Smart Investing Step-by-Step

Now that you’ve discovered your investor yin and yang—risk capacity and tolerance, it’s time to get started. Smart investing is a step-by-step process. These steps are listed in the graphic immediately below. They will be discussed in greater depth in the sections that follow.



Step 1. Identify Your Goals

Financial planning is a goal-setting activity. Set your goals before you start investing. Goals are achieved through saving and investing money.

Your reasons for investing will dictate:

  • Your investment objectives
  • The type of investments you own
  • The type of investment account or plan you use

Life is messy. At any moment in time you may have one or more financial goals. List all of your goals. For example:

  • Retirement
  • Children’s education
  • Accumulate, then sell investment assets to:
    • Pay down/off debt
    • Buy land/real estate
    • Spend on lifestyle events
  • Emergency/contingency fund

Step 2. Identify an Investment Objective for Each Goal

There are many different reasons to invest. An individual's investment objectives also change over time, as his/her life and financial situations change. Investment objectives may include:

  • Capital preservation: Ensuring that the original money (capital) invested is not at risk
  • Growth: Increasing the value of capital invested
  • Stability: Through an ongoing income stream, either reinvested or withdrawn
  • Tax Efficiency: Between and within accounts

Defining these objectives will help you decide which financial products belong in your investment portfolio. The time horizon for your objectives takes account of how long you can comfortably leave your money in an investment.

Examples of Investment Objectives

Tax minimization is usually a secondary investment objective.

Step 3. Revisit Your Risk Capacity and Risk Tolerance, Goal-by-Goal

What is your risk capacity? How well can you afford a loss? Your capacity for risk depends upon your:

  • Investment time horizon; and,
  • Need for ready cash (liquidity).

What is your tolerance for risk. What will be your emotional reaction to a loss (investment uncertainty)? Will you be comfortable and at ease if you know that part, or all, of your portfolio consists of higher-risk investments?

These are important considerations for you to take into account, not just for the well-being of your portfolio but also for your personal well-being. Before you enter the investment arena, be sure of what your risk capacity and tolerance are. If you're not sure of these, check out Who Am I?

Step 4. Choose Appropriate Investments

Finally, it’s time to buy. Stop! Have you completed steps one through three, above? No? Have you ever been disappointed or angry with the performance of a stock, bond or mutual fund? Maybe it was the right investment, but for the wrong reason.

Choosing appropriate investments is really about matching the risk and return characteristics of different securities with your investment objectives. Completing the self-discovery process will increase your investor readiness. Give it a try.

Investment returns related to cash and fixed income investments are much less variable than those of equities. They are better investment choices to achieve stability and capital preservation. Potential returns offered by equities far exceed those offered on fixed income investments. Investment growth is the benefit of accepting this inherent volatility. See the section Types of Investments for a comprehensive review.    

Step 5. Choose an Appropriate Investment Account to Suit Your Goal

After you’ve gone through steps one through four, above, and you've decided that it's time to jump in the investment pool, you need to pick the type of account or asset to use. Registered plans and accounts may come with “free money” and tax sheltering of investment returns. It’s worth your time to discover which one will suit you best. For more detailed information, check out  Pick and Choose Accounts.