- I've been working with my financial planner since 2017.
- I asked for her top tips on becoming a better investor.
- She said to keep risk tolerance in mind, consider all your options, and do your due diligence.
Even though I worked in financial literacy for years, I know there's still more left to learn about money.
I've been working with my financial planner, Liz, of the New School of Finance Inc., an advice-only financial planning firm based in Toronto, since 2017.
In the spirit of becoming a better investor, I asked for her top three tips for anyone who wants to build wealth.
1. Know your risk tolerance
About a year ago, I increased the risk factor on my retirement savings plan for the second year in a row. I made this change because my time horizon for using these funds is long. In a sense, I'm dipping my toes into slightly more aggressive investments as a form of exposure therapy.
The most important thing when it comes to risk tolerance, Liz told me — setting aside the emotional, psychological part — is your timeline for using this money and how rigid that timeline is. The shorter your timeline, the less risk you'll want to take on with your investments. "The longer or more flexible your timeline, the more risk you can generally afford to take," she said.
For long-term investments (over 25 years), the performance of comparable conservative and aggressive portfolios is very small. They can look very different in the short term, but in the long term, things tend to average out.
The risk factor matters most when your timeline is short — if you're planning on using that money soon. "We need to be really conscious of how much risk you can afford to take if you're planning on using that money soon," Liz said, "but if your timeline is long, it actually matters less than you might think, whether you invest really aggressively or really conservatively — so it's better to just go with your gut."
If you'll use the money in less than five years, you might want to keep it out of the market entirely and use an interest-bearing option like a high-yield savings account or CD.
2. Explore your options for investing
When I first started investing, I had actively managed funds with one of Canada's big five banks. Fairly early on, I made the shift to robo-advisor investments to save on fees. Now, all of my investments are in robo-advised accounts. I'm not comfortable paying someone to actively manage my investments or try to beat the market, because nobody has a crystal ball.
Many financial institutions offer robo-advisor services, from big, brick-and-mortar banks to smaller, online banks. Robo-advisors can be a good option for folks looking to invest who "aren't interested in the traditional active management style of investing," Liz said. "What they want is to have passive index investments at a low fee, and they don't feel compelled to have a dedicated advisor necessarily. They're comfortable using an online platform."
People seem to have a lot more investing knowledge, in general, than they did five to 10 years ago, she continued. Millennials and Gen Z clients in particular are coming to her having done a lot of research and with an idea of what they plan to do, but they want to speak with a pro first.
3. Do your due diligence
Our conversation turned to the wild world of social media, AI, and fake news. While I'm on board with financial empowerment and the role social media plays in making financial information more accessible and breaking down taboos around talking about money, I'm wary of false information.
We spoke about the rise of the "Finfluencer" with equal parts curiosity and caution. There are some real wins when it comes to improved access to financial information: It's no longer being gate-kept by large financial institutions. But, "it's important to always take a critical eye to what you're consuming," Liz said. There's misinformation out there. Do your due diligence and make sure you're using credible sources.
Keep in mind that the information you find online isn't customized to you and your life. As Liz said, "Something may be true, but not right for you."
It can be hard to know what's right for you when someone's trying to sell you something. It's OK to go to your bank and ask about which investing products might be right for you, but Liz recommends doing your research first. "You probably wouldn't go into a car dealership and ask, 'What should I buy?'" she says. Instead, ask yourself: Who am I talking to, what is their role in this, and what stake do they have in it?
