Focusing on legal tax shelters and high-quality dividend-paying stocks are two key ways for investors to build personal wealth

An important part of that strategy is holding stocks rather than bonds. We advise against investing in bonds, mainly because low interest rates make bonds unattractive, and rising rates would push down their future value.

When we build an investment portfolio of stocks for a client, we start with our three-part Successful Investor approach: Invest mainly in well-established, profitable, dividend-paying stocks; spread your portfolio out across most if not all of the five main economic sectors; downplay or avoid stocks in the broker/media limelight. This, however, is just the start of our Successful Investor investment methodology.

How to build personal wealth through investing: Seek out dividend-paying investments

If you’re new to investing, one tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break they may be eligible to receive.

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How to build personal wealth over the long term with Canadian tax shelters

Registered Retirement Savings Plans (RRSPs) and tax-free savings accounts (TFSAs) are great ways for Canadian investors to cut their tax bills. In the United States, IRAs and 401ks are examples of retirement tax shelters.

RRSPs, are the best-known and most widely used tax shelters in Canada. RRSP contributions are tax deductible, and taxes are deferred on growth in the value of investments you hold in an RRSP. You only pay taxes on RRSP withdrawals. However, RRSP tax advantages come at a cost. RRSP withdrawals are taxed as ordinary income. That means in an RRSP you don’t get any benefit from the lower rate of tax on capital gains (half the rate you pay on ordinary income), and the dividend tax credit doesn’t apply to dividend income you get in an RRSP.

The federal government first made the TFSA available to investors in January 2009. These accounts let you earn investment income—including interest, dividends and capital gains—tax free.

You can contribute a maximum of $7,000 to your TFSA in 2024 and each year after. However, if you have not contributed in the past, or did not meet maximum contributions in any given year, you can catch up on unused contributions.

Tax-free savings accounts let you earn investment income—including interest, dividends and capital gains—tax free. But unlike RRSPs, contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.

How to build personal wealth over the long term by avoiding aggressive investments

Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to a smaller part of your overall portfolio.

Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth investing strategy. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.

How to build personal wealth for retirement: Don’t be distracted by the stock market’s direction

The funny thing about a financial plan is that you can actually make it less effective if you try to improve it. For instance, you may decide to vary how much money you invest every year, depending on your view of the market outlook. And that’s likely to cost you money at least half of the time.

If you invest more money in years when you’re confident about the economy or market, you may wind up buying more shares when prices are high. If you cut back on your investing in years when the outlook is uncertain, you’ll buy fewer when prices are low.

In the course of your investing career, you’ll make some good guesses about market direction, and some bad ones; overall, they are likely to average out. That’s why it’s best to keep to your plan no matter what the market does. It’s much easier to spot high-quality investments than it is to try and predict the next shift in the direction of share prices.

This plan can produce great results for you, when you start early and stick with it. However, few investors do that. Many investors simply run into too many ways to get sidetracked, and fail to stay with this steady—and successful—approach.

Do you believe in short-term strategies for building wealth? What forms of investing have you found to be most valuable?

What has been your biggest mistake in building your personal wealth?