Setting Up Your Investment Strategy
When it comes to investing, you need goals and a plan for how to reach your goals. If you haven’t read the Investing Basics post, start there to help you understand the fundamentals of the stock market and different kinds of funds. In this post we’ll look at what you need to set up your investment strategy.
Determining Your Financial Goals
What are you investing for? This is the first and most important question to ask yourself. Your financial goals are the foundation for your entire investment strategy. Think about what you want to achieve in the short and long-term. Here are some common goals:
- Saving for a down payment on a home.
- Building an emergency fund to cover unexpected expenses.
- Growing retirement savings so you can maintain your standard of living at retirement or retire early.
- Paying off debt (which lets you free up money to invest).
The key is to be specific about what you when to do and when you want to achieve the goal.
Assessing Risk Tolerance
One of the first things to consider is how much risk can you handle. To know this consider what your current financial situation is and how you react when the market goes up or down. It’s about finding out how much risk you’re comfortable taking while your money grows.
Consider the following when determining how comfortable you are with risk:
- Timeline: How long do you plan to keep your money invested? If you’re saving for something decades away (like retirement), you can usually afford to take on more risk. But if you need the money soon, you’ll want safer options.
- Financial Cushion: Do you have savings to fall back on if the market takes a dip? Having an emergency fund lets you tolerate investment losses.
- Emotional State: How do you feel when markets drop? If watching your investments lose value keeps you up at night, stick to lower-risk options.
Creating a Diversified Portfolio
Once you’ve decided on your goals and risk tolerance, you need to decide where to put your money. Don’t put all your eggs in one basket. Diversification—spreading your investments across different asset types—helps reduce risk. Here’s how you can build a diversified portfolio:
- Include Different Asset Classes: Stocks can offer high returns, bonds add stability, and real estate provides long-term growth potential. You can get ETFs, index funds, or REITs that include these assets.
- Spread Across Industries and Countries: Instead of focusing only on tech companies or Canadian stocks, include international markets or different industries like healthcare, energy, or consumer goods.
- Mix Risk Levels: Include some high-risk investments with lower-risk ones to create balance (e.g., stocks and bonds).
Building a diversified portfolio doesn’t mean you’ll completely avoid losses, but if some investments underperform, others may pick up the slack. For beginners, personally I think starting with low-cost ETFs is the easiest way to set up a diversified portfolio. Your plan doesn’t have to be perfect—start and your portfolio can grow with you.
For examples of diversified portfolios, check out the Canadian Couch Potato model portfolios. I like these model portfolios because they give you list of all in one ETF portfolios that you can choose based on your risk tolerance. Each of these portfolios combines various stocks and bonds from Canadian, US, and international funds from the largest providers of ETFs in Canada. It’s a great resources for DIY investing. My personal investment strategy is very similar to the ones listed here.
How to Start Investing with Limited Funds
Many tools, strategies, and resources are designed specifically to help you build wealth even with a small amount of money. The key is consistency.
Low-Cost Investment Platforms
One of the easiest ways to start investing, even with a limited budget, is by using low-cost platforms. These are typically apps, online services, robo advisors that automatically manage your investments), or online financial institutions like Wealthsimple that offer low or no-cost services. Instead of paying high management fees, you’re usually charged a small percentage of your investments annually, which can save you money over time. Features of low-cost platforms:
- Automatic Contributions: You can schedule regular deposits.
- Ready-Made Portfolios: Many apps have pre-built investment options, so you don’t have to pick individual stocks.
- Mobile Access: You can manage your investments anytime from your phone.
Fractional Shares
If you can’t afford to buy a whole share of a stock, you can buy a part of a share called a fractional share. Fractional investing lets you invest in companies like Tesla, Amazon, or Google even if you only have $10. Fractional shares are a game-changer for people with limited funds. For example, if a full share costs $200 but you only have $50 to invest, fractional shares let you own 1/4th of that stock.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging is a strategy of investing the same amount of money on a regular basis, regardless of how the market is performing. By spreading out your investments over time, you reduce the risk of putting all your money in when prices are high. For example, instead of investing $600 all at once, you could invest $50 a month for a year. When prices drop, your $50 buys more shares, and when prices rise, you buy fewer shares—but at an average cost. Over time, DCA helps smooth out the effects of volatility in the market. You can’t time the market, and using a DCA strategy means you don’t have to. You just need to be consistent.
Employer Sponsored Plans
If your workplace offers investment plans like Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), it’s a great opportunity to invest. These plans often come with tax benefits, and some employers even match a portion of your contributions—essentially giving you free money. If your employer matches 50% of your contributions, investing $100 from your paycheque would mean you get an additional $50 from your employer. That’s an immediate 50% return on your investment, which is a return you can’t get on the market. Additionally, employer-sponsored plan contributions are usually deducted directly from your paycheque, making it an easy way to keep up with your savings and investing.
Conclusion
Building an investment strategy starts with clear financial goals. Whether you’re saving for retirement or a home, knowing your “why” keeps you on the right track. Define your priorities and align your plan with your timeline.
- Balance Risk with Comfort
Your risk tolerance guides your investment choices. Consider your finances, timeline, and comfort with market changes. - Diversification is Key
A diversified portfolio spreads risk. Include different assets, industries, and regions to balance your investments. - Start Small and Be Consistent
You don’t need a lot of money to begin investing. Use low-cost platforms, set up automatic contributions, or try fractional shares. Be consistent—every bit adds up over time.
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