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Time-tested investment strategies

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There’s no shortage of “sure-fire” schemes that promise to get maximum returns with a minimum investment. But the truth is, these schemes rarely live up to expectations. There are, however, some time-tested strategies that can help you make the most of your investments. Here are five strategies that can help you achieve your retirement income goals.

1. Contribute

Increase the likelihood that your savings will grow over time by contributing to your retirement plan early and regularly. Increase your contributions whenever you can. Maximize employer contribution matching, if your plan allows.

2. Diversify

You’ve heard the saying, “Don’t put all your eggs in one basket.” When it comes to investing, keep this in mind. By investing your money in a variety of different investments, you can minimize the impact of a decline in any one asset.

3. Maximize tax-deductible contributions

Registered savings typically give you a significant advantage over non-registered savings. First, the more you contribute, the bigger your tax deduction. But even more important is the fact that investments in a registered plan are tax-deferred. This means your investment earnings aren’t taxed until you withdraw them from the plan, so your savings inside a registered plan grow untaxed, at a faster pace than savings held in taxable investments.

4. Invest to minimize tax

When it comes to taxes, not all investments are created equal. In non-registered plans, different kinds of investments receive different tax treatments.

For tax purposes, investment income falls into one of three categories:

  • Interest income – Interest income from taxable savings, guaranteed investments and bonds is fully taxed as income.
  • Dividend income – Dividends earned on Canadian stocks qualify for a federal tax credit. As a result, Canadian dividends are taxed at a lower rate than interest income.
  • Capital gains – Capital gains (profits from the sale of investments) are also taxed at a lower rate than interest income. They’re also reduced by capital losses (losses from the sale of investments).

5. Dollar-cost averaging

Some people save for retirement by making one contribution a year during RRSP season. What if the markets are high at that time? Your investment would buy less.

Making regular, ongoing contributions throughout the year generally smoothes out the highs and lows of the market and takes the risk out of trying to time the market.

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Next lesson: Pay yourself first