Here's a basic primer for advisors to provide clients with a grounding in investments
Are some of your clients just beginning to learn about investing? You can share this primer with them to cover the basics.
What is investing?
According to the dictionary, investing means committing your money somewhere – such as in a company or government – to earn more money through a financial return.
Investing is different than saving as it can help you grow your money to achieve your goals. It usually means putting money away for a long time rather than trading it frequently, like you might with stocks. It’s riskier than putting it in a savings account, but it can offer you more return.
What should you consider before you invest?
It’s easy to get overwhelmed with all the options and information when you’re a new investor. Check these tips to learn how to build your wealth.
- How to start investing:
- Find a financial advisor: Ask friends and family who they work with so you can find the guide who fits you best. You want to find someone you’re comfortable with who is knowledgeable as that person will soon know almost everything about your spending and be guiding you.
- Decide what you can invest: Work with your advisor to develop a financial plan to cover your expenses, pay down any debts, save for an emergency fund, and then determine what money you can afford to invest to grow.
- Define your risk tolerance: Your advisor can help you define what your risk tolerance, or capacity for risk, is so you’ll know what kind of vehicles you should invest in. A portfolio with 100% stocks might give you the highest long-term interest, but be the riskiest. Bonds, on the other hand, will provide lower returns, but provide more buffer if the market crashes, as it did in March 2020. Knowing that will help your advisor recommend where best to place your money for maximum growth with minimum stress.
- What to consider before you invest:
- Know why you’re investing: Are you investing to pay for a teen’s schooling or for your own retirement? Those timelines are very different, and may also influence how much risk you can comfortably take. The shorter the horizon, the more conservative you need to be with your investing. The longer your horizon, the more you can invest in higher-risk and return vehicles before you need the money. Let your advisor guide you.
- Define your investment horizon: Are you saving for a short- or long-term goal? You’ll need to be more conservative if it’s short-term, like investing for a house down payment, as you’ll need the money sooner. A general rule is don’t invest in the stock market if you need the money within three years. Keep it in a guaranteed investment certificate or high-interest savings account instead. Stocks, ETFs, and mutual funds are more suitable for long-term – ten years or more – investments.
- Diversify your investments: You need to have a diversified, or mixed, portfolio so, if one part of your investment doesn’t do well, you don’t lose everything, because other parts of your portfolio that may do better. That may mean a mix of equities and bonds or other configuration.
- Ask about fees: Some of the online do-it-yourself investment systems may not charge fees, but they may expose you to more risk because you don’t know what you don’t know until you lose your money. Advisors, who provide you with their expertise, typically charge about 1% on investments, but they can steer you through some rocky shoals so you earn more returns and don’t lose your money.
- Tips on how to invest the right way:
- Be prepared to ride the waves: You can make, and lose, money by investing. Prepare to ride market ups and downs for the long-haul, but also heed your advisor’s advice to move your funds to make the best returns when the advisor deems it necessary.
- Listen to your advisor, not the media: Don’t base your decisions on what’s trending in social media or showing up in news reports. They may just have a short-term picture, which may not even be accurate or to your financial benefit.
Types of Investments
- Bonds: Bonds are loans that you give a company or government, such as the Canadian government’s Canada Savings Bonds (CSBs), because they earn more interest than bank savings accounts. You must commit the money for a block of time and the higher the interest, the higher the risk.
- Mutual Funds: Mutual funds allow you to invest in a basket of stocks or bonds that you couldn’t access on your own. They allow you to diversify by holding many investments in one product. They’re the most widely used investment vehicles in Canada. They may require a certain dollar requirement to invest, and fees can range from very little for passively managed funds to up to 2 to 3% for equity mutual funds.
- Stocks: A stock is a tiny piece of a company that anyone can buy. If you’re going this route, you should understand the business you’re investing in and be prepared to hold the stock for a long time as these can be the riskiest investment since your profit rises or falls with the company. While stocks can earn a lot, people can be drawn in by the short-term mentality because stocks are priced at every second of the trading day.
- Exchange-traded Funds (ETFs): These have become very popular in the last decade. They are like mutual funds because they hold a basket of stocks or bonds, but they trade like stocks throughout the day. They don’t have the same minimum investment dollar requirements as mutuals, but do have fees. There are many types of ETFs, including passive and active.
- Real Estate: You must buy houses or apartments from the property owners, which can be very expensive in the major markets.
- Real Estate Investment Trusts (REITs): REITs are companies that own and operate real estate holdings, such as mall, hotels, hospitals, and seniors’ homes. They collect rents and provide their shareholders with dividends or distributions. These allow you to invest in a sliver of real estate property with other investors, so they’re more affordable than buying property on your own.
- Cash equivalents: Cryptocurrency, like Bitcoin and Ethereum, is online money that isn’t related to any bank or government. These are highly speculative alternative investments, which should not be the core of your portfolio.
