With low-interest rates for savings accounts and a high rate of inflation, saving is no longer adequate to ensure financial security. You need to make your money work for you by investing it. However, the idea of investing can seem intimidating. If you’re just beginning your journey of investing and have some hesitation, read on for our answers to the most frequently asked questions about investing.
What is the difference between saving and investing?
Saving is the practice of putting money aside for future use (mortgage payments, emergencies, retirement). Investing involves putting your money to work for you (through stocks, bonds, property, mutual funds, etc.) with the intention of increasing its value over time.
Why should I invest?
Investing allows you to grow your wealth and meet your financial goals (purchasing a home, preparing for retirement, building an emergency fund). It can also minimize your tax liability. Before choosing where to invest you need to balance your potential gains with the risk involved. You may choose very safe investment options (ie: GICs) medium-risk choices (ie: corporate bonds) or high-risk picks (ie: REITs). It’s important to have a variety of investment types in order to create a safe, well-rounded, diversified portfolio.
When should I invest?
The longer you invest, the less impact the short-term ups and downs of the market have upon your return. Consider investing as soon as you can.
How much should I invest?
Invest the maximum amount that you can comfortably afford. Pay off your high-cost debt, set aside an emergency fund, provide for living expenses and short-term goals. Then invest the rest.
Is investing risky?
All investments carry some risk. The goal is to manage the risks. Have a plan and diversify your portfolio. Divide your money among many types of investments based on your risk tolerance and timeline.
What do I need to consider?
There are a number of factors to keep in mind; your risk tolerance, your timeline (thinking about your future needs for money), your knowledge of investing, your financial situation and how much you can realistically invest.
What are the different types of investment strategies?
- Growth investing strategies are most suitable if you are a long-term investor and are willing to withstand market ups and downs. They involve investing in growth stocks; young or small companies whose earnings are expected to increase at an above-average rate. Growth investment is risky as young and/or small companies are untried.
- Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Investors who use this strategy hope the stock price will rise as more people come to appreciate the true intrinsic value of the company’s fundamental business.
- Momentum investing involves buying stocks experiencing an uptrend with the belief that they will continue to do so. This investment strategy often uses a data-driven approach to trading, looking for patterns in stock prices to guide purchasing decisions.
- Dollar-cost averaging is the practice of making regular investments in the market over time and can be used with any of the above methods. This disciplined approach is particularly powerful when you use automated features that invest for you.
Does age affect which investment strategy I should choose?
Goals and strategies for investment often shift with age. Young investors with a long timeline might feel comfortable with risky investments. Older investors often focus on preserving their savings for retirement and tend to emphasize diversification and dollar-cost averaging.
What are the most common types of investments?
- Stocks: Companies sell shares of stock to raise money for start-up or growth. When you invest in stocks, you’re buying a share of ownership in a corporation. You’ve become a shareholder. Investment returns and risks for stocks vary, depending on factors such as the economy, the political scene, the company’s performance and other stock market factors.
- Bonds: When you buy a bond, you’re lending money to a company or governmental entity, such as a city, province or country. Bonds are issued for a set period of time during which interest payments are made to the bondholder. At the end of the set period of time (maturity date), the bond issuer is required to repay the face value of the bond (the original loan amount).
- Mutual funds pool cash from investors to buy stocks, bonds or other assets offering investors an inexpensive way to diversify. They are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
- Exchange-traded funds (ETFs) are like mutual funds in that they pool investor money to buy a collection of securities, providing a single diversified investment. They can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. The difference from mutual funds is how ETFs are sold. Investors buy shares of ETFs just like they would buy shares of an individual stock.
- Real estate: Traditional real estate investing involves buying a property and selling it later for a profit, or owning property and collecting rent as a form of fixed income. Another option is to invest in a REIT. A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modelled after mutual funds, REITs pool the capital of numerous investors making it possible for individual investors to earn dividends from real estate investment without having to buy, manage, or finance any properties themselves.
- Annuities: An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.
- Guaranteed investment certificates (GICs) is a deposit investment sold by Canadian banks and trust companies. People often purchase them for retirement plans because they provide a low-risk fixed rate of return and are insured, to a degree, by the Canadian government.
- Cryptocurrency is a kind of digital electronic-only currency that is intended to act as a medium of exchange. It’s become popular in the last decade, with Bitcoin becoming the leading digital currency. Cryptocurrency is good for risk-seeking investors who wouldn’t mind if their investment goes to zero in exchange for the potential of much higher returns.
- Life insurance products are often a part of an overall financial plan. They come in various forms, including term life, whole life and universal life policies.
Investing is a great way to build your wealth over time. There is a range of investment options, from safe lower-return assets to riskier, higher-return ones. You’ll need to understand the pros and cons of each investment option and how they fit into your overall financial plan in order to make an informed decision. While it seems daunting at first, many investors manage their own assets while others work through a brokerage account.
Looking for investment advice for your business? Contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, we use our experience and expertise to assist you. Contact us to request a meeting.
