At some point in your life, you might receive a lump sum of money that you can use as you wish. Under these circumstances, some might choose to use this money to buy a car, buy a home, or take a dream vacation. While these are popular options, some may explore starting an investment portfolio as another possibility.
An investment portfolio is a collection of financial assets, such as stocks, bonds, and real estate, that an individual or institution holds with the aim of generating returns over time. There are several types of investments a Canadian can purchase should they receive a lump sum. Options include:
- Registered Retirement Savings Plan (RRSP)
- Tax-Free Savings Account (TFSA)
- Registered Education Savings Plan (RESP)
- First Home Savings Account (FHSA)
- Non-Registered Investment Account
If you're not familiar with investing, it can be difficult to determine the right portfolio for you. This guide provides an overview of different investment options beyond the list above and factors to consider when choosing the right path.
What To Do Before Investing
Before you consider investing, keep one thing in mind: lump sums of money don't come often.
You may have existing financial needs to take care of first. Consider addressing these items before you start planning your portfolio:
- Take control of your personal finances: No investment guarantees a return in the first few years. Don’t rely on your invested money as a savings method, either; it’s not easily accessible, or its value may fluctuate in the near term. Ensure your regular income and savings match your personal needs first.
- Create a six-month safety net. Your lump sum is an opportunity for growth, but it's important to have a financial cushion in case of emergencies. Many people find it helpful to have emergency savings covering six months' worth of expenses as a financial cushion before investing.
- Pay off high-interest debt. While having some debt is normal, high-interest debt, such as credit card debt, will only hurt your financial progress. Addressing high-interest debt, such as credit card balances, could be a step to consider before exploring investment options.
- Make sure it's a good time to invest. Reflecting on external factors such as the state of the economy and personal factors like your own job security may help inform you if it's the right time to invest. It's important to have a secure foundation before taking any risks.
Leaving a lump sum in a low-interest account may limit its potential for growth compared to other financial opportunities. Stocks, bonds, mutual funds, and other investment options can provide higher returns that you can use or reinvest later. Plus, inflation will gradually reduce the value of your money, making it less effective for purchasing worthwhile items over time.
The Pros and Cons of Different Investment Options
Many people often view stocks as the main way to invest, but there are plenty of options beyond just the stock market. Consider the pros and cons of the following investment opportunities to help you make informed choices.
- Stocks. Stocks represent ownership shares in a company, granting you a claim on part of the company's assets and earnings. Stocks are often associated with long-term growth potential and can offer returns that may surpass other investment options. However, they come with higher risk and are subject to market fluctuations.
- Bonds: Bonds, which are loans to companies or governments, are often considered a more conservative choice for investment, particularly for those who want to generate a steady income and preserve their wealth; however, they typically yield lower returns than stocks.
- Mutual funds: Mutual funds are groups of stocks, bonds, and other investments managed by professionals. Although management fees can reduce returns, they allow investors to diversify their portfolios without the need to handle individual securities on their own.
- Exchange-traded funds (ETFs): ETFs are like mutual funds, but they trade on an exchange like stocks. They often have lower fees and offer more flexibility; but they require a bit more knowledge and they can be affected by market fluctuations.
- Real estate: Real estate ownership brings potential for appreciation, rental income, and tax benefits. But renting, maintaining, and "flipping" property involves maintenance costs and may require a significant initial investment.
Simple Checklist for Beginners Looking to Invest
If you want to kickstart your investment journey, here are some simple steps to follow:
1. Create your budget. A well-structured budget keeps your personal finances on track.
2. Set clear financial goals. This helps guide your investment strategy.
3. Know your risk tolerance or how much you can afford to lose. Understanding this is key to making informed decisions.
4. Decide on your level of diversification. Diversifying investments is a common strategy to distribute risk across different asset types.
5. Choose the best investment accounts for your goals. Different accounts offer various benefits and features.
6. Learn how to manage or adjust your investments. Staying informed allows you to adapt to changing markets.
When To Get Professional Investment Help
Hiring a financial advisor can be a smart move when dealing with complicated financial choices, like planning for retirement, managing large assets, or preparing for major life changes. If you're unsure about creating an investment strategy, feeling overwhelmed by your financial decisions, or looking for personalized guidance to match your investments with long-term goals, consider getting professional help.
A financial advisor can provide personalized guidance, offering insights on tax-efficient strategies and helping you adjust your portfolio to align with your evolving financial goals. Begin by looking for advisors with the right credentials, such as a Personal Financial Planner (PFP) designation or other recognized qualifications. Check their experience, fee structure, and client reviews.
It’s also key to find an advisor who understands your needs and communicates clearly. Talk to several advisors to find someone you’re comfortable with and who has a solid track record of helping clients achieve their financial goals.
The Right Guidance Means the Right Investments
No one knows your financial goals and necessities better than you. But getting the right guidance is essential to making the right investments to meet those needs. Focusing on emergency preparedness, managing debt, and exploring a mix of investment options tailored to your needs can contribute to your financial goals.