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5 steps to successful investing


As the saying goes, success is where preparation and opportunity meet. For investors, what does it mean to be prepared? These five steps will help you identify your needs, choose your most suitable asset allocation and lead you toward your financial goals step by step.

Step 1: Assess your risk tolerance

Conservative? Balanced? Aggressive? Which approach suits you?

Deciding to start investing is the crucial first step on every investor’s five-step investment journey. Of the five steps, the first is to assess your risk tolerance and decide what mix of assets you need.

Different people have different attitudes about investing. You may not be willing to take any risks or withstand losses, and would rather forgo potentially higher returns. You may be willing to take some risks but want to avoid serious volatility. Or you could be willing to take risks in exchange for returns that outperform the markets.

Gauging your risk tolerance

How do you gauge your risk tolerance? Look at your investment horizon. Put simply, the more time you have to invest, the more risks you can take because you have the time to ride out the markets’ ups and downs. That’s why, for example a 30-year-old who plans to retire at 65 can typically invest more aggressively than a 70-year-old retiree.

Imagine this 70-year-old retiree relies on their investments for income. They need their portfolio to be conservative and focused on preserving capital even in the face of market volatility. Of course, this doesn’t necessarily mean the 70-year-old retiree should completely avoid more aggressive investments. The risk of outliving your money can be tempered by maintaining some more aggressive growth-oriented investments in your portfolio.

Setting your goals

Your risk tolerance is also directly linked to your life goals. Ask yourself if you need to set aside funds for your children’s education. Are you going to buy a property in the near future? These factors will have an impact on your cash flow. And what about unexpected expenses? You may need to reserve some cash at all times just for emergencies.

Step 2: Diversify your investments

Balancing risk and return is the key to long-term investment success

In a perfect world you would have access to worry-free investments that always deliver top performance. But, of course, the truth is that there are ups and downs in all economic cycles and markets are unpredictable. Even investment experts can’t reliably predict market performance.

Going from first to worst

Historical data shows that the same asset can perform drastically differently during different investment cycles. The best-performing asset one year can turn out to be the worst performing asset the next year. No one particular asset can be a winner all the time.

This means investors should avoid putting all their eggs in one basket and instead allocate assets across different sectors and geographies. This can help diversify risk in an investment portfolio, and capture investment opportunities at different times—earning more stable returns in the medium to long term.

Understanding correlation and diversification

To make diversification work, different asset classes held in a portfolio should be a mix of assets with varying degrees of correlation. The degree of correlation measures how different investments react to the same economic and market conditions.

Consider how highly correlated shares of Canadian energy companies react to weaker oil prices. Their high degree of correlation means the shares of most energy companies will tend to fall together if oil prices fall.

The opposite happens when there is low correlation. Sticking with our example of falling oil prices, while an energy company will see its shares fall, shares in a manufacturing company could rise if oil prices fall and the company’s energy expenses are reduced. In this example, we see that an energy company and a manufacturing company have relatively low correlation.

Step 3: Have an asset allocation plan

Hit your investment targets with the right approach

Once you have identified your investment targets, you can put your cash into different asset classes and construct a portfolio based on your risk tolerance. The idea of asset allocation is to include equities, bonds and other investment tools in a portfolio. Since different investment vehicles come with different risk-return profiles, asset allocation is complex and can benefit from professional advice.

Generally, the higher the potential return of an asset class, the higher the risks it carries.

Asset class Potential risk General characteristics
Equities High Relatively high return, depending on economic cycles
Bonds Medium to low Relatively low return and low volatility compared to equities, tend to pay interest regularly and generate fixed income
Cash Low Return on savings is dependent on deposit rates, which might not be able to catch up with inflation

Investors who are willing to take risks tend to see their investment portfolios more heavily weighted in equities, while those wishing to moderate volatility tend to take a more balanced approach. For conservative investors, bond funds are a good option because of their relatively lower risks.

Step 4: Assess investment performance

Investments need a checkup

Generally, a well-designed investment portfolio can help investors reach their risk-adjusted investment goals over time. But economic changes and financial events can profoundly affect the market. Industry fundamentals will also change, which will have varying effects on different asset classes within a portfolio.

For instance, central banks from around the world adjust their monetary policies from time to time. Changing interest rates will affect the prices of equity, bonds, foreign exchange, and real estate to varying degrees. When the economic environment and market condition change, securities that are expected to outperform may become laggards, and underperformers may shine.

Over time it’s critical to regularly assess the performance of your portfolio against your investment goals. Regular assessments can help you stay on track to meet your expectations.

Step 5: Rebalance your investment portfolio

Rebalance your asset mix to stay on track

A lot of people understand the importance of asset allocation. Yet many fail to maintain their optimal asset allocation consistently, which can put long-term goals at risk.

The proportions of different assets within a portfolio change over time as their prices tend to move up and down with the market. For instance, during bull markets, equity prices will rise while other asset classes might stay stable or even drop. This will tilt the weighting of your portfolio towards equities and increase your risks.

Rebalancing your portfolio back to its original asset mix can avoid these risks. Rebalancing involves selling assets that have gained in value and reinvesting undervalued assets. Making adjustments regularly can maintain appropriate risk levels and keep your portfolio aligned with your goals.


Information provided on this page is for information purposes only and does not constitute any financial, legal, tax, investment, or other advice and should not be relied upon in that regard. Any graphs, charts, or graphics are used for illustrative purposes only and do not reflect any future event or future value or performance of any investment or investment strategy. Click to read more