Finding your best investment approach: 4 considerations
CONSIDERATION #1: TIMING
Your investment time horizon is one of the most important influences on your investment approach. If you'll need access to the principal to pay for a substantial expense, such as the downpayment on a home or college tuition, you'll want a more conservative approach to your investments. Same applies if you're relying on your investments to generate income for you now or in the near future because you're retiring, reducing your employment income or have already retired. You can be growth-oriented if your investment time horizon is longer, because you can withstand greater fluctuations in the value of your accounts. ETFs can be used in either short-term or longer-term investment approaches, but we feel they're most effective when your time horizon is longer.
CONSIDERATION #2: RISK TOLERANCE
Your risk tolerance is a combination of two things: your personal attitude towards risk, particularly when it comes to your money, and the level of risk you can afford, given your investment time horizon and your financial capacity to withstand fluctuation in the value of your investments. Your personal attitude towards risk can change over time, as well as with increasing information and experience with investments. ETFs are not an inherently aggressive or conservative investment approach, but if you are risk averse, you may find that there are better ways than ETFs to generate reliable returns.
CONSIDERATION #3: GOING GLOBAL
ETFs are an excellent way to get exposure to global markets, something that any growth-oriented approach should include. Of course, you can get ETFs that track Canadian and U.S. indices, but our experience of the past and understanding of future global economic and cultural forces tells us that there are more effective approaches to domestic investing than ETFs.
CONSIDERATION #4: TAX IMPLICATIONS
Interest income is taxed at the highest tax rate, while dividends paid on stocks and capital gains are taxed at a lower rate. If you have high taxes on your income, your investment approach should minimize tax liability or at least defer it until after retirement, when presumably your income will be less. When it comes to ETFs, portfolio managers will choose different ETFs for RRSPs, RRIFs, TFSAs and non-registered accounts, taking into consideration currency conversion and investment timeline.
Find out if ETFs are for you.
Use our quick, six-question assessment to learn whether ETFs are the appropriate investment product to meet your financial goals. Based on your answers, we'll send you a report with your results and helpful advice on next steps.