Investing Your Dollars
We all work hard for our money. Investing makes the money we earn work for us. Today there are a multitude of investment options and styles. It is important to understand these options in order to make wise investment decisions.
Investments generally fall into three main categories based on investment needs: cash and equivalents, fixed income investments and equity investments. The type or mix of investments you choose depends on your investor profile, your time-frame for investing and your tolerance of risk.
Cash and cash equivalents: These are assets that can be made accessible or liquid at any time. This is typically the safest category of investment, but produces the lowest rate of return.
Fixed income investments: These tend to offer higher returns than investments in the cash / cash equivalents category. They provide a source of regular investment income which remains the same over time.
Equity investments: These are assets which can grow in market value, but do not necessarily pay dividends to the holder. This is probably the riskiest category of investment, particularly over the short-term, but offers the greatest potential for high long-term rates of return.
As an investor, you can choose to be a lender or an owner. Lender or debt investments pay interest. Owner or equity investments offer the potential to generate earnings or profits.
- Savings Account
- Canada Savings Bonds
- Government Treasury Bill
- Term Deposit / Guaranteed Investment Certificate
- Bankers’ Acceptance
- Commercial Paper
- Government Bond
- Corporate Bond
- Mortgage-Backed Securities
- Stocks- general comments
- Common Shares/ Stock
- Preferred Shares/ Stock
- Precious Metals
- Income Trust
A mutual fund is an investment product in which your money is pooled with that of many other investors. A professional fund manager invests this pool of money in a variety of securities, depending on the fund’s specific objective. The manager is also responsible for monitoring each of the investments on an on-going basis. Mutual funds allow you gain access to a wider range of investments that you otherwise may not be able to afford.
Financial institutions charge a fee for access to their mutual funds in the form of a Management Expense Ratio (MER). The MER covers the cost of investment management, marketing, administrative costs and fees to salespeople (called trailer fees). The MER is based on a percentage of the mutual fund’s value.
Most mutual funds fall into five broad categories:
- Money Market — Consists of short-term corporate and government debt securities. They are usually low risk funds offering low returns.
- Fixed Income Funds — Consists of debt securities that typically provide investors with a regular, low risk, income stream.
- Balanced — This category consists of a balanced portfolio of equities, debt securities and money market instruments. The objective is to provide reasonable returns with low to moderate risk.
- Equity/Growth — This group consists primarily of common shares of public companies. The goal is typically long-term growth with the value of the assets held increasing overtime.
- International/Global Funds — Consists of common shares of foreign, public corporations. These funds are subject to risks associated with investing in foreign countries and foreign currencies.
Investing is not a matter of luck, but a result of deliberate planning. There are multiple variables to consider when developing your investment strategy. The following suggestions are a guide to improve your investing success.
Do your homework
- Read about different types of investments and consider which best suits your objectives.
- Consider recommendations from trusted advisors.
- Make investment decisions based on solid research and knowledge of the market.
Invest your time
- Spend time on your investments by researching your options, or choosing and monitoring your investments.
- If you do not have enough time to devote to your investments you can hire a professional advisor to spend time on your behalf.
- Investing in equities requires a significant amount of time. Income and safety investments do not require such regular attention.
- Regularly track the performance of each of your funds.
Start early and invest regularly
- Begin early and invest regularly, even if you can only afford small amounts.
- Small amounts frequently invested can grow faster than large sums invested less often.
Relying on professional advisors
- You can use a financial advisor for investment guidance, advice and portfolio management.
- When choosing a financial advisor ask about their credentials and fees involved.
Diversification and balanced investing
- Diversification is an effective way of minimizing risk and protecting yourself from volatility in a particular class or industry.
- Diversification involves holding a variety of investments, including cash, fixed income and equity investments.
Understanding tax treatment
- Depending on your type of investments, the way they are taxed will differ.
- Interest income, dividend income, capital gains and income from foreign companies are all taxed differently. In order to understand these differences please refer to Canada Revenue Agency.
The world of investing does not have to be complex and confusing, but it does require careful thought and planning.