Investment planning

Investment planning is part of the long-term process of managing your finances so you can achieve your goals and dreams. It is recommended that you set specific and realistic goals, figure out how much to regularly save, choose an appropriate investment strategy and develop an investment policy statement. This article attempts to guide you through the process.

Educate Yourself
If you have never taken the time to educate yourself on investing basics, you should do that now. There are several easy-to-read books that do not require math knowledge, finance interest, or hours to read. Check out recommended reading for a listing of books on various investment topics. Explore further within this wiki using other articles links via categories and navigation boxes.

Our sister US site, Bogleheads, is another useful resource for reading materials.

Investment Plan
After educating yourself, the first step on your investing journey should be to settle on an investment plan that includes your desired asset allocation. Your investment plan should look out into the future and include things like a new car or home purchase in a few years, education expenses for children, and retirement, just to name a few. All of these goals require money in different time frames, and the money should be invested accordingly. Studies have shown that your asset allocation will determine more than 90% of the variation in your portfolio return, so you should focus on your asset allocation first rather than on fund selection.

Since risk and return are directly related, your asset allocation should balance your NEED to take risk with your ABILITY to withstand the ups and downs of the market. NEED can be determined in many different ways. If you are young, you have the benefit of many years of compounding, so in one respect your NEED to take risk is low. On the other hand, your portfolio size is probably small, leaving you with a long way to go to reach your retirement goals. As a result, you could argue that your NEED to take risk is high.

For people closer to retirement, it may be possible to more closely determine NEED. First, estimate approximately how much income you will need annually after retirement. For this example, we’ll assume you need $100,000 per year. Next, look at any pensions or government benefits that will provide a source of income. If a pension plan provides $30,000 per year and your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits provide an additional $20,000 per year, then your investment portfolio would need to provide an extra $50,000 each year. To prevent running out of money, you should probably start by withdrawing 4% a year or less with an annual inflation adjustment. To generate $50,000 per year at 4% requires a minimum portfolio size of $1,250,000. How close are you to your goal?

Turning to ABILITY, this relates to your ability to withstand the ups and downs of the market without getting nervous and making changes to your asset allocation. Selling in the face of a decline is about the worst thing you can do. Here is a table offered by author Larry Swedroe, based on the 1970s bear market:

There are other ways to determine an asset allocation, including several rules of thumb:


 * Your age in bonds. So, if you are 40 years old, then use a 60/40 (equity/bond) allocation.
 * 110 minus your age = equities (110-40 yrs old=70/30 asset allocation)
 * 120 minus your age = equities (120-40 yrs old = 80/20 asset allocation)

Asset Allocation
Once you have identified the split between stocks and bonds, you need to focus on whether you prefer to use funds that cover large parts of the market (Total Market funds) or whether you prefer to slice and dice your portfolio into sub-asset classes.

One part of the market that everyone needs to consider is international investing. The Canadian stock market is far less diversified than the US market, and is highly dependent on just three sectors: financials; energy (oil and gas); and materials (gold and mining). Therefore, an investor who purchases only Canadian securities has too much of a home country bias and may have insufficient sector diversification.

Portfolio Construction
After settling on your primary asset allocation you can turn to selecting funds that flesh out your desired asset allocation and placing them in the most tax efficient manner. If you do not have taxable accounts, then tax efficiency isn’t a huge concern but it is still a factor that should be considered. It is usually best to consider all of your investments together. If you are married you should usually blend accounts held by both spouses into one unified portfolio.

The best place to start building a portfolio is by making a list of all your current investment accounts and the investments in each account. Finally, you must consider the tax consequences of investing, especially in taxable accounts. Generally, the most tax efficient way to use your different accounts is (our thanks to Taylor Larimore and David Grabiner from our sister Bogleheads forum for this list):


 * 1) Invest as much as possible in your tax-deferred and tax-free accounts.
 * 2) Put the most tax-inefficient funds in your tax-deferred and tax-free accounts.
 * 3) Use only tax-efficient funds in taxable accounts.
 * 4) If all else is equal, put funds with higher expected returns in tax-free (Tax-Free Savings Account) (TFSA) accounts in preference to tax-deferred (Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF). Locked-in accounts (LIRA) and Registered Education Savings Plan (RESP)) accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):

Hi-Yield Bonds Taxable Bonds Real Return Bonds REIT Stocks Stock trading accounts Balanced Funds Small-Value stocks Small-Cap stocks Large Value stocks International stocks Large Growth Stocks Most stock index funds Tax-Managed Funds

Investing Priority
The general rule of thumb for investing priority is:
 * 1) RRSP up to the company match
 * 2) RESP up to getting the Canada Education Savings Grant (CESG) maximum
 * 3) Max out TFSA
 * 4) Rest of RRSP
 * 5) Rest of RESP
 * 6) Taxable Investing

Now that you have established your investment plan you can follow the Asking portfolio questions link to learn how to post your portfolio and receive many helpful suggestions.