Investment Planning

Q.1. What is investment planning?

Investing is a way of growing your money, but there are no guarantees so before you think about investing you should know what your risk tolerance is. When you invest, you hope that the value of your investment will grow and give you a positive return on your money. As a rule of thumb, the safer the investment, the slower the rate of return. You therefore, should consider ways to maximize your returns and minimize your risks.

Q.2. How do you get involved?

There are real risks associated with investing, so it’s important not to just jump in and invest on hunches. Proceed slowly and with caution. Consider creating some sample simulated portfolios to start, so you can see how investing works. When you have a better idea of how the Canadian market works, you can get involved by purchasing a few GIC’s, stocks, bonds, and mutual funds, for example. However, even professionals can lose money on their investments, so it is important that you involve a professional and accredited investment counsellor, financial adviser or stock broker. Only those with a very high tolerance for risk should get involved in on-line day trading. Work with your adviser to determine your risk tolerance, choose the right tools and in time you will be able to build an investment portfolio that is right for you.

Q.3. What kind of investor am I?

Investment is about choices and your choices are a reflection of your level of risk tolerance. There is a school of thought that says your risk tolerance is the level that allows you to sleep at night. You need to know what your investment goals are and how patient you can be in achieving them. Before investing you need to know how much risk you can live with.

Q.4. What options are available?

Very low risk investments, such as bank savings accounts, and GICs will often rarely return more than the rate of inflation. With these types of investments you likely will not lose your money but it will grow more slowly than it would if it were invested in higher risk equity stocks. Some investments, like blue chip stocks, pay dividends. Here you get regular income from your investment depending upon how well your company does. Mutual funds and exchange-traded funds (ETFs) can be good ways to get involved in equity trading with lower risks than buying individual stocks directly. However, there is always some risk in equity investing, so it’s important to learn as much as possible before you invest. You will also need to learn about tax strategies because different tax rates apply to different types of investments; for example, dividends are taxed differently from capital gains.

Q.5. How do stocks work?

When you buy stock in a company you buy a share in the company. The price depends upon the performance of the company and the demand for those stocks. As such, if a company does well, the price goes up and your investment is worth more. Conversely, if the company does poorly, demand for that stock drops, the price goes down and your investment is worth less. When you invest in stocks there are varying levels of risk involved depending upon your choices.

Q.6. How do bonds work?

When you buy a bond you are lending money to that company or government for a set period of time at a set interest rate. On the set date the company or government pays you back in full with interest. Bonds can be safer investments as you know how much interest you will make and when you will receive that money. You can, however, also lose money on bonds too so you need to understand what makes investing in bonds risky.

Q.7. Should I borrow to invest?

Never do anything with your money that you do not understand. Borrowing to invest is also called leveraging and you need to know what is involved. You should know the true costs of borrowing to see if the benefits will outweigh the costs.