Becoming a Client

Defining Your Investment Policy

Your investment goals may include having sufficient money for a comfortable retirement starting 20 years from now, or helping pay for your children’s education in five years.

Deciding on the right types of investments to meet your goals will depend on your personal situation. Think how much money you have to invest, the return you will need and when you will need your money back. Your income needs and your risk comfort level have a bearing on which investments are appropriate for you.

The importance you put on various investment objectives – the three key ones are capital preservation, income and capital growth – will influence how you mix your investments among the three main asset classes: cash, fixed-income and equities.

Example: If you are now 40 years old, and your goal is to retire at age 60, then you will likely need to include equities in your portfolio to get the capital growth you need to meet your goal.

Your investment goals will drive, at least to some extent, your investment objectives. And investment objectives determine, to a large extent, the kinds of assets you need to reach those goals.

Your investment policy, written out as a statement, contains the operating rules and goals you have set down to guide your portfolio. Two key parts of that policy are your investment objectives and constraints.

Constraints are limitations, which may affect reaching some of your investment objectives. They include legal restraints (for example, if you don’t have a spouse, you can’t use a spousal RRSP for income splitting). If you have a strong personal conviction against alcohol, you might decide you will not invest in liquor or beer companies.

Keep these seven major considerations in mind when you set your investment objectives.

• Risk
  Decide on the amount of risk you are prepared to take. Make sure the risk of your overall portfolio matches that risk level.
• Return
  Do you want to maximize return where assets are invested to make the greatest return possible within your risk tolerance? Or do you prefer a required minimum return with certainty, generating only that much return with emphasis on risk reduction.
• Time horizon
  Design your portfolio keeping in mind how soon you may need the money: If you know you will need all of your investment money in a year for a home down payment, it may not make sense to have it all socked away in stocks. Stocks are a long-term investment that expose you to price volatility, which means you risk having to cash out when stock prices may be down.
• Inflation
  Think how much inflation protection you need in your portfolio. If you are retired with a long time horizon and a goal of using your portfolio to generate current income to live on, inflation will be a big concern for you. All investors will be concerned about inflation – to varying degrees.
• Liquidity
  How much cash or cash equivalents do you want or need to hold in your portfolio? If you need a big chunk of money soon, you may hold a large share of your portfolio in cash. If your income varies a lot (for example, if you are self-employed), you may need to keep more of your assets in cash than someone with a regular paycheque. Or, if you feel the stock market is overpriced you might shift some of your assets from stocks to cash, planning to buy back into the stocks later when you judge stock prices are more favorable. If the yield curve is inverted and the returns from cash are high, you may switch into cash to take advantage of that.
• Taxation
  Your marginal tax rate will be a big factor in deciding how much of your income should come from tax-favored dividend income versus interest income.
• Market timing
  Two approaches to investing include buy and hold and market timing. Your might use one or the other or a combination. The theory of market timing may be simple – you want to buy when an investment is cheap, and sell when its price is high. But market prices, when they change, tend to and do shift quickly. Most investors are unsuccessful at market timing.