Effective investors consider the following inter-related items
- inflation protection
- investment liquidity
- investment objectives
- market timing strategy
- marginal tax rate
- risk tolerance
- time horizon
Inflation Protection
A return of 18% is not impressive if inflation increased 19%
You can improve your overall return by balancing
- investments with higher risk and higher return with
- investments with lower risk and lower return
Investment Liquidity
How easily can the investment be converted to cash?
Investment Objectives
What are your investment objectives?
| Goal | Consider |
|---|---|
| preserve your capital | GIC, segregated funds |
| grow your capital | mutual funds, segregated funds |
| guaranteed income | annuity |
| liquidity | savings account |
| minimize your taxes | capital gains instead of dividends or interest, registered plans |
Market Timing Strategy
Are you an active or passive investor?
| Market Timing Strategy | Consider |
|---|---|
| passive | buy & hold |
| active | buy & sell (knowledge, confidence, willingness to take risk) |
Marginal Tax Rate
What is your marginal tax rate?
For higher tax rates, investments with lower tax rates give higher after-tax returns.
| Marginal Tax Rate | Consider |
|---|---|
| higher | capital gains or dividends |
| lower | interest income |
Risk Tolerance
Higher returns come from higher risk. How much risk are you willing to accept?
Risk tolerance depends on your
- age
- personality
- investment experience
You would generally match your risk tolerance in your overall portfolio (not per investment)
- so you could have some investments that are riskier if you have others that are safer
| Goal | Consider |
|---|---|
| no tolerance | guaranteed returns |
| risk-averse | guaranteed return of capital with growth |
| risk tolerant | some safety + some probability of better returns |
| speculative | accept risk completely |
Time Horizon
When do you need the money?
How long your money can be invested depends on when you need the money.
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