The world of investments
It is an obvious understatement to say that investments are more top-of-mind today than at any time in our recent history. It is impossible to read a newspaper, watch TV, listen to radio or surf the net without being bombarded with information – much of it conflicting in nature!
The purpose of this brief commentary is to outline some of the more widely-appealing investment alternatives and provide some basic guidance on where these might fit in your plans.
Cash is an important part of any sound plan – emergency funds (Murphy is alive and well!) and opportunity funds – and cash doesn't mean in a sock under the mattress – your chequing accounts, savings accounts, T-bill or Money Market Funds all fall under this category.
Term Deposits, Guaranteed Investment Certificates and Guaranteed Investment Accounts (issued by life insurance companies) are the next product most people should consider. These provide fixed rates of return for periods ranging from 1 to 20 years – depending on your specific requirements. These products are lumped into a category called "Fixed Income Investments" and are designed to provide stable returns and a solid foundation before expanding your choices into more risky investment alternatives.
Other types of Fixed Income Investments (FIIs) are government and corporate bonds. These typically range in maturity dates as low as 1 year (Canada Savings Bonds) to more than 20 years – some corporate issues. The credit rating and relative risk assessment of the issuing entity are keys in deciding which products to include as part of your financial foundation. Typically, most people would not want invest in other than AAA, AA or A-rated issues. Lower grades carry greater risk and could be considered elsewhere in your plans.
FIIs also come bundled inside various mutual funds and segregated funds which provide even small and novice investors the opportunity to get into these markets with only modest deposits to their plan. The fact that these funds hold a wide range of bond issues provides investors with the opportunity to spread risk and improve the potential for higher long-term returns than trying to do things on their own.
As we move up the risk/return spectrum, we enter into the wonderful world of equities – shares – both preferred shares and the more widely-known common shares. Both evidence some level of ownership in the issuing company and each has differing rights (such as voting, conversion, etc.) along the ability to receive dividends when companies make profits. Predominantly, investors purchasing common shares are more interested in capital growth (appreciation) and buyers of preferred shares are looking for regular dividend payments while protecting their capital from being depleted – no guarantees of course!
The word "preferred" in the name indicates that these shares get any dividends before common shareholders and if the company is sold or dissolved, they get their investment back before common shareholders. While "preferreds" also own part of the company, not all issues include the right to vote for directors and officers or at Annual General Meetings. Common shares on the other hand, typically do hold voting rights based on some formula and are second in line after "preferreds" to receive dividends and get their investment returned when a company dissolves or is sold.
Investors can purchase the securities directly through properly licensed/registered investment advisors of course. Minimum order size can be a deterrent which makes mutual funds or segregated funds a more appropriate choice (where minimums can be as low as $50.00 per month). Some consumers choose to purchase "index" funds or ETFs (Exchange Traded Funds) if they want to take a more passive approach to investing and eschew purchasing individual securities, bonds or funds. These products also offer the potential for lower transaction costs and management fees.
Inside mutual fund or segregated fund wrappers, these funds have names such as "Large-cap Canadian Dividend Fund", "Canadian Equity Fund", "American Equity Fund", "International Equity Funds", etc. Your investment advisor will be pleased to explain the differences – funds that include words such as "Large-cap" or "Dividend", TEND to be less risky when it comes to preserving investment capital. Funds that include words such as "Growth" or "Value" TEND to have an increased level of risk attached to them and more capital volatility. ALWAYS read the Prospectus and Fund Fact Sheet BEFORE you invest to be sure that you are making a choice for the right reason(s) as it relates to your own plans and level of risk you are willing to accept.
Also under the "equities" heading some more speculative investments such as specialty funds – funds may invest in a specific country, a specific industry, a specific resource or a technology. Names such as "biotechnology", "resource", "healthcare", "telecommunications", real estate", "emerging markets", "Pacific Rim", "European" and similar titles identify these products. Generally speaking, the narrower the investment mandate of the fund, the POTENTIAL for greater returns may exist however that is ALWAYS coupled with a higher level of risk and increased fund value volatility. If you have to rush to your computer or mug the newspaper delivery person to see how the funds are doing, you are invested way above your risk tolerance! Be careful, select wisely – and as mentioned previously, ALWAYS read the Prospectus and Fund Fact Sheet BEFORE you invest!
Finally we come to speculative investments – products with names such as "hedge fund", "derivatives", "commodities" and similarly named issues. They offer the POTENTIAL for greater returns but come with lots of strings and very high risk and volatility attached. Generally speaking, these are the realms of very sophisticated and wealthy investors.
Some alleged "pundits" make grandiose statements about one product being so much better than another – and only idiots would purchase anything else. These people normally have a specific ox to gore or they are usually pushing something – a product, a manager, an institution
or their own services. The cold truth is that the products are NOT interchangeable – they are each designed to do something different. Savvy investors build a balanced portfolio of various products with potential risk and return levels closely matched to their own risk tolerance, investment objectives, investment knowledge and time horizon. Deal only with advisors that place your interest first, last and all the time – and above their own!
To arrange a free consultation call MONEY® at (905) 475-0000 or e-mail us.