Investing: It’s not really a question of “if” you should invest, but “how”. When done properly, investments can offer a great return and help to save up for important life events such as education or retirement. A great place to start when it comes to investments is to get familiar with some terms:
- Risk: Risk is the potential of losing your money when investing. Every investment involves some level of risk, and typically the higher the risk, the greater the potential return.
- Return: The return is the profit you make on an investment. This can widely vary.
- Risk tolerance: This refers to how comfortable you are with risk or not knowing what your return will be. This will widely vary between people, and it’s an important factor to consider when deciding on investments.
- Liquid assets: These are assets or investments you can cash in or sell quickly.
- Diversification: A mix of different investments is called diversification. It’s a way to help you reduce risk.
Now that you have a better idea of the terminology, let’s look at some of the types of investments that are available to you:
- Bank Products – Banks and credit unions offer safe and convenient ways for you to tuck away some savings. The advantages of bank accounts are the ability to quickly access your funds and they have wide flexibility. Because of their nature, your money isn’t going to increase a great deal with the interest accumulated.
- Stocks – When you buy shares of a company stock, you own a piece of that company. Stocks come in a wide variety of formats – common shares, preferred shares, different class shares etc, depending on what type the company chooses to issue. Stocks are generally based on the company’s size and type and are often issued by the company to raise capital. The company’s stock performance can be affected by market cycles and other factors like interest rates. Stocks offer the potential for short and long-term capital growth and some types of stocks will also pay the investor dividends. Within stocks are a wide array of choices, from penny stocks to large caps and more – each with different risk profiles.
- Mutual Funds – are essentially a basket of stocks and/or bonds and sometimes other instruments eg. ETFs, that are pooled together in a unit trust and can either be open ended or close ended funds (ie. They have a fixed number units/shares). Mutual funds have mandates that they are required to adhere to for example, a Canadian Small Cap fund would only be able to invest in smaller Canadian companies – usually with market capitalization’s of less than $1Billion or so.
- ETF’s – or Exchange Traded Funds, are similar to mutual funds, ie. they are baskets of various securities, however they have some characteristics that are more similar to stocks eg. they can be traded throughout the day just as an individual stock would be. ETF’s can be sold short as stocks can be, mutual funds cannot be sold short. Due to the passive nature of ETF’s (although actively managed ETF’s are becoming more commonplace) the internal expenses of most ETF’s are considerably lower than their mutual fund counterparts – mutual fund expenses are trending lower though. ETF’s can offer tax advantages over mutual funds also through the process in which investments are redeemed from the vehicle limiting the possibility of paying capital gains.
- Segregated Funds – or Seg’ Funds for short, is a type of investment fund administered by the Canadian insurance companies and subject to the jurisdiction of the insurance act. Seg funds take the form of individual, variable life insurance contracts offering various capital guarantees to the policy holder such as reimbursement of 75%-100% of their capital investment upon a specified maturity date and/or death of the policyholder. Aside from capital protection they can offer additional benefits in estate planning such as bypassing probate, creditor proofing and tax free proceeds to the named beneficiaries.
- Annuities – An annuity is a contract between you and an insurance company, in which the company promises to make periodic payments for the rest of your life, either starting immediately (called an immediate annuity) or at some future time (called a deferred annuity). Annuities can come with guarantees in the event you pass away early they will continue to pay out to your beneficiaries.
- Retirement – There are many options available when saving for retirement and even managing your income after you retire. For saving, tax-advantaged retirement options such as a TFSA (Tax Free Savings Account) or a RRSP (Registered Retirement Plan) can be a smart, tax efficient choice. Which type of investments you choose is often dependent on your risk tolerance and retirement lifestyle.
- Commodity Futures – Commodity futures contracts are agreements to buy or sell a specific quantity of a commodity at a specified price on a particular day in the future. Commodities include metals, oil, grains, and animal products as well as currencies. Most futures are traded on the floor of a commodity exchange such as the Chicago Mercantile Exchange (CME) and the London Metal Exchange (LME). Traditionally, investors have used stock brokerages to access these markets however there is now a wide range of online brokers that offer very competitive pricing to retail investors to invest and trade these types of financial instruments from the comfort of their own home.
- Alternative and Complex Products – These products include notes with principal protection and high-yield bonds that have lower credit ratings and higher risk. The advantage is a higher rate of return.
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- Hedge Funds - are alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha (return above a designated benchmark), for their investors. They often only available to “exempt” investors – ie. Investors with net income of more than $200,000 or have more than $1,000,000 in investable assets.
- Bonds – A bond is a loan an investor makes to an organization in exchange for interest payments over a specified term plus repayment of principal at the bond’s maturity date. Bonds come with various credit ratings and durations that are often correlated with the respective bonds yield. Higher credit rated bonds, such as Canadian government bonds, will have a lower bond yield than a bond issued by a corporation eg. A Suncor bond, as the Canadian government is presumed to be at a lower risk of default than a corporation.
- Investment Funds – Investment funds pool money from many investors and invest it according to a specific investment strategy. Funds offer diversification, professional management and a wide variety of investment strategies and styles. But not all funds are the same.
- Saving for College – Funding college begins with savings, starting with how much to save. There are many smart ways to save for college, including RESP’s and other college savings plans.
- Options – Options are contracts that give the purchaser the right, but not the obligation, to buy or sell a security, such as a stock or exchange-traded fund, at a fixed price for a specific time period. There are numerous strategies investors use when engaging in options investing, not only to make money but also for example to hedge the downside on a stock position they may be holding.
- Security Futures – Federal regulations permit trading in future contracts on single stocks, also known as single stock futures, and certain security indices.
- Insurance – Life insurance products come in various forms, including term life, whole life and universal life. There are also variations on these, which are considered securities. Eg. Participating Whole Life Insurance can be a very tax efficient way to grow and pass on wealth, and can act as a great fixed income component of your overall investment portfolio.
There are many other investment types available as well. Two questions can help you figure out what you should invest in are: “What is your investment time horizon” and “What is your current risk tolerance?” This is where the real art of investing comes into play. There are online resources which allow you to invest on their websites and completely do everything yourself. This can be a great option for someone who already has a base understanding of how investments work, but for someone completely new to the game, it can be rather daunting.
The best advice is always to talk to licensed, qualified financial advisor. An advisor can take you through each step, recommending particular services, as well as provide you an analysis of what type of investment would fit with you the best, depending on your comfort level of risk. Advisors analyze your portfolios so you don’t have to, and based on their experience and knowledge of the markets, they can make informed and valuable recommendations to get you where you want to go. Call Belmont Health & Wealth today to get started. It’s never too early, or too late, to get started!
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