Investing and Managing Wealth

Even for young people, it is important to start learning how to invest at an early age. There are many reasons for its importance. The trend of rising costs of living means that staying alive after your working days are through is going to be expensive - more expensive than today. Furthermore, the trend towards nuclear families means that the burden of your retirement will likely not be completely born by your children. Investing and wealth management is how you bridge the gap.

Sadly, this topic isn't something that everyone gets a chance to learn. Yet, it's something that everyone needs to know. When should you invest? As long as you have an income, you should be investing and managing your wealth. Do you have a part-time or full-time job? Do you have some extra money left from that interest free student loan? Have some allowance from your parents?

How do you do it? Everyone's got a slightly different situation, but I'll recommend a framework that you can use (assuming you live in Canada)

Long Term Investments
I'm assuming here that you're still in your teens or your early twenties. You have decades of your career ahead of you but you can start investing in your retirement. You can afford to have a higher risk tolerance than your comfort level when talking about long-term investments. Why? Because over the long term, almost all investment products has an upward trend. This investment doesn't have to be an RRSP. Unless you make more than $10K in taxable income, there's really no point to put this money into RRSPs. RRSPs are only good for reducing your tax burden at the cost of locking away your money in something not very accessible. There are many investment products for this: funds, stocks, bonds, etc. Do some research and find a comfortable product for you. Be aware of the service charges. Service charges can severely hamper your investments.

Short Term Investments
This is your rainy day savings - the portion of your savings that you cannot afford to lose. You should keep this in a guaranteed income investment like a savings account or a term deposit. Make sure this money is very liquid (i.e. you can draw from it anytime you're in trouble without penalties or losing interest).

Diversifying and Dollar Cost Averaging
For your long term investments, you should look to diversify your investments. This means investing into various different industries and/or markets. You should also take advantage of dollar cost averaging. This means that when you have a larger sum of money available, break it up into smaller amounts and invest it regularly over a period of time rather than one lump sum. These strategies reduce your risk for long term investments. Don't bother doing this for your short-term guaranteed income investments.

Proportions
How much of your income should you save? That depends on your budget. Please refer to my blog on budgeting to find out how much you can save.

How much should go into short term investments and how much should go into long term? While you're still young, you can put a larger portion of your savings into long term. Say, 90%. As you age and as your need for rainy day money grows, you should lower that percentage down.