Here are some thoughtful ideas on securing your future...
Building wealth through investing is a vital part of any financial plan but can often be the most confusing and emotionally challenging experiences you will encounter. Here are six guiding principles to help guide your financial plan.
Six Principles to Investment Success
1. Start today
The biggest threat to your investment program is not the return but procrastination. Start building the habit of “paying yourself first”. Begin with a comfortable amount and add to this over time.
2. Use tax shelters
Take advantage of government programs to receive tax deductions, tax sheltered growth and grants. The four most basic ones available are:
RRSP (Registered Retirement Savings Program)
TFSA (Tax Free Savings Account)
RESP (Registered Education savings Plan)
Cash Value component of a permanent life insurance policy
3. Understand risk
Is risk good or bad?
We tend to think of risk in predominantly negative terms, as something to be avoided, or a threat that we hope won't materialize. In the investment world however, risk is inseparable from performance, and rather than being desirable or undesirable, it is simply necessary.
Understanding risk is one of the most important parts of financial education. Generally, investments with a low risk also generate a low return. Investing in a bank deposit will probably earn a return of around 1-2% per annum. Investing in shares however, could generate much higher returns on your investments fluctuating widely from year to year. This is a personal evaluation that only you can make.
What risk is right for me?
The length of time you are prepared to invest the money is an important part of understanding your risk profile. High risk strategies can offer higher returns and should usually be engaged over a long time period. A low risk option tends to suit investors who have a short investment time frame or are uncomfortable with the volatility of high growth assets.
Everyone feels differently about the investment risk. If you take out the high risk investments only to be consumed with anxiety, you are in the wrong level of risk. You need investments that balance your appetite for risk, with the ability to reach your financial goals. Find out where your risk level is so that you can make investment decisions that don't stop you from sleeping at night.
A way of managing risk
Diversification is a risk management technique that combines a wide variety of investments withing a portfolio. The rationale behind this technique is that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk that n any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Simply put, it avoids having 'all your eggs in one basket”.
5. Match your investment portfolio to your risk portfolio
Find your most suitable investment plan through asset allocation
Assets allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time. There is no simple formula that can find the right the appropriate asset allocation for every individual, so it is important to go through the process to define the appropriate asset allocation to meet your financial goals.
Maintain your portfolio's optimal performance over time
As your portfolio grows, certain areas can become heavier in weighting, therefore it is beneficial to periodically re-spread the proportions to ensure the balance is achieved. Shifting money away from an asset category when it is doing well in favour of an asset category that has underperformed may not be easy but if done systematically, results in employing a 'buy low, sell high' strategy.
Following these six simple principles will ensure that you are in the fast lane on the road to building wealth.
(source: Your Financial Compass)
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