If you’re wanting to start investing, but are not sure where to start, we’re here to help! Today on our blog we’re sharing some helpful information from Manulife My Solutions Magazine. We’ll break down important terms and investment categories to help you get started on the right foot with the investment basics you need to know.
First off, what is the simplest way to describe investing? It is investing money with the expectation of material reward. Basically the opposite of driving a new car off the lot.
Types of Assets
There are three main types of investments, or “asset classes.” These are considered in terms of their risk and reward levels.
Equities: These are essentially shares sold by companies which gives you a fractional ownership in the business. There is a higher risk with equities because they’re dependent on the stock market, which can be very volatile. That being said, the risk comes with the potential for more reward as well.
Fixed income: This category typically delivers more modest returns, but also comes with less risk. What we’re talking about here is bonds, which are in place for companies or a government to borrow money for a fixed period, with regular interest payments. At the end of the fixed period, the bond issuer returns the principal amount invested initially. Although typically less risky, Manulife says some bonds have higher risk profiles. This can be due to an issuer’s lower credit rating. There are also some bonds that are only available through a financial institution. These are typically accessed through mutual funds, exchange-traded funds (ETFs) or similar.
Cash and cash equivalents: Typically this asset isn’t earning meaningful returns. However, you may want cash on hand for unexpected expenses or planned purchases you know are coming up soon.
An alternative option to keeping cash in your savings account with limited returns would be to invest in a money market fund or short-term GIC (guaranteed investment certificate). This way your cash is protected, but there is generally a better return than keeping it in a shoebox. With GICs, the longer you can commit, the better the return will be. Make sure you know how long you’re willing to commit, because taking the money out before the term ends can result in a financial penalty.
Source: https://napkinfinance.com/napkin/risk-vs-reward/
Asset Allocation
The next step is to build an investment portfolio and decide how much equity, fixed income, and cash to include.
Whether you are investing to save for a house in 5 years, or retirement in 35 years, should impact the risk level. You want to make the most of long-term investments that have time to recover from volatility in the markets. Remember, higher risk = higher reward. Then as you near retirement, you can work with an advisor to alter your portfolio to better represent your new stage of life and investment goals.
For a further breakdown explaining mutual funds, ETFs, segregated funds and registered versus non-registered accounts, read the full article here.
To speak with one of our financial planners about your investment options, asset allocation, and realistic time horizons, contact us today. We hope you found this article about investment basics useful!