Tuesday, 10 November 2015

Your Investment Options

Types of Investments

If you're just getting into investing one of the first things you need to understand are what options are available to you. It's important to have an emergency fund setup and easily accessible (I suggest a high interest savings account) but when you start an investment account it should be for longer term goals like buying a house, your kids education or retirement and you want that money to work for you. I'll breakdown some of the most popular investment options to help give you a better idea on what will work for you right now.

GICs are the ultimate in safety when it comes in investments because they guarantee your return. Now this sounds great but the return you get (especially right now) is going to be low; think 1.50% on a 5 year GIC. The concern with such a low return is that your money may not beat inflation, which means your're actually losing money in the long term. The other concern is that most GICs are locked in so you can't get access to your money if you need it before the term is up.

Now onto more complicated matters...bonds. There are many types of bonds but they are all basically debt investments where you loan the issuer money and in return they pay you back your principal with interest. Bonds are usually a low risk investment but it really depends on the type of bond you buy and the trustworthiness of the issuer. You can get government bonds (think Canada Savings Bonds) or corporate bonds that could be backed by very solid companies or those in financial trouble. Wit
h that said, even if a company goes under, bond holders get paid out before stock holders which makes them inherently less risky.

Stocks are a riskier option but they are also where you can earn the highest returns. High risk, high reward right? When you buy stock in a company you essentially buy yourself a little (or big I suppose) piece of the company. Now stocks don't always have to be high risk but there is, of course, always some amount of risk. Even the biggest and most successful companies can loose you money and they often aren't the ones that will have big increases in returns. It can be fun to get into trading some stocks but it is always important to have a lower risk portion of your portfolio to pull you through rough market conditions. 

Mutual Funds You can buy a mutual fund that covers just about any part of the market, whether it be a specific risk level, geographical region or corporate sector. Now, mutual funds will cost you and you need to make sure you understand all the costs involved, but I think they are a good option to help you maintain a diversified portfolio. The guys and gals that run mutual funds are good at their jobs and have all possible research, analytics and models available to them to help them succeed. Stock picking can be fun as I said, but you just aren't going to have the time or resources to do the job they do so I'm OK paying them to do that for me. If you're just starting out funds can also be a way to get into a few sectors of the market with smaller amounts of money.

Index Funds and Exchange Traded Funds (ETFs) Index funds and ETFs are created to mirror an index (such as the S & P 500) which basically means they hold the stock positions used in that specific index. Like mutual funds, they are a good way to diversify your account but they won't cost you as much because they simply buy what's in the index and so aren't actively managed. Just remember that while you won't do any worse than the index, this doesn't mean you are always going to have positive returns. The markets aren't always up and can sometimes be down...by a lot.

Hopefully this helps you understand some of the different components you can use when you start investing. Let me know if you have any questions.

Types of Investments


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