You work hard for your money and now it’s time to make your money work hard for you by learning investing basics. Learning how to invest is an important step in planning your future. Most people know they should play a more active role in their investments but they often don’t know where to start.
As well, considering that more companies are putting the onus of saving for retirement on individual employees, the emphasis on investing should be more important than ever.
Investing Basics: Set a Goal
Before you start investing, you should set a goal. Ask yourself, what are you investing for? The goal should be Specific, Measurable, Achievable, Realistic and Timely, also known as a SMART goal. The goal can be short term, medium term or long term.
Investing Basics: Know Your Risk
As an investor, you have a plethora of investment solutions that you can put your money into, such as stocks, mutual funds, real estate, exchange traded funds, GICs and more! Each investment solution has a risk associated with it. The higher the risk, the higher the potential return and vice versa. You have to ask yourself, how comfortable are you with volatility and how far away is your goal? The further the goal, the more risk you could take.
Risk Reward Spectrum
The amount of risk that you’re willing to take could depend on a number of factors
- Timeline to achieve your goal
- Your attitude towards risk
- When you’re planning to withdraw the funds
- How comfortable you are with volatility
- Your current debt levels
- Your job stability and sources of income
Investing Basics: Investment Choices
In Canada, we have the option to invest our funds in many investment vehicles such as Registered Retirement Savings Plan, Tax Free Savings Accounts, Registered Education Savings Plan and much more! Depending on your goal, it’s important to choose the right type of account that will help you achieve your goal.
- If your goal is to save for retirement, then a Registered Retirement Savings Plan will make sense
- If your goal is short term in nature, then a Tax Free Savings Account will work.
- If you’re thinking about saving for your child’s university, then a Registered Education Savings Plan will help you get there
- If your goal is to save on taxes each year, then a Registered Retirement Savings Plan and a Tax Free Savings Account could help you do that
Each goal is unique and there is no all in one solution. A proactive investor would take advantage of all possible investment vehicles as they would have more than one goal.
Choose Your Investment Solution
Part of investing basics is choosing your investment solution. Inside your investment vehicle, you can purchase thousands of investment and the list to choose is endless. The investment that you choose should align with your risk appetite mentioned above.
Essentially, whatever you choose will most likely have a combination of stocks and bonds also known as equities & fixed income.
Stocks/Equities
The majority of people have stocks in their investment portfolio. When you buy a stock, you’re buying what is known as a share, meaning that you become a part owner in the business and allowed to vote on matters related to the company. Certain stocks pay out dividends to those who own shares in the company. Dividends are a way for the company to share the profits with its owners.
Since 1926, stocks have returned an average rate of 10% annually since 1926. This is a higher return that you would normally receive from other investment instruments such as bonds, which are less risky.
Stocks are on the far-right end of the risk/reward spectrum. The more stocks that you’re holding in your portfolio, the more volatile your portfolio will be. However, you will experience a higher return long term if you’re buying established, blue chip companies that have a fairly stable stock price, pay out dividends and are considered relatively safe.
Bonds/Fixed Income
Bonds, also known as fixed income are a popular way to offset some of the volatility in your portfolio that stocks bring. When you’re purchasing a bond, you’re lending money to a corporation, government or a municipal entity. Bonds are more safe than stocks and are given a rating from agencies such as Moody’s, Standard & Poors, etc. Ratings act like a credit score and bonds with AAA rating are usually considered safe.
When you buy a bond, you’re receiving a guarantee from the particular issuer that you’ll get your money back plus interest. Be careful that you do not buy junk bonds which are sold by corporations. Junk bonds also known as high yield bonds are issued by corporations but they come with higher risk than normal.
Ask Questions
Many Canadians are do not show interest in their investment. It’s important to be involved and knowing how world events might affect your portfolio. Make sure you ask as many questions about your investment. Below are some common questions that investors would ask their financial advisors or brokerages.
- What’s my expected rate of return on this investment?
- How much commission am I paying?
- Does my stock pay out dividends?
- What is the yearly fee I am paying?
- Is there an annual fee for me to hold this account?
- How often will my advisor contact me?
- How do I sign up for online access?
- Where can I contact you?
One golden rule of investing basics is to never invest in anything that you’re not familiar about or don’t understand. Make sure you read the fine print, ask questions and review your investment quarterly.
