What is Investment Planning?
Diversification is an important element in any investment strategy, as it reduces your exposure to risk. A good investment plan should provide the best possible return for the degree of risk you are willing to assume. It must be kept in mind however, that there are different kinds of risk. Market risk or volatility is not the only kind of risk. There is also the risk of declining interest rates as well as the potential for erosion of purchasing power due to inflation. Your investment plan must also take into account tax considerations. Certain types of investment returns are fully taxed at an investor's top marginal rate, while other types of return feature significant tax advantages:
Interest is fully taxable each year at your top marginal rate.
Dividends are taxable as they are received, but offer the benefit of preferred tax treatment through the Dividend Tax Credit.
Capital gains are only 50% are taxable when realized, meaning when the capital property is sold at a profit. In the case of mutual funds, a percentage of gains must usually be reported each year even if shares are not disposed of, as the fund managers buy and sell assets within the funds. Funds which feature low annual realized gains offer the further advantage of tax deferral.
The key to maximizing the growth of your investment portfolios is to strike the right balance between using tax efficient investments to your advantage and maintaining the right asset allocation relevant to your risk profile, accumulation requirements, and life cycle. Your asset allocation needs will change over time, and periodic realignments of a portfolio can force taxable gains.