.
Long term investing allows you the advantages of compounding. This happens when interest is paid on interest on fixed income investments or when you reinvest your dividends to buy more dividend stocks. Stay with your investments unless there is a significant change to it or to your own personal circumstances.
By the way, many people think that “long-term” stops at retirement age, but there can still be twenty-five years or more of earning potential after retirement. After all, you won’t immediately need access to all your money at age sixty-five.
Dollar Cost Averaging
Make a habit of investing even small amounts of money frequently. When you start budgeting, get into the habit of paying yourself first. When done consistently over time, you will be amazed at the results.
Regular automatic withdrawals from your account into the same investment accomplish two things. One, you buy more of the investment when prices are low and less when prices are high, thus smoothing out the cost. This is most often done with purchasing mutual funds but is also effective with a DRIP (dividend reinvestment plans) on your stocks.
Secondly, an automatic plan takes the emotional element out of investing. If you stick to plan you are not as likely to start worrying and cash out when the market hits a rough patch.
Spread the risk around. No single investment works well under all economic conditions. Spreading your investments around reduces the impact of one poor performer in your investment portfolio.
A portfolio that combines all three asset classes – safety, income and growth – is considered a diversified portfolio and can hedge against changes in the economic cycles. You can diversify within asset classes to compensate for other risks. And you can diversify globally as well.
Foreign investing can protect you against any downside economic changes in any one country and you can diversify among economies and markets that may behave differently from ours.
Global markets can also provide greater access to high-growth areas such as technology, health care and entertainment. One way to get more exposure to foreign markets is to invest through an ETF or mutual fund.
Maximize your RRSP and TFSA
Take advantage of your higher earning years to save the most and decrease your income tax burden whether by deferring tax in an RRSP or tax free investment earnings in a TFSA. Keep track of your contribution limits and try to catch up.
Take advantage of group RRSPs offered by your employer or association. Some generous employers match all or part of your RRSP contribution. Also, mutual funds purchased under a group plan very often have reduced management fees, further increasing your savings.
A spousal RRSP allows you to split your retirement income resulting in lower incomes taxes for both of you as money is withdrawn. It’s worthwhile to check to see if this will benefit you.
Evaluate your portfolio at least once or twice a year. You want to see how each investment is doing by comparing data from your previous review, looking at your growth rate and performance.
Is your asset allocation still balanced the way you want it to be? Has your time horizon changed? Or your life circumstances? Has your investment manager or objectives changed? How about fees? Even if you choose a “buy and hold” strategy you can’t just let it be, you still need to do an assessment.
So there you have it. I know you’ve heard it all before but sometimes when you get complacent and neglect to monitor your investments, or start heading off into different directions based on the latest “great opportunity” you hear about, it pays to get back to the basics of your plan and stay on course.