There was a time when a savings account seemed enough. Letting money work for you operated with low risk, but the return was small. Even now, the financial landscape in Canada and the United States features a mix of options beyond simple savings, with many institutions offering investment products and alternative savings solutions.
With this in mind, it’s important for clients to understand that there may be a certain return on invested capital, but not without risk, and losses can occur. In a world of uncertainty, this is a reality to consider. The guiding rule for investing remains the same as for other life decisions: approach it with common sense. Here are five practical recommendations for making reliable investment choices:
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Be clear about your goal
The first step before starting any project is to be clear about the purpose. The same holds for investing: before taking action, set a specific objective. For example, for a comfortable retirement, prioritize long-term growth and tax deferral (taxes are paid when funds are withdrawn). In this scenario, experts often suggest a mix of mutual funds, automatic savings plans, and retirement accounts.
If the aim is to grow income that complements a salary, the prudent move might be to invest in shares of dividend-paying companies. These are businesses that distribute profits to shareholders. One can invest directly in the stock market by selecting suitable companies or choose a savings-focused mutual fund.
A family may also have medium-term goals such as buying a home, funding a child’s education, or planning an enjoyable getaway. In these cases, simple savings can work, or one might seek a modest boost with minimal risk. Personal Individual Savings Accounts (PIAS) remain a solid option, offering regular contributions and redeemability, with tax benefits typically arising after five years.
Evaluate what risk you are willing to take
When it comes to investing, there is no magic trick: higher security usually means lower return, and the reverse holds true. Investors should act in line with their profile, whether conservative, moderate, or aggressive. It’s not about chasing a specific dollar amount but about how much loss one can endure without a financial setback.
Those prioritizing capital preservation tend to favor deposit accounts, guaranteed products, structured deposits, and savings insurance, which have varying risk levels. For a step further, fixed income and short-term debt—issued by both governments and corporations—can offer stability. Extending the time horizon may provide stable income in the medium to long term, though longer horizons bring more uncertainty. In a moderate approach, mutual funds, retirement plans, PPAs and Unit-Linked products can be chosen with adjustable risk levels.
On a higher risk tier, direct stock investments (risk declines with diversification), cryptocurrencies, or derivatives like CFDs or binary options can be considered. These carry significant risk due to complexity and volatility.
Time can be your ally if you know your rules
Time cannot be sped up or paused, so its rules must be respected. The investment time horizon answers the question: how long can you go without some savings to let them grow? This, combined with the goals described earlier, helps determine whether a short-, medium-, or long-term approach fits best.
As always, the risk-return trade-off is central. Short-term investments may demand higher risk to seek greater returns, such as funding a growth potential venture, but there is a real possibility of losing capital. In such cases, sensible actions limit exposure and avoid tying up all savings. Long-term investing, while markets are inherently volatile, often offers a more favorable balance over time as recovery periods lengthen. Diversification—across different asset types and timeframes—helps manage risk.
For longer horizons, it helps to remember that stock markets have historically trended upward over time. The longer the horizon, the smaller the chance of a total loss, though volatility can persist. Diversification should be understood in both spatial (several different investments) and temporal terms (varying entry points and holding periods).
Always have a financial pillow
After recognizing that investments carry risk and after setting goals, time horizon, and risk tolerance, it’s essential to ask how much to set aside. The widely advised rule is to invest money you don’t need for essential living expenses.
In practical terms, this means calculating monthly outlays against income and maintaining an amount set aside in traditional savings. The concept of a financial cushion becomes crucial: funds to cover unexpected events and market downturns without derailing the plan.
This cushion might cover three to six months of fixed expenses or even more. If monthly fixed costs are around 2,000, a reserve of roughly 6,000 to 12,000 provides a buffer before dipping into investments. Having this safety net helps weather market dips, meet unplanned expenses, and keep the investment plan intact.
Just as important as investing is reinvesting
A broad view helps see the full journey beyond the maturity and amount of a single investment. Time is an ally when reinvestment fuels growth. Reinvesting returns, rather than spending them, compounds the effect and expands the base.
The principle of compound growth is key. If an initial 1,000 euros earns 10% in a year, the profit is 100 euros. Reinvested, the next year’s gain rises to 110 euros, and so on, with growth accelerating over time.
Patience and discipline matter. If monthly profits are added to the principal, a snowball effect forms, and progress becomes increasingly exponential as new capital is added over time.