Thursday, 22 May 2008

A Process to Build a Sound Investing Plan

"If you don't know where you are going, you might end up someplace else." Legendary baseball player and manager Yogi Berra's words (and other delightful quotes here) apply perfectly well to DIY investing. A bit of simple and straightforward planning will yield significant benefits - having the right amount of money at the right time in one's life. It will also provide the confidence and peace of mind to withstand the inevitable shocks along the way.

Following a certain sequence of steps or a process will make it all seem natural and will avoid going down the wrong path, saving the DIY investor time, effort and money. This blog will therefore go through a series of posts illustrating and explaining these topics:
  1. Setting Investment Objectives: why are you investing? retirement, education, sabbatical, inheritance/legacy, house, vehicle, other significant future expenditure; or perhaps even gambling / speculation / entertainment; this determines, or helps determine, target amounts, time frame, types of investments / portfolio mix, type of accounts (RRSP, RESP, TFSA etc)
  2. Taking Financial Stock: what do you have now and what is available to invest? assets vs liabilities; income vs expenses; effect of job stability and work pension or stock purchase plan; human capital; investing monthly cash or a lump sum
  3. Investment Building Blocks: the Range of Securities & Products Available: "the ingredients", such as stocks, bonds, cash, GICs, T-bills, CSBs, Income Trusts, preferred shares; mutual funds, ETFs, REITs, ETNs, PPNs, seg funds
  4. Investing Principles: what are the important rules for success in the investing world such diversification, risk vs return relationship, taxes, inflation
  5. Risk - How Much Can You Afford and How Much Can You Put Up With?: risk as loss and volatility
  6. Diversification and Avoiding "Diworsification": the difference between many holdings and different holdings; non-correlated assets and asset classes
  7. The Written Investment Policy, Don't Invest a Cent Without It: asset classes to hold and in what proportions, under what conditions and/or how often to buy or sell; benchmarks for tracking and how often to review
  8. Account Choices: Regular/taxable, RRSP, TFSA, RESP, Informal Trust, Formal Trust, Mutual Fund, Wrap/Discretionary
  9. Broker Choices: comparative factors - trading costs, admin fees, range of accounts, research tools, service and telephone support, foreign exchange in registered accounts; convenience or fee reductions for family holdings, links to banking
Hopefully, we can thereby avoid later saying as Yogi did, "We made too many wrong mistakes" and instead become competent investment players who hit for a decent batting average.

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