5-Week Financial Fitness Challenge: Week Five
Written by Kaileigh van den Berg, Associate Financial Advisor, Assante Capital Management Ltd.
Now that you have sorted your savings out, investing is an important next step to combat inflation and put that hard earned money to work. If you were to invest $10,000 with a 5% annualized return, after 15 years it could grow to about $20,000 without any additional deposits. Think about the impact that could have on your savings!
Determine your risk tolerance and time horizon
An important first step is to determine how comfortable you are with taking on risk, and how long you are looking to have the funds invested for. Depending on the type of investment, there is a risk that you could see large fluctuations in your investment value. The investment return you receive is compensation for taking on this risk. Determine what you are saving for, and how long you think you will have those funds invested for. If you are currently saving for something where you will need the funds in the next year or so like a down payment on a home, a low-risk investment like money market or fixed income would be your best choice. If you have a longer time horizon, like saving for retirement, you have more time for your investments to recover from fluctuations and can choose higher risk investments like equities to enhance your portfolio returns. A risk budgeting approach where you earmark lower risk investments for short term needs, and higher risk investments for long term needs is a great approach.
Now that we have discussed risk, the best way to decrease risk in your investments is diversification. Ever heard the phrase “don’t put all of your eggs in one basket”?. Holding a mix of asset classes, geographies and sectors will help to protect you if an unforeseen event affects any one of those areas. The best way to hold a diversified portfolio would be through mutual funds or ETFs which can give you exposure to each of these areas without having to buy each individual stock. An advisor can help you build the right investment portfolio for you.
Remove emotion from the equation
This can be a hard one when we’re considering your savings, but it’s important to leave your emotions out of your investment decisions. It is natural to see market fluctuations, but the last thing you want to do is sell right after a large drop and miss out on the recovery that will follow. Working with an advisor can help you determine the right time to make changes to your investment portfolio. If you are someone who is tempted to sell on a whim, it can be helpful to check your statement less frequently so you are less bothered by the market noise.