Being a smart investor will help you make better investing decisions and recognize the warning signs of investment fraud. GetSmarterAboutMoney.ca is your resource for unbiased investing information. Here are 7 tips to be a smart investor.
1. Check registration
Registration helps protect you
Always take the time to check that the person or business you are dealing with is registered with the securities regulator in your province or territory. Their registration status will also inform you of the products or services they are allowed to provide and if there have been any regulatory disciplinary actions. Registration also helps protect you from unqualified or fraudulent investment professionals.
2. Have a plan
Plan for the short- and long-term as well as the unexpected
Each individual’s investing needs and goals are unique. Having a plan means having a road map for reaching short- and long-term financial goals which could include saving for a new home, higher education, marriage or retirement. It provides you with an action plan and can instill financial discipline.
Life can also present you with unexpected events and unplanned expenses. A strong financial plan will also help you better financially weather these events.
3. Assess the impact of fees on investments
Fees can significantly impact your investment returns
You may have to pay fees to buy, hold or sell your investments. Common fees include mutual fund fees, ETF fees, RRSP fees and RRIF fees. Assess the impact of fees when choosing an investment and be aware that fees can differ between products and companies.
Try our Mutual Fund Fee Calculator. This calculator will show you how fees and other costs affect what you make investing in mutual funds.
4. Understand risk
Risk is the potential to lose some or all of the money you have invested.
You invest to earn a return on your money, but returns are not the only consideration. Risk and return are connected. In general, higher-risk investments offer higher potential returns, and lower-risk investments offer lower returns. This is known as the risk-return relationship.
5. Recognize the power of compound interest
Make your investments grow faster by reinvesting any interest earned
You can grow the money you save by investing it to earn a return. You can make your money grow faster if you also invest the money you earn (your return) along with the money you started out with. This is called compounding.
Try our Compound Interest Calculator to see how your investments could grow over time at different interest rates.
6. Understand the benefits of diversification
Diversification can help reduce risk
You’ve likely heard the phrase “don’t put all your eggs in one basket.” When it comes to investing, having a mix of different investments can help reduce risk and protect your portfolio from losing value (or money) all at the same time, especially if there is a downturn in the markets. The right mix is different for each individual and situation, but it could include a variety of stocks, bonds, cash and other investments in different industries, countries or asset class.
7. Protect yourself from frauds and scams
Know the common strategies and techniques fraudsters use
Investment fraud is easier to recognize when you know what it looks like. Always take your time to research and think before investing. Don’t give in to sales pressure. Ask questions until you are satisfied that you have a good understanding. If something seems too good to be true, it probably is.