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choosing the investments that are right for you

Deciding on the best investment can seem like picking a tree in the forest — you know all the trees are different, but they all look the same. How can you choose?

Perhaps the most important thing to remember is that you don't have to choose just one tree — uh, investment. Effective strategies almost always involve mixing a number of different types of investments, balancing the risks of one with the particular strengths of another. The key, then, is figuring out how to divide your money between different classes of investments. That process is known as "asset allocation".

When considering investments, assets generally fall into three classes:

Savings investments include savings and chequing accounts, Treasury Bills, Money Market funds, savings bonds and shorter-term Guaranteed Investment Certificates (GICs). You can expect these assets to provide fairly consistent, relatively low returns on your money. Generally, the amount you put into savings investments isn't going to fall. That's why some investors put money they're going to need soon in this class: they know it's going be there.
Income investments include longer-term GICs, mortgage-backed securities, bonds, and income mutual funds. This might be the place to put money you want to turn into a relatively reliable source of cash, month after month and year after year. Money invested in this class has historically grown more than savings investments in the long run. At the same time, though, your investments are more likely to experience unexpected changes in value.
Growth investments, the riskiest class, include stocks and equity (or growth) mutual funds. Since growth investments have historically shown higher returns than other types of holdings over the course of years — rather than over weeks or months — many investors view them as a good way to save for the long term, despite the increased risk to their investment.

So how do you decide how much of your money to put in each class? Knowing two things will go a long way toward answering that question.

Your financial goals. Are your goals short-term, like taking a sabbatical from work, planning a dream wedding, or buying a car? In that case, you might want to put more of your money in savings investments. Or are your goals long-term, like saving for retirement or your children's education? If so, you might want to consider allocating more to growth investments.
Your risk profile. Do you consider yourself a conservative investor, a balanced investor, or an aggressive investor? If you're unsure what type of investor you are, read more about defining your risk profile.

Ultimately, the best asset allocation for you should balance your financial goals with your risk profile.

In investments, as in life, success comes to those who see the forest for the trees. Good luck!

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