Seven Considerations Of Effective Investors

Effective investors consider the following inter-related items

  1. inflation protection
  2. investment liquidity
  3. investment objectives
  4. market timing strategy
  5. marginal tax rate
  6. risk tolerance
  7. 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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