Investing For Canadians For Dummies Cheat Sheet

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.

Making an eye-popping return on an investment is great. You add to your savings, feel better about your finances, and have something to boast about with your friends. But often, you can get a solid pay-off from simply avoiding common investing missteps:

• Where possible, minimize fees. The more you pay in commissions and management fees on your investments, the greater the drag on your returns. Don’t fall prey to the thinking that “you get what you pay for.”
• Don’t expect to beat the market. If you have the right skills and interest, your ability to do better than the investing averages is greater with real estate and small business than with stock market investing. The large number of full-time, experienced stock market professionals makes it next to impossible for you to choose individual stocks that will consistently beat a relevant market average over an extended time period.
• Don’t bail when things look bleak. The hardest time, psychologically, to hold onto your investments is when they’re down. Even the best investments go through depressed periods, which is the worst possible time to sell. Don’t sell when there’s a sale going on; if anything, consider buying more.
• Ignore soothsayers and prognosticators. Predicting the future is nearly impossible. Select and hold good investments for the long term. Don’t try to time when to be in or out of a particular investment.
• Minimize your trading. The more you trade, the more likely you are to make mistakes. You also get hit with increased transaction costs and higher taxes (for non-retirement account investments).
• Think long term. Because ownership investments are riskier (more volatile), you must keep a long-term perspective when investing in them. Don’t invest money in such investments unless you plan to hold them for a minimum of five years, and preferably a decade or longer.
• Match the time frame to the investment. Selecting good investments for yourself involves matching the time frame you have to the riskiness of the investment. For example, for money you expect to use within the next years, focus on safe investments, such as money market funds. Invest your longer-term money mostly in wealth-building investments.

No one is born a knowledgeable, savvy investor. Here are some basic guidelines to keep in mind as you start to learn more about investing and begin to make your money work for you:

• Saving is a prerequisite to investing. Unless you have wealthy, benevolent relatives, living within your means and saving money are prerequisites to investing and building wealth.
• Know the three best wealth-building investments. People of all economic means make their money grow in ownership assets — stocks, real estate, and small business — where you share in the success and profitability of the asset.
• Be realistic about expected returns. Over the long term, 9 to 10 percent per year is about right for ownership investments (such as stocks and real estate). If you run a small business, you can earn higher returns and even become a multimillionaire, but years of hard work and insight are required.
• Diversify. Diversification is a powerful investment concept that helps you to reduce the risk of holding more aggressive investments. Diversifying simply means that you should hold a variety of investments that don’t move in tandem in different market environments. For example, if you invest in stocks, invest worldwide, not just in the Canadian market. You can further diversify by investing in real estate.
• Look at the big picture first. Understand your overall financial situation and how wise investments fit within it. Before you invest, examine your debt obligations, tax situation, ability to fund retirement accounts, and insurance coverage.
• Hire advisors carefully. Before you hire investing help, first educate yourself so you can better evaluate the competence of those you may hire. Beware of conflicts of interest when you consider advisors to hire.
• You are what you read and listen to. Don’t pollute your mind with bad investing strategies and philosophies. The quality of what you read and listen to is far more important than the quantity. Find out how to evaluate the quality of what you read and hear.
• Keep things in perspective. Your personal life and health are the highest-return, lowest-risk investments. They’re far more important than the size of your financial portfolio.