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Your guide to investing for the future
How to grow your hard-earned cash the smart way.
You work hard for your money. And investing can help your money work hard for you by generating income and growing in value.The goal of investing is simple: build wealth so you can use it later in life or pass it on to the next generation. But while you have countless ways to invest, each comes with a degree of uncertainty.
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What's in this guide?
Key ingredients of investing in Canada
When planning where to put your money, consider the four major factors that affect investments:
- Savings. The first step to investing is learning to live within your means to build reserves. Start by recording your assets, your debts and liabilities and everything your family spends, and adjust your budget accordingly. Building a nest egg in a high-interest savings account can be a good way to grow your money while keeping it easily accessible.
- Goals. Maybe you want to save for a home, a higher education or travel. Perhaps you’re looking to set up for a comfortable retirement or pass on a financial legacy to your kids or grandkids. Your goals will guide your investment choices.
- Time. Most investments rely on the power of compounding interest, which is additional interest paid on your principal deposit. In other words, it’s interest paid on interest. And it helps to speed up your earnings.
- Vehicles. You have many ways to put your money to work — GICs, stocks, bonds and more. Factor in the risks and rewards for each.
The benefits of investing in Canada
With investing, the idea is to use your money to make more money. By creating and preserving your wealth, you can reap the rewards of:
- Return on investment. Many investments increase in value over time. Investments aren’t always guaranteed, but profit projections can help you decide what to invest in and how much to invest.
- Dividends. If you purchase stocks, funds or cash-value life insurance, you own shares in that company and may receive a percentage of its profits — which you can either cash in or reinvest. These dividends are distributed to shareholders on a set schedule. Stocks and funds typically pay quarterly dividends, while mutually owned life insurance companies tend to pay annual dividends, sometimes called a return of excess premium.
- Compounded interest. Many investments give you the opportunity to earn compound interest, which is essentially interest on your earnings. The longer you hold a stock, the higher its value — and the more interest you’ll earn.
- Voice in how a company operates. When you own shares in a company or corporation, you get to vote or have a say in how it’s run.
The risks of investing
No investment is risk-free, so a big part of investing is deciding how much risk you can comfortably assume. Generally, the higher the risk, the higher the reward.
Risks investors face include:
- Losses. The value of investments can decrease for many reasons. Companies can underperform, demand for products or services can dry up and the stock market can crash. To earn a Return on Investment (ROI) on loans, stock and annuities, the company you invest in must stay in business. If it goes bankrupt and liquidates its assets, that affects how much money you get back — if any.
- Volatility. The value of an investment can fluctuate, sometimes wildly, due to internal factors like faulty products or external events they have no control over, like political changes.
- Inflation. When goods and services cost more in the future than they do now, your money becomes worth a little less, and if you don’t grow your money at a rate higher than the rate of inflation, you’ll essentially be losing money on your investments.
- Fees. Most investment categories come with a set of fees. For example, brokers charge commissions or management fees to carry out the purchase of stocks and bonds. Weigh the fees against your potential ROI.
- Taxes. Likewise, capital gains (profit) from investing are often subject to taxes. The timing of the collection of those taxes depends on the investment. Most investments are taxed on their sale, but retirement investments can be taxed on withdrawal from the account. If you house your investments in a tax-free savings account (TFSA), you can avoid being taxed on capital gains and withdrawals. However, annual account contribution limits apply.
Are any investments guaranteed?
No. But a few protections are in place for specific vehicles and situations:
- The Canada Deposit Insurance Corporation (CDIC) insures savings accounts, money market accounts and GICs. The CDIC insures up to $100,000 of your deposits in each insured bank. The catch? CDIC-insured accounts generally earn a lower interest rate.
- Deposits into credit union members’ accounts are backed by insurance organizations located in each province, although some federally-regulated credit unions are insured by the CDIC.
- Credit union insurance coverage is comparable to, and sometimes even exceeds, that of the CDIC.
- The securities you own aren’t insured against a loss in value. But the Canadian Investor Protection Fund (CIPF) is a non-government entity that replaces missing stocks and securities in customer accounts held by a CIPF member firm if the firm fails. The limit for most types of investments is $1 million, though this amount can vary based on what types of customer you are (individual, corporation, partnership etc.) and what type of account you have (trust, joint account etc.).
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What to invest in
The information on this page is current as of March 6, 2020.
You’ll find various ways to invest your money to achieve specific financial goals. Investments are grouped into categories by type — for example, bank products and bonds — each with its own features, risks and rewards.
You can stash your cash in a bank account, but other ways can make better use of your cash and earn interest or tangible assets.
Types of stocks
When you buy stocks, you’re buying a share of ownership in a company. Also called equities, stocks are based on the company type, size, potential for growth and performance in the market.
Your profits and losses depend on the success and failure of the company, as well as the influence of major trends in the stock market.
Types of bonds
Bonds are a type of fixed-income investment that pay interest or dividends at set intervals and return your principal amount at the end of the term. They are issued by governments and companies at fixed rates, so when you buy a bond, you’re essentially lending the issuer money in exchange for interest payments. Bonds are generally less risky than stocks, but like any investment, your returns may vary, so there’s no guarantee you’ll make money.
Types of funds
An investment fund collects capital from a bunch of investors to buy stocks, bonds and securities. Usually managed by professionals, they give investors access to opportunities they may not have been able to invest in on their own.
Types of options
Options are contracts that give the investor the right — but not the obligation — to buy or sell a security, such as a stock or foreign currency, at a fixed price within a specified time.
They’re derivative, which means they derive their value from their underlying assets. Options are open to both institutional and individual investors.
Types of real estate
Buying a home is among our major investments. But other investment options make up the real estate realm.
Traditionally, banks granted these fixed-rate loans to help investors finance a specific project and acquire such assets as property, equipment or machinery. Today, investors will find direct lending options that include crowdfunding and peer-to-peer lending platforms.
Types of contracts
An advanced form of investing, contacts are agreements to buy or sell commodities, shares and assets.
Also called forex or FX, foreign exchange is the largest financial market in the world. Investors trade international currencies online and over the phone.
Cryptocurrencies are digital assets that serve a variety of different purposes. There are over a thousand cryptocurrencies on the market, of which the best known are bitcoin and Ethereum.
On the other hand, money market funds are mutual funds that are invested conservatively in government, municipal, corporate or bank securities. The return on money market funds also fluctuates with market conditions, but there’s a possibility that return drops below zero and you lose some of your principal.[/fin_hide]
How to invest
Investing is accessible to anyone. The paths you can take to build a portfolio depend on your budget, risk tolerance and financial goals.
Before signing up for an investment account, read the fine print. These accounts are typically taxable, and fees can vary.
- Brokerage accounts. This is an arrangement between an investor and a licensed brokerage firm. As the investor, you deposit money into the brokerage account and then place orders to buy or sell such investments as stocks, bonds and mutual funds.
- Digital apps. In recent years, fintech startups have launched apps that allow everyday earners to invest their money from their smart devices. These apps appeal to millennials and the tech-savvy, and they cut down on the fees you’d typically pay for a human to manage your money.
Look at retirement accounts as a way of investing and securing your financial future. They can help you to save for retirement and manage your income after you retire.
- Employer pension plans. With defined contribution plans, you contribute pretax money from your paycheck to your individual account. The value of the account fluctuates over time, and on retirement, you’ll receive the balance. Many employers match your contributions, offering another incentive to save.
- Registered Retirement Savings Accounts (RRSPs). These accounts offer tax advantages. For example, you won’t pay taxes on your earnings until you make withdrawals during retirement. If you withdraw sooner, you will be subject to a higher tax rate.
Other sources of retirement income include investments held in TFSAs, funds deposited into bank accounts, real estate investments and government programs such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
Robo-advisors are exactly what they sound like: digital financial advisers. A robo-advisor relies on intricate algorithms and technology to offer financial advice, help with asset allocations and automate the management of your investments.
If you prefer working with a human, you can enlist a financial planner or adviser to help you set up an investment portfolio. Most financial advisers work out of banks and require a minimum amount to invest.
A good investment strategy addresses the opportunities and risks of the financial markets in a way that helps you achieve your goals. Such a strategy can change over time, but consider important components like:
Divvy up your savings sensibly. This involves determining how much money to invest into each vehicle, often based on its volatility and your risk tolerance. The classic example is for younger investors to put more money into stocks than bonds to leverage long-term growth potential, while investors closer to retirement generally keep most of their investments in less risky bonds.
Know what’s coming. Business cycles, economic cycles and seasons can influence the movements of investment vehicles. Restaurants must be planned, then built. Oil must be discovered, then drilled. Prescription drugs must be developed, then tested and approved.
Don’t put all your eggs in one basket. To manage risk and protect against market fluctuations, savvy investors diversify their portfolios across multiple vehicles and sectors.
Keep your finger on the pulse of the economy. Recognize the role that generational, technological, societal and other shifts can play in the ongoing supply and demand tug of war.
Broadly speaking, there are 2 main investing philosophies: Active and passive investing.
Many traditional wealth management firms prefer active investing, where advisers regularly buy and sell assets for you. The idea is that skillful investing can “beat the market” and outperform a portfolio that changes very little.
Robo-advisors tend to use a passive investing approach. Rather than try to pick winning and losing investments, they put your money in a curated mix of investments and wait for it to grow.
Some actively managed funds outperform the market, but most don’t. According to the 2017 Dow Jones Indices SPIVA Scorecard — a semiannual comparison of managed funds against benchmarks — large funds usually don’t beat the S&P 64% of the time. And medium-size and small funds fall behind their benchmarks almost 90% of the time.
Robo-advisors aren’t designed to beat the market, but they move in sync with it. According to experts, robo-advisors often perform better than actively managed funds, once you account for the difference in management fees.
To get money into your desired investment, you’ll need to access a market that offers that investment, often through an investment account that participates in the various markets.
You can invest your money through exchanges in Canada, the US and elsewhere in the world including:
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All investments are a dance of risk and reward. The aim of investing is to build wealth and set yourself up for a comfortable financial future. But it comes with a degree of uncertainty.
What you invest your money in and how you invest it should be guided by your goals and capital.
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