– Determine your investor profile –
After reading the first post of the “DIY Growth Investment Strategy”, you have a pretty good idea of how much you need to put aside if you want to retire comfortably. However, you may have made your investment projection with an investment expected return of 6,5% but you would like to invest the majority of your portfolio in a bond ladder. If it’s the case, you will earn approximately 4% – 4.5%. Now, go back to your retirement calculator and plug the new number in. You probably increase your periodic investment by a few hundreds, right?
This is why it is so important to determine your investment profile and buy financial products according to the correct asset allocation. Depending on banks, they created 5 or 6 investment profiles. I won’t named them (I’m too afraid of the trade mark issue 😉 ), but the asset allocations will look like this:
– 100% fixed income (money market fund, government, provincial and company bonds, certificate deposit, etc.).
This type of asset allocation is used for short term project such as putting money aside to buy a house or to go on vacation next summer.
– 80% fixed income, 20% equity (Canadian, American, International stocks or mutual funds).
We will often see this type of investment portfolio for retiree since they are withdrawing money from their account and they don’t want to risk too much.
– 60% fixed income, 40% equity
This is where we start the balanced portfolio. They give you a good “balance” between fixed income and equity. I noticed that most clients will go toward this kind of asset allocation.
– 40% fixed income, 60% equity
note: many “balanced funds” offer an asset allocation of around 50% / 50%. Technically, anything between 60/40 and 40/60 can be considered as a balanced fund.
– 30%-25% fixed income, 70%-75% equity
We call usually call this one growth portfolio. This is made for people who are not afraid of the market fluctuation.
– 10%-0% fixed income, 90%-10% equity.
This is obviously the most aggressive investors who would prefer such asset allocation. You are directly invested in the market with its good and bad sides.
In order to know what to buy and which asset allocation to choose, you need to start from something. You can find an investment profile questionnaire on any good bank websites. You will usually find it under “investment products or solutions”. Lookup for tools and calculators and you will find a quick questionnaire that will tell you which kind of investor you are. It is important to answer the questions while thinking of you goal. For example, if you think about retiring, you should consider that a drop of 10% of your portfolio is acceptable as you will not touch your money for a good 20 years or more. At the end of the questionnaire, you will end-up with an investor profile along with a suggested asset allocation.
Here are a few places where you can get such questionnaire. I suggest you do 2 or 3 of them to make sure you end-up with the correct asset allocation:
Canadian Banker Association investor profile
National Bank investor profile
Scotia Bank investor profile
US Bank investor profile
Rabo Bank investor profile
Tomorrow, we will look at options you have according to your investment profile.
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