Be Strategic: 5 Things to Keep in Mind When Investing

If only investing were as simple as putting money into an investment and watching it grow. In reality, you need to do your homework, consider all the options and develop an investing strategy that meets your needs and goals. Whether you’re just starting out or reviewing your existing portfolio, it’s always worth reminding yourself about some of the key things you need to have on your radar.

Tip #1: Keep your emotions in check

It’s natural to feel excited about a soaring stock or get angry about a falling share price, but allowing those emotions to affect when you buy or sell an investment can undermine your performance. “Emotions,” says Michael Sherman, an RBC Behavioural Economics expert, “can hijack your investment decisions.”

Of course, that’s easier said than done. First, stay focused on your plan and goals. Whether you’re a long-term investor or a more active trader, you’ll want to create a plan that outlines your investment strategy and acts as a north star to help you reach your goals. Before making any decisions refer back to your plan so you don’t do anything rash. Keep the concept of loss aversion in mind, which is the idea that we feel the pain of losses far more intensely than we get enjoyment out of gains. Find more tips in 3 Timely Reminders During Market Volatility.

Tip #2: Do your research

Informed investors are the best investors, which means doing some research before buying and selling any securities is a must. For more active traders, that might mean studying a variety of technical charts to help you form an opinion on your trades. For longer-term investors, that may involve reading analyst reports and looking at company metrics, such as price-to-earnings ratios or sales figures. While you can’t look at everything, the more research you consider, the stronger conviction you can have on where the companies in your portfolio may go. Get ideas in Where to Get Started With Your Research.

Tip #3: Be mindful of inflation

Investors have always had to be mindful of rising consumer prices to help gauge the health of an economy, but with inflation still above the Bank of Canada’s 2 per cent target, ignoring it now could affect your future wealth. Real returns are adjusted for inflation and taxes. Say you’re earning 2.5 per cent today, and inflation is at 3.4 per cent, which is where it was in December 2023, then you wouldn’t be growing your money enough to cover the increasing cost of goods.

To have enough money to cover your retirement, you’ll likely need to build a portfolio that will outpace inflation, as costs – including medical, transportation and others – tend to rise over time. If your returns aren’t keeping pace, consider increasing the amount you are setting aside, if feasible. Understanding the Risk-Return Relationship of stocks can help you determine if an investment is right for you.

Tip #4: Consider asset allocation

The main benefit of achieving an appropriate asset mix is diversification, which is important because financial markets in different sectors, asset classes and geographies typically don't all move in the same direction at the same time. In a diversified portfolio, the positive performance of some investments could offset the negative performance of others. This can help reduce overall portfolio volatility. Diversification also allows you to take advantage of different opportunities. For instance, a number of Canadians have the majority of their money in Canadian companies, despite this country only making up 3 per cent of the MSCI All Country World Index. That can cause them to miss out on good businesses in the U.S. and elsewhere. It’s what’s known as home country bias.

Check out How to Analyze Your Investment Portfolio for an easy way to review your asset mix.

Tip #5: Timing isn’t always everything

Research has proven time and time again that it’s nearly impossible to perfectly time the market. An alternative is to develop a strategy around buying and selling investments that is aligned with your goals and capabilities. Using the charts or metrics you’ve studied, put some thought around when to purchase and how best to maximize your portfolio. Certain active traders, for instance, may buy stocks in the morning and sell at night, while some longer-term investors may want to keep their money invested through various market cycles. For more perspectives, check out A Time Machine for Investing? Sign Me Up and learn more in Know Yourself: 5 Qualities Direct Investors Share.