President's Choice Financial|helpful stuff|financial wellness|the basics

before you begin investing

Once you know your long- and short-term financial goals, all you have to do is start investing, right? Wrong. One of the worst mistakes you could make would be to jump into the world of investing with both feet. Instead, you need to step back and get organized. In fact, before you get your feet wet at all, you need to plan.

Taking the time to understand your goals before you start investing is useful for a number of reasons.

First, it forces you to determine your investor profile. What's your time horizon? In other words, when will you need the money you're investing? For instance, if you're already 45 and want to retire early at 55, you have a relatively short time horizon. In turn, your time horizon can have a significant impact on the amount of risk you're willing to take. For example, if you're investing now to finance your retirement in 30 years, you may be comfortable taking on additional risk today for the potential of greater returns over the long term.

Second, your investor profile can help you determine how you will achieve your goals and where you should invest. Incorporating asset allocation and diversification as key components of your investment strategy can help you meet your objectives. Asset allocation involves dividing your investment dollars between the three main asset classes — savings, income and growth — in the proportions best suited to your risk profile and objectives. For more detailed information about asset allocation and selecting the investments that are best for you, check out choosing the investments that are right for you.

Diversification can be instrumental to achieving your financial goals. Financial markets tend to be cyclical. For instance, when one part of the world is enjoying an economic boom, others may be experiencing a downturn. By holding investments in different geographic regions, industries, and asset classes, you can reduce risk by making sure you aren't holding all your eggs in one basket. The idea is that, through diversification, losses in one area of your portfolio may be offset by gains in other areas.

Third, developing a financial strategy will help you set realistic expectations of the returns you could earn. While everyone hopes to achieve double-digit returns, in reality they aren't a foregone conclusion. By setting out a plan, you can plot a course for your financial future, so your goals will actually be achievable in the time frame you've allotted.

If you're looking for assistance in developing a strategy, a good financial planner can be invaluable in guiding you through the process. You may also want to check out your local library or check out the following links for helpful hints and information:

Helpful tools and information

Canadian Bankers Association: Investing Your Dollars