Business & Personal Finance

In a recent article in MoneySense magazine, authors Preet Banerjee and David Hodges discuss how to build your financial wealth in 10 easy steps. According to the authors the steps aren't complicated but do involve planning, commitment and discipline. This is a summary of the steps they suggest you take to meet your financial goals:

Step #1: Start with a plan. If you are young you probably don't need a comprehensive retirement plan, but in a complicated situation you should probably seek financial advice from an expert.

Step #2: Make sure to put aside automatic biweekly or monthly contributions to your investments, be they TFSAs, mutual funds and so on. The authors suggest 10% contributions.

Step #3: Find the right balance for your portfolio. A traditional balanced portfolio  holds about 60% equities and 40% fixed income.  Young investors can afford to be riskier by holding more equities but as you age you have less time to recover from market ups and downs, so readjusting your portfolio by adding more bonds and GICs will protect your investments.

Step #4: Avoid unnecessary risk. Proper asset allocation is the key.  Although high returns on equities can fool you into investing more, having bonds in your portfolio will protect you from volatility and  provide you with a safety net when stock markets decline.

Step #5: Try to reduce hidden fees that don't show up on your quarterly statements. Mutual fund investors should take particular care when choosing funds since the MERs (management expense ratios) can really cut into your gains.  Look for a low-fee, no-load provider.

Step #6: Dont borrow money to invest if you are just starting out. This should be left to sophisticated investors with high-risk profiles, high incomes and high net worth.  Boost the size of your portfolio by increasing your savings rate first.

Step #7: Track your investments. If you have an advisor ask them to provide you with your personal rate of return on an annual basis and, if possible, compare them to an appropriate benchmark such as the S&P/TSX Composite.

Step #8: Avoid complex fancy packaged products and stick to the basics: stocks and bonds, GICs, and low-cost funds.

Step #9: Don't follow the herd.  Following a fad can cause investors to underperform. In reality it is very difficult to predict what the next hot investment will be. The best thing to do is to create a plan, stick with it and ignore the latest trends.

Step #10: Get financial help. It may be a good idea to use a fee-based adviser who is paid by you and not an investment company. This will provide you with a non-biased opinion on how your investments are doing and what you should be investing in.

Here are some books that can help you make wise investment decisions: