Top Questions to Ask Yourself When Investing?

Top Questions to Ask Yourself When Investing?

I have had many conversations over the past year with friends and family members who are looking to invest some of their capital in the financial markets, especially in light of the volatility in 2018 and market rally over the last few years. I have included below a few questions that I ask colleagues when they bring up this topic and a few items that they ask me.

“What is the purpose of your investment?”

This is the first question that I bring up when I am asked about investing. This question usually guides the entire decision-making process of where the funds should be allocated amongst the different types of registered and non-registered accounts and what kind of investments should be invested in the account. The strategy that you would use for your retirement savings should not be the same as your house down payment which should not be the same as any “play” funds.

“What is your investment timeline?”

The general rule is that the closer your timeline is, the more you should have in cash like instruments such as a high-interest saving account or cashable GIC. One example is purchasing a house. Earlier this year I met with a couple in their 30s, and they said that they had been saving diligently to put a down payment on their first house and they were currently invested in the equity markets as they had been going well and they had been able to grow their savings. I told them that regardless of how the equity market has done, since they were close to their proposed time of purchasing a house, they should start moving funds to cash so that a pullback in the markets wouldn’t throw them off course and that I would not be willing to take their funds to invest as I didn’t want feel like our team was the ones responsible if they weren’t able to make their goals. Unfortunately, they did not heed our advice and had to postpone purchasing a house to later in the year when the market pulled back on inflation and growth fears.

On the other side, with an account such as your RRSP which is slated towards investment growth, you can be significantly more aggressive with your asset allocation to more aggressive investments like equities. While equities take on much more risk, over a longer-term time horizon they outperform all other asset classes if you can stay invested for the long term.

“How much are you prepared to lose?”

This question is quite often linked to the investment timeline question and the why question. With behavioral finance, investors often place a higher value on a unit of loss compared to an equal unit of gain. This becomes amplified when taking into account when accounting for what not meeting your goals would mean to your lifestyle and how a 10% loss would make you feel. Going back to the earlier example of purchasing a house, if you were to lose 10% of the funds and this caused you to postpone your house purchase would have a much more significant effect on your lifestyle and goals than if the funds were to appreciate by 10%.

“What type of account should I use?”

There are three main types of accounts that are available to invest in when you are doing it yourself, Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and non-registered investment accounts. Each type of account has different features available to it and various pros and cons.

TFSA:
A TFSA is funded with after-tax dollars and all of the funds invested in the account grow on a tax-free basis, up to a specified contribution room limit. A TFSA is an excellent location to benefit from compound growth over a more extended period. Each year the TFSA contribution room grows by an annual limit, and you can carry forward any room that you haven’t used in the past. (For 2018, the maximum contribution room is $57,500 and will grow to $63,500 for 2019). Furthermore, any withdrawals from the TFSA can be contributed in the next calendar year (So if funds were taken out to purchase a house, they could be re-contributed at a later date for another goal).

RRSP:
A RRSP is funded with pre-tax dollars, and you receive a tax deduction when you file your tax return. An RRSP is based upon your earned income the previous year and takes into account any employer retirement savings programs you may have at work. Each year, when you receive your notice of assessment in your tax return, the Government of Canada will inform you of your contribution room for the current tax year. An RRSP is designed as a tax deferral mechanism and is best used to make contributions at a higher tax rate while you are working and withdraw funds in retirement when you are theoretically at a lower tax rate. In 2018, many corporations are no longer offering defined benefit pension plans, and RRSPs are becoming the predominant way for Canadians to save for their retirement. RRSPs also have tax consequences. Since the funds are contributed as pre-tax income, any funds that are withdrawn from your RRSP are added to your tax return as income. This feature makes RRSP as poor investment vehicle for short-term savings due to the additional tax consequences.

Many additional features apply to RRSPs, but the major one that our younger clients use is the First Time Home Buyers Withdrawal. This feature allows you to withdraw up to $25,000 from your RRSP tax-free to use towards a down payment on a house, with repayment over the next 15 years. This is an excellent feature as it allows you to use your RRSP for a short-term goal of purchasing a house while not facing tax consequences and receiving the RRSP contribution tax benefits.

Non-Registered Investment Account:
A non-registered investment account is the simplest type of investment account. All of the income generated in the account and any gains from investments are taxable, but there are no special tax treatments or rules for this type of account, making it an excellent place to invest funds once you have topped up your TFSA and RRSP.


With most clients, I recommend topping up your TFSA first to benefit from the compound growth of investments over time, then RRSP, then a non-registered investment account. The most important thing to consider is aligning your goals for your investments and time horizon and matching it with the features of the investment vehicle.

“What types of investment options are available to me?”

In 2018, many different investment options are available; from discount brokerages such a BMO Investorline, to robo-advisors such as BMO Smartfolio or Wealthsimple to working with a full-service advisor such as our team.

Dicount Brokerage
A discount brokerage puts you in full control of your investments. You get the ability to choose what type of account you open as well as what investments will go into the account, and as such you are the one responsible for determining your risk profile and making the investment decisions. Discount brokerages often charge the lowest fees of all of the investment options and offer a range of products from ETFs, mutual funds to individual stocks but have limited support compared with a full service brokerage.
           
Robo Advisor
A robo-advisor is an option between a discount brokerage and working with an advisor. Quite often you will fill out a risk questionnaire, and the algorithms will match you to a model portfolio of ETFs or mutual funds that will meet your goals.  In terms of service, this investment option is a step above a discount brokerage and has higher fees. These portfolios are a one-size fits most solution, and it is up to you to choose the right profile for your investments. One of the benefits of the robo-advisor platforms is that it allows you to benefit from professional management of the funds while overseeing the overall strategy of your funds.

Investment Advisor
Finally, an investment advisor is the highest level of service that you can work with, and a team such as ours can help you consult on a wide variety of financial issues such as financial planning, insurance planning, banking, consolidated tax summaries to make tax time easier, helping with your lending needs and more customized investment solutions suited to you. We are like the five-star hotel option for investing; we look at you holistically to fully understand your goals and best help you strategize to help you achieve them. With these extra services, there are additional costs, but it comes back to “you pay for what you get.”

One of the benefits of working with an advisor at BMO Nesbitt Burns is that we can recommend investments across the spectrum of options to help you choose the ones that are best for you. If you are young and just finished paying off student debt and do not need the full suite of products offered by BMO Nesbitt Burns, we can work with you with options like Smartfolio until you can fully benefit from the “white glove” service provided by our team.

Conclusion

There are many reasons why you should invest your funds to reach your goals and many ways to invest and securities and instruments to select, each one with their benefits and negatives. It is essential to consider all of the questions when you are investing your funds or reviewing your investments


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