The ABCs of investing

September 5, 2005

You believe in the old saying, money makes money. So you scrimp and save to come up with a few extra dollars to invest. But, with all the investment choices open to you, the biggest question you face is this: Where should I put my money to get the most from my money? And the answer is this simple and this complicated: It all depends on you, your unique needs, goals and risk tolerance. To help you make the best choices for you, let's start with an investment primer. Here are the ABC (and D)s of investing:

A is for Asset Allocation -- the key to the long-term health of any investment portfolio.

An asset allocation program helps you determine the right mix of investments, selected from different classes of financial assets (see B below) that best suits your goals and risk tolerance. Each asset class has different levels of return and risk, so each will behave differently over time , for example, when one investment or market is not performing well, others may have superior performance and lift your overall return. But, it is also a fact that all asset classes will grow over the long term, even though each does so at different rates at different times.

B is for Basic Asset Classes -- the three major investment types available to you.

C is for Tax Cost of Investing -- the amount of tax you pay on returns depends on the type of investments you choose. Obviously it is the goal of every investor to make money on their investments, but there is almost always a tax cost associated with returns. The asset class/investment type dictates the amount of tax you may have to pay:

You can reduce, defer or even eliminate taxes on your investments with a number of strategies. For example, it's generally a good idea to keep highly taxed interest-generating investments inside your tax-sheltered RSP and more reasonably taxed dividend- and capital gains-producing investments in the non-registered portion of your portfolio.

D is for Diversification -- spreading your investments among asset classes to improve returns and reduce overall risk. When it comes to investing, the old saying, never put all your eggs in one basket is the best advice you can get -- because when you put all your nest eggs (money) into a single (investment) basket, two things can happen: you can win big (highly unlikely) or you can lose big (more likely).

A properly diversified portfolio with investments strategically selected from the three main asset classes should match your tolerance for risk and help ensure you achieve your investment goals. Your financial advisor can help design an investment portfolio that gives you the best bang for your hard-earned investment bucks.

This page is part of the GayFinance series.