No, this isn’t a get-rich-quick article.
Research shows that financial security and wealth is, for most people, created over their entire working career.
What sets the wealthy ($1 million plus in invested assets, not including real estate) apart from the crowd are a couple of big factors.
First, wealthy people simply invest more for retirement than the average person — about 15 to 20 per cent of their gross income for their entire career. They start this investing habit as early as possible, which means they simply live on less in order to work this investing allocation into their budget. And they take advantage of any matching programs through work.
You can do the same by trimming back unnecessary spending and automating your contributions so they are made the same day you get paid. If work is offering you free money, sign up for their savings program!
Second, financially independent people align their risk profile with their investments, and adjust their risk exposure downwards as they age. I teach my students the five-point scale of risk; one being low risk and five being high risk. It’s key to take an investor risk quiz a minimum of every two years. Your score can be used to craft an appropriate investment strategy that matches your risk profile to investments that represent the same level of risk.
Now, the key to managing risk in your investments is to ensure you are adjusting your risk exposure as your risk score changes. Typically, this means less risk the closer you get to retirement.
Third, wealthy people keep their fees as low as possible (typically less than two per cent) while monitoring their returns to ensure they are keeping up with the market.
Yes! You’re going to have to pay fees for your investments. But the key is to avoid the double whammy situation where your fees are high and performance is low. You want the exact opposite. The rise of robo-advisors and low-cost ETFs are because they address this situation of high-fee low-performance scenarios.
The only way you’ll know what your fees and performance are is if you look carefully. So crack open those statements. Note that if you are into funds, you pay fees on your funds and possibly to your advisor, too.
Fourth, they take advantage of tax savings opportunities when investing. Your tax-advantaged investment account options in Canada are RRSPs, TFSAs and, typically, retirement savings plans through work. The tax savings (now and in the future) can be used towards other wealth-building activities such as buying real estate, investing in nonregistered accounts, and clearing debt. If you’re unsure about which tools you should be using to invest, book an appointment with a financial advisor, a money coach or a financial planner.
You can invest in any manner of investments within your accounts — mutual funds, ETFs, stocks, bonds and more. You’ll simply want to ensure that what you choose matches your risk tolerance and that’s where doing your research on any investment before you buy can really pay off.
My best two pieces of advice to help you invest better in 2022 are don’t do it alone, and have patience. There are advisors, blogs, books, courses and coaching that can help you be a great investor. I use all of these resources! Remember that building a strong investment portfolio will take time, so embrace the learning as you go.