Perhaps you need a new car or have a wedding to pay for. Maybe there are education plans down the line. Whatever they are, you’ve got goals. Wouldn’t it be great if your money worked a little harder to help you attain them? Enter investing: The concept is, you invest money to make money, and doing so can help you reach your financial goals. Sounds simple enough. So why is dipping into investing a challenge for some?
There are a few things you can do to better understand the concept of investing. These include clearly defining your financial goals, knowing your risk tolerance level, understanding the products that are out there—and having an open mind. While there’s no denying that investing in stocks comes with ups and downs, once you know how investing works you can make informed decisions. Read on for some insights that can help you get on track to financially achieve what you want:
Know your risk tolerance
How you invest should be based on your risk tolerance. In simple terms, those who want safer returns should have more of their portfolio dedicated to low-risk investments. However, if you’re the type of person that’s willing to take chances for potentially higher returns, then higher-risk investments will be appealing.
It’s also worth noting that your age will help determine your risk tolerance. “Someone in their 20s who’s starting their career can usually afford to take more risks since they’ll have many investing years ahead of them,” says Colleen Ciccozzi, Senior Manager of Wealth Programs for Coast Capital. “However, if you’re retired, you likely want to preserve your capital.”
What reflects your risk tolerance is something called asset allocation, which is defined as the process of dividing the money you have in your investment portfolio among equities (higher-risk investments), fixed income (lower-risk investments), and cash. Here are some asset allocation examples based on risk tolerance:
- Low risk: 40% equities and 60% fixed income
- Medium risk: 60% equities and 40% fixed income
- High risk:80%-100% equities and 0%-20% fixed income
Having a balanced portfolio allows you to diversify, so you’re not exposed to a single sector if a market crash happens. Also, your risk tolerance will change over time along with your goals. So making adjustments to your asset allocation depending on your circumstances will most likely be needed.
Learn about different investment types
When people invest their money, they expect to make a profit. How much you’ll make depends on what products you invest in and the current market conditions. Generally speaking, low-risk investment options have a lower rate of return, whereas riskier investments may yield you higher profits. Understanding the different products available to you and where they fall in that spectrum will help you build your portfolio to match the pace of your goals.
There are two investment “buckets” to pull from, low risk and high risk. Here’s a rundown on what they’re about:
1. Low-risk investments
Often referred to as fixed income, the following low-risk investments are a good choice for anyone who’s looking to preserve capital or needs to balance their portfolio.
- Term deposits: Often known as guaranteed investment certificates (GICs), term deposits guarantee you a set interest rate as long as you’re willing to lock in your money for a certain period.
- High-interest savings account (HISAs): These accounts are similar to a traditional savings account, but you’ll typically get a higher interest rate.
- Money market funds: A money market fund is a low-risk mutual fund that invests in short-term government and corporate bonds.
- Exchange-traded funds (ETFs): ETFs are a type of investment that groups securities that have multiple assets—like stocks, bonds, and gold, for instance—together. Shares can be bought or sold on an exchange.
- Bonds: Bonds are government- and corporate-issued investments that have little risk.
2. High-risk investments
Investments that are higher risk, also known as equities, could give you higher returns. Most people have some of these products in their portfolios to help them meet their investment goals.
- Individual stocks: You can purchase shares in companies. The value of the stocks is typically determined by the performance of the company.
- Speculative stocks: These are companies/stocks that are being hyped on social media without a proven product or strategy and could be risky.
- Emerging and frontier economies: These are countries to invest in that have potential, but less-regulated exchanges, thus they often lack liquidity (limited buyers).
- Cryptocurrency: Highly volatile and without any regulations, cryptocurrency—a digital form of payment that can be exchanged online for goods and services—is one of the riskiest products out there.
It’s worth noting that ETFs and mutual funds are often low-risk but can also be high-risk options. That’s because those products passively track an index, sector, commodity, or are a basket of stocks. The types of investments held within the product would determine how risky they are.
“The key thing to understand is that investing is all about balance. You don’t need to choose between low-risk or high-risk investments,” says Ciccozzi. “You can choose a balanced portfolio of ETFs and mutual funds. There are even market-linked GICs available that guarantee your initial investment while allowing you to capitalize on any gains.”
Taking the first steps to invest in the market
For many people, investing can be intimidating. Navigating the markets and understanding asset allocation can be things that make your head spin. Fortunately, there are different ways you can invest in the market.
First off, you need to decide between passive and active investing. “With passive investing, you would purchase products that track an index or sector,” says Ciccozzi. “The fees with passive investing are low, but your returns will always be the same as the market.” With active management, your financial advisor will make decisions based on market conditions and experience. You may pay a bit more in fees, but your return could be higher.
Which method you choose is really based on your preference. When you’re ready to put money in the market, you should decide on one of three styles of investing:
- Do-it-yourself investing: If you want complete control of your portfolio, going the do-it-yourself route is an option. It’s actually a pretty simple process. All you need to do is open an account with a discount brokerage and then purchase the investments you’re interested in. The main advantages of DIY investing are the lower fees and the ability to choose the investments that are right for you. “Investing on your own requires you to do research, and you may need to have an understanding of financial concepts such as correlation, beta, and price-to-earnings ratios,” says Ciccozzi. “While some investors love this, you may be emotionally vulnerable to changes in market value and less confident.”
- Robo advisors: Still relatively new in Canada, robo advisors have become attractive since their fees are reasonable. What investors like about robo advisors is the hands-off approach. Your portfolio is chosen based on your risk tolerance. All of the actual investing and rebalancing is handled by algorithms and fund managers, so there’s nothing for you to do. This passive style is suitable for some investors, but there’s no one to check your emotions, and you may not get personal advice about your overall financial picture.
- Financial advisor: Although using a financial advisor, or wealth manager, will cost you more than some other options available, you’re getting added value. Wealth managers can create a custom portfolio that’s designed for your needs and help you navigate the ups and downs of the markets. Essentially, you’re getting someone in your corner who will help you manage your finances so you can focus on the things that you care about. “Professional advisors understand market volatility, are an objective party, and will monitor your portfolio,” says Ciccozzi. “In addition, you’ll get value through their knowledge of tax-efficient investing, portfolio rebalancing, and goal alignment.”
Tapping a wealth of information for the future
With so many possibilities for entry, it’s never been easier to invest in the stock market. The key thing is to choose the route that makes the most sense for you and the financial goals you’re defined for yourself. Regardless of your thinking, it’s always a good idea to do some research so you can start to visualize how your money can work for you. Seeing is believing.
Reach out to a Coast Capital Financial Advisor to better understand all the investment options available to you.
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Coast Capital Savings Federal Credit Union provides advice and service related to deposit, loan, and mortgage products. Coast Capital Wealth Management Ltd. provides investment and financial planning services. Worldsource Financial Management Inc. provides advice and service relating to mutual funds.
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