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 $10,000 in the S&P/TSX Composite Index (total returns) from January 1, 1973 to December 31, 2022. An investment cannot be made directly in an index. Graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Source: Bloomberg, RBC Global Asset Management Inc. Values and performance are in CAD.
Source: RBC Global Asset Management Inc.
When it comes to investing, one of the easiest ways to manage risk and improve your probability of success is to have a variety of investments. You can diversify your portfolio across different asset classes, geographical markets and industries. Why is this so important?
Different financial markets do not move in the same way at the same time. At various points in the market cycle, different types of investments or asset classes – such as cash, fixed income and equities – will lead or lag. They may respond differently to changes in environmental factors: inflation, the outlook for corporate earnings, and changes in interest rates for example.
When you diversify, you are better positioned to tap into opportunities across different investments as they emerge. This tends to create a smoother investment experience. How? Investments that increase in value can balance out those that are not performing as well.
A strong case for diversifying your investment portfolio
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Balanced Portfolio represented by 2% Cash, 38% Canadian bonds, 15% Canadian Equities, 25% U.S. Equities, 15% International Equities and 5% Emerging Market Equities. All performance is in C$. 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.
As an enthusiast with a deep understanding of investment principles and financial strategies, it's clear that successful investing is a multifaceted journey that requires a combination of knowledge, discipline, and strategic planning. Throughout my years of exploring and studying the intricacies of financial markets, I've come to appreciate the significance of evidence-backed strategies in achieving long-term financial goals. Now, let's delve into the key concepts presented in the article.
1. Getting Started: The principle of starting early is emphasized as a foundational element for building wealth. The article provides a compelling illustration of the power of compounding. By investing $200 per month for 40 years, an "early" investor can accumulate an additional $86,676 by age 60 compared to a "late" investor who invests $400 per month for 20 years. This demonstrates the snowball effect of compounding, showcasing the advantage of time in growing investments.
2. Investing Regularly: The article highlights the importance of investing regularly, making it a consistent priority throughout the year. A disciplined approach to regular investing allows individuals to navigate various market conditions without the need to time the market perfectly. The strategy of investing a fixed dollar amount at regular intervals enables investors to buy more units when prices are low and fewer units when prices are high, potentially reducing the average cost of investment over the long term.
3. Investing Enough: The concept of investing enough is tied to achieving long-term financial goals. The article stresses the need to save adequately today to build a sufficiently large investment portfolio for future goals, such as buying a house, funding education, or planning for retirement. The more one saves today, the less they may need to save in the future to achieve the same financial objectives.
4. Having a Plan: A well-structured plan is presented as a crucial element in avoiding hasty investment decisions, especially during market fluctuations. The article emphasizes maintaining perspective and focusing on long-term objectives. The illustration of the growth of $10,000 in the S&P/TSX Composite Index from 1973 to 2022 demonstrates the historical resilience and growth of markets over the long term, urging investors to stay committed to their well-thought-out plans.
5. Diversification: Diversification is highlighted as a key risk management strategy. The article recommends spreading investments across different asset classes, geographical markets, and industries. By diversifying, investors can position themselves to tap into opportunities across different investments, creating a smoother investment experience. The visual representation of a balanced portfolio, including cash, Canadian bonds, equities from various regions, and emerging market equities, reinforces the importance of diversification for long-term success.
In conclusion, these five fundamental principles – getting started early, investing regularly, investing enough, having a plan, and diversifying – form a comprehensive guide for investors seeking to navigate the complexities of the financial markets and achieve sustainable long-term success. These principles, supported by evidence and illustrated scenarios, serve as a valuable roadmap for anyone looking to embark on or enhance their investment journey.
