Take time to think about your overall financial situation and investment goals. Carefully considered the questions below and read the checklist before you invest.
Do you have money to invest?
Your financial well-being depends on careful planning. To assess whether making an investment is the best use of your money, at this time, here are some things to consider:
- Do you have enough money to cover personal and family expenses?
- Are you carrying adequate life, disability, property, and liability insurance?
- Would it be wiser to use extra funds to pay off debts or reduce your mortgage rather than making an investment?
If you have money available after meeting your financial needs, you are ready to think about your investment goals.
What are your investment goals?
Before making an investment, it is important to decide why you are investing and what you want to achieve. Once you've determined your investment goals, it will be easier to choose an investment that will meet your needs.
You may invest for a variety of reasons:
- To meet short-term goals like saving for a vacation, a car, or a down payment on a house. Investors with short-term goals often buy such investments as Canada Savings Bonds, term deposits, guaranteed investment certificates (GICs), or money market mutual funds.
- To earn investment income, which will supplement other forms of income. Bonds, preferred shares, or income mutual funds might be appropriate if investment income is your goal.
- To achieve long-term growth, so that you will have money for your children's education or your retirement. Suitable investments for long-term growth include common shares and equity mutual funds.
- To minimize taxes. Investing in a Registered Retirement Savings Plan (RRSP) is one way to minimize your current taxes. Money invested in an RRSP, and income earned on the investment, is not taxed until money is withdrawn from the plan.
Once you have determined your investment goals, the next step is to decide how much risk you are willing to assume in order to achieve them.
How much risk are you comfortable with?
Different investments have different levels of risk. Keep in mind that an investment
offering a higher return always carries a higher level of risk than one offering a lower
return. Investments such as Canada Savings Bonds and GICs are relatively safe, for example, but generally offer lower rates of return. Common shares of growth companies have a higher level of risk, but offer potentially greater returns.
Investing your money should not fill you with anxiety. Are you a conservative investor, concerned above all about safety of capital and stability? Are you an aggressive investor, prepared to take higher risks for the possibility of greater returns? Or are you a moderate risk taker, falling somewhere between? Once you have a clear idea of your investment goals and how much risk you are willing to assume, you are ready to start looking at specific investments.
Being a wise investor means taking the time to examine each investment before signing
on the dotted line. The following is a checklist of questions to ask yourself before committing to an investment. If you answer "yes" to most of these questions, the investment should be suitable for you. However, if you frequently answer "no," be cautious about proceeding.
The checklist is meant to be a starting point. Seek advice from an experienced professional to help you make your investment decisions.
Is the investment right for you?
- Does the investment meet your personal investment goals? Whether you are investing for long-term growth, investment income, or other reasons, an investment should match your own investment goals.
- Are claims about the investment realistic? Some things really are too good to be true. Use common sense, or get a professional opinion, when presented with investments that seem to offer unusually high returns compared to other investment options.
- Do you understand and accept the risks involved with the investment? Most investments include an element of risk. You should know what these risks are and be prepared to accept them.
- Are you putting too much money into one investment? Putting all your eggs in one basket is a risky proposition. If the investment fails, you stand to lose everything. Wise investors put their money into a variety of investments to achieve a balanced portfolio of investments.
- Can you sell the investment? Find out if you can sell the investment and, if so, how. Can you sell it through an exchange, or do you need to find a private buyer?
- Do you understand the conditions that apply if you withdraw from the investment? Find out if there are any restrictions or penalties that apply if you want to withdraw from or sell the investment in the future.
Do you understand the investment?
- Has the seller given you written information that fully explains the investment? Make sure you get detailed information about an investment before proceeding. You should be provided with enough clear and accurate information that you can assess whether the investment is right for you.
- Have you read the written information? Reading the written information carefully is one of the most important steps in making a wise investment decision.
- Do you understand the investment after reading the written information? Do not commit to an investment you do not understand. Get professional advice if you have trouble understanding anything within the written information.
The FCAA cannot tell you how to invest, but it can tell you if the person selling the investment is following the rules. If you have questions or concerns about investments, you can contact FCAA at 306-787-5645.