Match Your Investments to Your Goals

What type of investor are you?

How do you create a sound investment plan that fits your personality and life circumstances? Start by using realistic assumptions about the returns you are pursuing - assumptions based on the performance of various investments over the past five-year and 10-year periods. Then factor in your investing time frame, financial goals and tolerance for risk. That's a plan to which you can stay committed in good times and bad.

Your time frame:The more distant your goal, the more investment growth you need to overcome the effect of inflation. Historically, stocks have offered long-term returns that have stayed ahead of inflation. Keep in mind, however, that past performance is no guarantee of future results.

Your goals:
Are you planning to use some of the money before retirement? Then you may want to keep that portion out of your RRSP, as RRSP withdrawals would be subject to steep withholding taxes. There are two exceptions: You may be able to borrow up to $25,000 to buy your first home, and up to $20,000 if you're planning to go back to school. However, you must repay the money to your RRSP within 15 years.

Your risk tolerance:
You don't want a portfolio with a risk level so worrisome you lose sleep over it. Instead, aim for a diversified portfolio that mixes stocks, bonds and cash investments. With the mix that's right for you, you're more likely to stick to your goals.

Financial planning professionals generally classify investors based on how they respond to a series of questions. Consider the three below: If you tend to pick (a), you are a conservative investor; if you select (b), you're moderate; and if you opt for (c), you're aggressive.

  1. The target date of my investment is:
    • a. less than five years
    • b. five to 10 years
    • c. more than 15 years
  2. If my investments lost 20% of their value, I would:
    • a. quickly sell them and invest in something safer
    • b. do nothing
    • c. buy more
  3. Which would you prefer?
    • a. $2,000 in cash
    • b. a 50% chance to win $5,000
    • c. a 20% chance to win $15,000

Based on these answers and other information, a financial advisor would recommend an investment mix suitable for that type of investor. For example:
Conservative: 40% stocks, 50% bonds, 10% cash
Moderate: 60% stocks, 35% bonds, 5% cash
Aggressive: 100% stocks

Use these results as a starting point for translating your comfort with risk into an investment strategy that works for you.

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