Seven Steps for Success

Five thousand? Ten thousand? Twenty thousand? The number of fund choices is in the thousands. Choose too many and your portfolio is without clear focus. Choose none at all and you will struggle to achieve a diversified portfolio. Identify the number of funds that suit your long-term financial goals.

The following seven steps won’t guarantee that you’ll become rich but they’ll give you a useful process for choosing suitable, low-cost investments funds that have experienced reasonable past performance.

Step 1. Know Your Investor Profile

Investing starts with knowing your investor profile. If you haven’t determined yours yet, see Discover Your Asset Mix/Investor Profile. Since the ability to take on investment risk differs from person to person, knowing your own level is most important because it should determine the types of investments to hold. You have to be able to sleep at night and not worry about your investments. Determine how much you should hold in each asset class before you start picking funds.

Step 2. Establish Your Objective

In 2011, 29% of non-senior Canadians were receiving investment income.

Identify what role your funds will play in building your portfolio. Are you best served with one fund that complements your stock portfolio or with a comprehensive pre-built portfolio fund (one fund combining many funds)? Will you build your portfolio by combining multiple funds? Are you looking to add a specific asset subclass fund to your suite of funds?

Once you have identified your objectives, you'll want to consider:

  • How you want to build your portfolio; and,
  • The techniques/strategies you want to use before choosing your funds.

For more detailed discussion of this topic, see Build It: Construct Your Portfolio.

Step 3. Evaluate One Fund Category at a Time

If your intent is to buy one pre-built, balanced or multi-manager fund, limit your review to only those types of funds. If you’re building your own portfolio, you should evaluate funds from each asset class and each technique or strategy (such as, fixed income, Canadian, U.S. and international equity funds, and so on). Do a quick review or use a filter to assemble a short list. Read the investment reports or the prospectus for each fund to compare and contrast funds on your short list.

Planning Tips

  • If you’re a member of an employer-sponsored pension or savings plan, review the fund choices available in those plans first.
  • Assess which funds are acceptable to use based on their objectives, fees and performance ratings.
  • Build your portfolio using the investment funds in those plans first (especially if low fees provide a clear advantage).
  • Check if you can transfer outside funds into your group plans (such as into a group RRSP).
  • Use your other accounts or those of your spouse/partner to buy funds (such as, emerging markets, index funds) not available in your company plans.

Step 4. Read the Investment Fund Reports

Investment fund reports are an excellent way to research funds. They are available from many websites. Some of the topics you want to pay attention to include:

  • Investment philosophy/style (such as growth, value, and so on).
  • Strategies used.
  • Number of holdings (is the fund concentrated or does it hold most of the benchmark index?)
  • Industrial sector weightings (does the manager know and love his bank stocks or is he/she a resource expert?)
  • Historical performance, especially performance compared to the benchmark and peers, is important, as is the length of the “track record”.
  • Volatility of the fund as compared to the benchmark and peers. Volatility (standard deviation) is a widely used measure of risk.

Finally, compare the fund to others you may hold or are considering for purchase. Would this new fund complement or simply mirror what you already have?

At the end of the day, you should be able to answer the question: “Has this fund delivered superior risk-adjusted returns compared to similar funds and has it done so consistently over a reasonable period of time?”

Step 5. Consider Past Performance

Past performance is no assurance that future performance will be comparable. However, historical returns are frequently used to:

  • Compare performance between investment fund managers
  • Compare performance against a suitable benchmark
  • Compare return over time

Learn how to Measure Past Performance.

Step 6. Question Your Fees: Keep Your Costs Down

Costs are important. A high annual fee reduces the investment return. Cost should always be considered when choosing a fund, but so should returns. If a manager can consistently deliver superior “after-fee” returns, then he /she is earning the fee, regardless of what it is. If available, take advantage of reduced fees offered in employer pension or savings plans.

There are two costs to consider when looking at different investment funds. They are:

  1. Cost of entry: Is there a sales commission to be paid to purchase or exit from the investment fund? These commissions are often referred to as “front-end loads” and “back-end loads. The advantage of no-load funds is that they do not entail commissions.
  2. Annual Cost: What are the annual fees for investment management and administration of the fund? This fee is often referred to as the management expense ratio, or “MER”. You should seek out funds that offer lower fees on average and consider index funds or exchange traded funds (ETFs) for their significantly lower fees.

Learn how to evaluate your investments to keep fees and other costs down.

Step 7. Avoid Emotional Attachments

As outlined in High-Risk vs Low-Risk Strategies, a disciplined approach to investing, using logic and reason, is a lower-risk strategy than an emotional approach. However, removing the emotions from investment decisions can be difficult (we are all human, after all).

Successful investors:

  • Hold their emotions back
  • Make decisions based on data and analysis
  • Don’t make buying and selling decisions based on tips or rumours
  • Sell a bad investment and move on
  • Don’t hold onto a bad investment until they “get their money back”
  • Recognize that searching for a higher return or a “safe” investment is, at times, a dangerous activity
  • Put risk first, knowing a loss requires a greater gain to fully recover

Investing is about risk AND return. Be aware of both.


With thousands of investment funds to choose from, the selection of the most suitable fund for an investor is a challenge. While intuition might work, a systematic approach plus a firm grip on emotions generally work out better in the long run.