Education Centre

Learning path for self-directed investors who want to know more about financial markets and investing

Determining your Investor Profile : A simple 5-step process

There are six basic types of investor profiles:

To determine your profile and establish an investment strategy suited to your needs, it is important to define several elements.

1 - Your investment objectives

Are you looking to invest for your retirement, a home, your child's education or a trip around the world? Regardless of your project, you need a strategy that provides the right results. For instance, if you are starting out in your career, you are probably looking to invest with more than one project in mind: retirement, a future home, a family and, of course, a well-deserved break at your favourite destination. Each of these projects requires a different approach.

Start by making a list of all your goals.

2 - Your investment horizon

When will you need your capital: in 5, 10 or 25 years? Are you investing for your retirement, in 30 years, or for a trip over the coming months?

Depending on your investment horizon, you will need to choose a strategy that will allow you to not only generate the returns you seek, but also withdraw you capital (or part of) without penalty when you need it.

For each of your goals, set a specific timeframe to achieve them.

3 - Your risk tolerance

Your risk tolerance level is a key element to defining your investor profile. If you cannot sleep soundly because you are worried about the security of your investments, you most likely are taking more risk than you should. If your objectives consist in earning interest and preserving your capital and high returns are not your priority, a portfolio of low-risk investments that provide stability may be the perfect solution for you. If, however, you are building a retirement nest and investing over the long term, you may want to increase the risk level of your portfolio to boost its growth potential.

Many new investors overestimate their risk tolerance, thinking they can ‘take it’... until they begin to have trouble finding sleep at the first sign of market fluctuations. It is therefore wise to start your investment journey carefully in order to properly assess your tolerance. There is nothing preventing you from revising your portfolio every 6 to 12 months to adjust its risk level.

For each of your goals, indicate the degree of risk you are willing to take. For instance, if you wish to save for a down payment on a home and are planning to make that purchase over the next couple of years, you may want to keep risk at a minimum to avoid seeing the value of your savings depreciate. Conversely, if you are investing for retirement in 30 years, chances are you can survive a few drops in the market value of your investments to take advantage of upward movements over time.

Below is a graph illustrating the different products available at National Bank Direct Brokerage, relative to their risk level. This graph is not scaled, but it demonstrates the risk-return profile of each product category.

4 - Your financial situation
Your financial situation helps you determine the level of risk you can tolerate in your investment portfolio. Investors with several other significant assets can more easily tolerate fluctuations in the value of their portfolios, while investors whose financial situation is less stable can have a lower risk tolerance.

Be very honest at this stage of the process. It is important that you invest according to your means and the stability of your situation. This will help you choose the right strategy depending on your liquidity needs.

5 - Your investment knowledge and experience
Novice investors must be extremely careful with selecting the right products, especially if they are not familiar with their characteristics. Some products may be ideal for certain people, but completely inadequate for others. Before investing in securities that are unfamiliar to you, visit our Education Centre to learn about their pros and cons, or consult the research we put at your disposal in the “Research and Analyses” section of our transactional website.

A good investment strategy must be based on returns, flexibility and security – in the proportions that are most important to you. Take the first step by researching the products you are interested in to ensure that they are suited to your profile, your financial situation and your objectives.

Now that you have detailed all of this information, let our Personalized Investment Plan help you define your investor profile and the optimal asset allocation for your situation. The PIP is an interactive questionnaire designed to guide you in your investment process.

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