Principles to Investment Success
Six Principles to Investment Success:
We can often look into the rear-view mirror and feel as though we “should have done” this or that. This “noise” can often cause us to make mistakes as we try to catch the next trend, or cause us not to take action at all. In most cases, following this noise usually leads to losing money. The old adage, “If it sounds too good to be true…” also holds true for investing.
To build wealth successfully over the long term, it is important to understand first
what your accumulation goals are, the time you have to accomplish them, and to follow the six basic principles to investment success:
We can often look into the rear-view mirror and feel as though we “should have done” this or that. This “noise” can often cause us to make mistakes as we try to catch the next trend, or cause us not to take action at all. In most cases, following this noise usually leads to losing money. The old adage, “If it sounds too good to be
true…” also holds true for investing.
To build wealth successfully over the long term, it is important to understand first what your accumulation goals are, the time you have to accomplish them, and to follow the six basic 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 at 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 Program)
►►Cash Value component of permanent life insurance policies
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.
Calculate your risk tolerance here( I would like to link this one to another page that they can calculate their risk tolerance)
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; but there’s also a much higher risk that the investment will drop in value.
We all have different attitudes towards investment risk. Consider how comfortable you are with the possibility of losing money or with the returns on your investments fluctuating widely from year to year. This is a personal evaluation only you can make.
What risk level is right for me?
The length of time you are prepared to invest the money for 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 investment risk. If you take out high risk investments only to be consumed by anxiety, you are at 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 won’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 within 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 than 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 profile:
Find your most suitable investment plan through asset allocation Asset 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 asset allocation for every individual, so it is important to go through a 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 that balance is achieved. Shifting money away from an asset category when it is doing well in favor 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.
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