It’s not surprising that the world of investing can seem complex. Investors today face often-changing market conditions. An endless supply of market news. And many, many investment choices.
So what guidelines can investors follow to achieve better results over time?
The principles of successful investing are quite simple. These five tried and true principles can help you build an effective long-term strategy designed to achieve your financial goals.Watch our Masterclass Minute videos for a quick introduction.
5 simple principles in just 5 minutes to help you master the basics of investing:
- Principle 1: Get started
- Principle 2: Invest regularly
- Principle 3: Invest enough
- Principle 4: Have a plan
- Principle 5: Diversify
Starting early is one of the best ways to build wealth. Investing for a longer period of time is widely considered more effective than waiting until you have a large amount of savings or cash flow to invest. This is due to the power of compounding.
Compounding is the snowball effect that occurs when the dollars you earn investing generate even more earnings. Essentially, you grow not only the original amount you invested, but also any accumulated interest, dividends and capital gains. The longer you are invested, the more time there is for your investment returns to compound.
Investing early can pay off over the long term
The "early" investor gets a head start, accumulating an additional $86,676 by age 60
The chart represents an “early” investor who invests $200 per month for 40 years and a “late” investor who invests $400 per month for 20 years. Both investors have invested a total of $96,000 by age 60.
Assumes a 4% annualized rate of return. Used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of any particular investment.
Source: RBC Global Asset Management Inc.
Investing often is just as important as starting early. This way, investing remains a priority for you throughout the year – not just around certain deadlines, like the yearly RRSP contribution deadline. Having a disciplined approach can help you build more wealth over time.
When you invest regularly, you can also ease into any type of market (rising, falling, flat). You don’t have to worry about trying to find the perfect time to invest. By simply investing a fixed dollar amount on a regular basis, you can buy more investment units when prices are low, and fewer units when prices are high. This can potentially reduce the average cost of your investment over the long term.
Investing small amounts of money on an ongoing basis can help smooth out returns over time and reduce overall portfolio volatility.
Your monthly savings can really add up
| Number of years invested | Monthly contribution amount | |||
|---|---|---|---|---|
| $50 | $100 | $250 | $500 | |
| 5 | $3,309 | $6,618 | $16,545 | $33,090 |
| 10 | $7,335 | $14,670 | $36,674 | $73,348 |
| 15 | $12,233 | $24,466 | $61,164 | $122,329 |
| 20 | $18,192 | $36,384 | $90,960 | $181,921 |
| 25 | $25,442 | $50,885 | $127,212 | $254,424 |
Assumes a 4% annualized rate of return. Used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of any particular investment.
Source: RBC Global Asset Management Inc.
Achieving your long-term financial goals begins with saving enough today. Saving for a major goal like a house, post-secondary education or retirement requires significant thought and decision making. It is vital to know how much you need to begin saving today to have a large enough investment portfolio for your future goals.
In general, the more you save today, the less you will need to save in the future to achieve the same goal as someone who invests over a shorter period of time. Your current income is a useful starting point for calculating certain long-term goals, like your retirement savings needs. The more you make today, the more savings you will likely need to fund your lifestyle in retirement.
What is your goal (e.g. retirement lifestyle, cottage)?
What is the time horizon required to reach your goal?
How much will you need to attain your goal?
What savings do you currently have in place to meet your goal?
When markets turn choppy, even experienced investors can become too focused on short-term movements.This can lead to hasty decisions, especially trying to time the markets. For example, investors see markets rise and jump in – buying high. Or, they see markets fall, lose confidence and sell at a loss. The key to avoid making rushed investment decisions is to maintain perspective and focus on the long term.
With a well-structured plan in place, you can confidently stay committed to it. And you’ll know that day-to-day market fluctuations are likely to have little impact on your longer-term objectives, or on the investment strategy designed to get you there.
Remember: there will always be events that affect equity markets in the short term. But over the long term, markets have historically moved ahead.
Chart illustrates the growth of $10,000 in the S&P/TSX Composite Index (total returns) from January 1, 1973 to December 31, 2022. An investment cannot be made directly in an index. Graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Source: Bloomberg, RBC Global Asset Management Inc. Values and performance are in CAD.
Source: RBC Global Asset Management Inc.
When it comes to investing, one of the easiest ways to manage risk and improve your probability of success is to have a variety of investments. You can diversify your portfolio across different asset classes, geographical markets and industries. Why is this so important?
Different financial markets do not move in the same way at the same time. At various points in the market cycle, different types of investments or asset classes – such as cash, fixed income and equities – will lead or lag. They may respond differently to changes in environmental factors: inflation, the outlook for corporate earnings, and changes in interest rates for example.
When you diversify, you are better positioned to tap into opportunities across different investments as they emerge. This tends to create a smoother investment experience. How? Investments that increase in value can balance out those that are not performing as well.
A strong case for diversifying your investment portfolio
| {{ year }} |
|---|
| {{ quiltTranslateMap[yearData[y][k].key] }} {{ formatCurrency(yearData[y][k].value, 'en', 1, '%') }} |
| Equities |
|---|
{{ col.title }}{{ col.subtitle }} |
| {{ name }} |
| Fixed income |
|---|
{{ col.title }} {{ col.subtitle }} |
| {{ name }} |
{{ col.title }} {{ col.subtitle }} |
| {{ name }} |
Balanced Portfolio represented by 2% Cash, 38% Canadian bonds, 15% Canadian Equities, 25% U.S. Equities, 15% International Equities and 5% Emerging Market Equities. All performance is in C$. Source: RBC Global Asset Management Inc. as of December 31, 2021.
Is well positioned for the long term
Successfully navigates temporary periods of market volatility
Takes advantage of opportunities as market conditions evolve
Thinking about how to save or invest your money? Your advisor can help you put these investment principles into practice and keep you focused on your long-term plan.
Ready to get started? Invest now.
