Build Portfolios with Purpose

The purpose of investing is to make enough money to achieve our financial goals. You assign a realistic return objective and an appropriate, acceptable level of risk to each financial goal based on your objectives. Then you grow your money through some combination of interest, dividends, rent or capital gains. Hold investments that are suitable for the time horizon: the shorter the time horizon, the higher the risk of holding equities. If you need to sell quickly, cash equivalents retain their value while equities may not, that is, the shares could decline in value.

Identifying your capacity for risk is crucial. If you haven’t done so already, see Who Am I?

Use the appropriate worksheet to create a  list of all your financial goals.

  • My Goals: My Accounts
  • Our Goals: Our Accounts

Treat each one as a separate investment portfolio, with its own time horizon (when you need the money) and objective (what you need it for). Then, place your investment accounts into the appropriate portfolio. For help comparing account rules, regulations, features and benefits, visit Choose Which is Better. If an account shows up in two groups, choose which group is more important; don’t leave an account in two places. 

An account, such as a TFSA, may apply to more than one goal, when both portfolios have the same time horizon and objectives. This is shown in the following example.

Kris is 40, married to Carl, with two children, Amy and Jamal. Their investment portfolios are outlined in the table below.

 

Retirement Portfolio

Education Portfolio

Emergency, Repair and Replacement Fund

Travel and Family Fun Fund

Time Horizon

25 years

5 years

1-5 years

1-2 years

Accounts in Portfolio

  • Defined contribution (DC) pension account
  • RRSP accounts
  • TFSA at work
  • Amy’s RESP
  • Jamal’s RESP
  • Savings account
  • TFSA at bank
  • Company share purchase account
  • TFSA at bank

Investment Objective

  • Growth
  • Reinvest income
  • Moderate growth and income
  • Safety of principal
  • Safety of principal
  • Minimal to moderate income
  • Safety of principal
  • Money must be available on short notice, without loss in value

Visualize each account you own as a cup. When you group your accounts into portfolios, you combine the cups. Your retirement portfolio includes all the accounts (or cups) that are for retirement. Some investors also hold physical real estate or alternative assets in their portfolios.

Do you consider shares held in your employer’s share purchase account to be liquid investments (that is, you can sell them at any time)? Be prepared for price fluctuations, especially if your expected holding period is short. Cash equivalents investments are a good choice when the money must be available on short notice with no loss in value; your company shares, not so much.

Diversify Your Portfolios

Which type(s) of portfolios do you own? Portfolios with short time horizons use safer, interest-bearing investments and require less diversification. Your retirement portfolio, with a long time horizon, needs more diversification to grow your money and control risk. This diversification process is called asset allocation (not putting all your investment eggs into the same portfolio basket). Identifying which assets to hold in each portfolio requires an understanding of the basic types: stocks, bonds, mutual funds and cash-equivalent investments (see Types of Investments). By always holding a variety of asset classes and subclasses, you’re better able to optimize returns whether economic conditions are fair or foul.