Getting started

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For many people, reading financial material or carrying on a financial discussion is a baffling and humbling experience. Jargon flies, everyone but you seems to know what's being talked about, and you don't know how to distinguish good information from noise.

The purpose of this article is to provide good information to get started, simplified enough that the average person is able to handle their finances on their own and at minimal cost. You need not understand everything from the word go and you need not do everything immediately. Work at your own pace and within your own comfort zone, but do work at it.

Although a great deal of information is available, sorting through it is a major task. Let us consider the various stages in order, with links to the appropriate finiki sections or Financial Wisdom Forum topics.

Finally, and above all, remember these words:

Life is a journey, not a destination.

— Ralph Waldo Emerson[1]

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

— Charles Dickens[2]

Are you ready to invest?

Investing starts with a sound financial lifestyle. The first step to decide if you are able to invest. It is generally recommended that investing should only commence after you have saved a minimum of six months of living expenses (preferably more) in an emergency fund, and consumer debts are paid off. Sufficient insurance should be in place. You should budget a certain portion of your income for investing.

A financial plan makes recommendations in a number of areas. Financial planning is not about amassing a pile of money. The initial and most important step is identifying objectives (in a family, agreeing on shared objectives), e.g. buying a house, retiring early, ensuring that children get an excellent education, and so on. Determining what the objectives are is primary. Since what usually requires money in the modern world, financial planning then proceeds methodically to lay out how.

Here is the one minute version:

  • Spend less than you earn ("live below your means").
  • Save and invest a percentage of every paycheque, not what is left after expenses (and start saving early).
  • Don't put all your eggs in one basket.
  • Watch the pennies and the dollars will look after themselves.

Or graphically: Pyramid.jpg

Create an investment plan

You should start with defining the objectives of your investment. Is it for retirement? A new home? Vacation? When will you need the funds? In retirement, or for an upcoming purchase? You will need to define clear objectives, which are documented in an investment plan. In some cases, a more comprehensive investment policy statement (IPS) is appropriate.

Developing a financial plan starts with assessing your current position. These steps are covered in Financial Planning; in particular in Creating a financial plan and the Financial Wisdom Forum topic: Financial Planning.

If you need assistance, a financial adviser may be enlisted.[note 1]

At the end of the process, you will have an investment plan or investment policy statement and be ready to take the next step.

Set your level of acceptable risk

Diversifying your portfolio is the only way to mitigate risk. It is a compromise of investing horizon (how long until the funds are needed) and acceptable loss. Diversification is mostly determined by setting the ratio of equities to fixed income (bonds, guaranteed investment certificates (GICs)), and is known as asset allocation.

For most people, owning stocks (equities) is necessary to get the expected return needed to accumulate funds for retirement. Stocks provide us with a share of the profits generated by publicly owned companies. But in exchange for the hope of high return, stocks are volatile and risky. Stock prices can stagnate or decline for decade-long periods. This is why having an allocation to bonds is a necessary element of asset allocation. Bonds are a promise to pay back a loan of money on a pre-set schedule. Bonds do not produce the same expected high returns that stocks do, but they are much less volatile. The way to get reasonable growth without stomach-churning drops is to hold a mix of stocks and bonds.

You therefore set your level of risk, the tolerance you have to a decline in your portfolio's value, by adjusting your asset allocation. Rules of thumb to determine the proportion of equities vs. fixed income include "your age in bonds", for example if you are 40 years old, you could have 40% fixed income and 60% equities in your long term portfolio. All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's.

The goal is to select an asset allocation that lets you sleep at night, and avoid the destructive urge to sell out in a panic the next time the market plummets; then having to agonize over when its a "good time' to get back in. This leads to selling low and buying high, the exact opposite of prudent investing.

Create a well diversified, low-cost portfolio

Once the IPS is created, the investment plan must be implemented. This falls under Investment Management, in particular Portfolio design and construction, as the outlines of the required portfolio are determined. Note that it is only after the portfolio has been designed that fund or security selection - i.e. purchasing components - takes place. Many investors make the mistake of starting at this point. There are asset classes and investment styles to consider at this point. The goal is to create a well diversified, low-cost portfolio. It is important to keep investing costs as low as possible since fees such as management expense ratios (MERs) are highly detrimental to long-term returns. Index funds and exchange-traded funds (ETFs) are ideal portfolio building blocks and can be used to create simple index portfolios. For small accounts, low-cost balanced funds can be considered. Taxes should be taken into account when locating assets into different accounts such as RRSPs, TFSAs and non-registered accounts (see Tax-efficient investing).

Maintain your portfolio

Monitor your progress and rebalance

Main article: Rebalancing

Once you have created your portfolio you should monitor it's progress against your objectives. This involves calculating your return each year and comparing it to a suitable benchmark (see measuring performance).

As time passes, the actual portfolio asset allocation will start to deviate from the target because different asset classes behave differently. To control risk, it is important to establish a rebalancing policy; for example, many people rebalance their portfolio once a year.

Stay the course

Staying the course is perhaps the most challenging part of investing, but is essential to success. Investors should adopt a reasonable plan, put it in writing, and then stay the course. In exchange for the higher returns that stocks produce over time, the equity markets are volatile. After big drops, it can be very difficult to continue to follow your pre-set plan. Create an asset allocation that includes bonds to reduce the volatility caused by the stock part of your portfolio, then rebalance when needed. This takes discipline, but it is also an enormous relief to be able to tune out the endless chatter of when and what to buy and sell.

What comes later?

Investing is usually done to meet a particular goal, often retirement. This is covered in Retirement Planning. Once the goal of retirement is reached, Retirement Living examines some of the lifestyle choices. You should also give consideration to your estate plan.


  1. Before enlisting the services of a financial adviser, please ask for advice in our discussion forum. You may find that you are able to do this yourself.

See also


  1. Cited at Goodreads, viewed May 14, 2012.
  2. Cited at Quote by Charles Dickens: Annual income twenty pounds, annual expenditure..., viewed September 28, 2013.