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As you may know there are many ways you can invest your money. While there are thousands of investments to choose from, in general, each will fall into one of the four main categories below. These categories are also called “asset classes”.
CASH & CASH EQUIVALENTS: This includes money in your bank account and “cash-like” investments, such as Canada savings bonds, treasury bills and money market funds. These are generally very safe and give you quick access to your money. However, they have relatively low rates of return compared to other kinds of investments.
FIXED INCOME SECURITIES: Bonds and other “fixed income securities” are investments that are based on debt. When you buy a bond, you are lending your money to a government or company for a certain period of time. In return, they promise to pay you interest on your money and to repay the “face value” at the end of the bond’s term. The face value is the value of the bond when it was issued.
Many fixed income securities come with a guarantee and are relatively safe. They tend to offer better rates of return than cash equivalent investments because you’re taking on more risk by lending out your money for a longer period. Other bonds, like “junk” bonds, offer much higher rates of return, but they can be very risky and have no guarantees.
EQUITIES: When you buy stocks or “equities”, you become a part owner in a business. You may be entitled to vote at the shareholders’ meeting and will receive any profits the company allocates to its shareholders. These profits are called dividends.
You can make money on a stock two ways: if the stock increases in value and if the company pays a dividend. However, there are no guarantees that a stock will make money or that the company will pay a dividend. The value of a stock can go up or down— sometimes frequently and sometimes by a lot.
ALTERNATIVE INVESTMENTS: These include things like options, futures, foreign currencies, hedge funds, gold and real estate. They represent some of the most complicated types of investments. For this reason, they usually have higher-than-average risk in return for higher-than-average return potential. Alternative investments are typically meant for sophisticated investors who can afford to take high risks.
What about Mutual Funds? Mutual funds are simply a collection of investments from one or more asset classes. Each mutual fund focuses on specific investments, like government bonds, stocks from large companies, stocks from certain countries, or a mix of stocks and bonds. The level of risk and return of a mutual fund depends on what it invests in.
When you buy a mutual fund, you’re pooling your money with many other investors. The main advantages are that you can invest in a variety of investments for a relatively low cost and leave the investment decisions to a professional manager.
GETTING THE RIGHT BALANCE: Not all investments perform well at the same time. Different investments react differently to world events, factors in the economy like interest rates, and business prospects. So when one investment is down, another might be up. Having a variety of investments can help offset the impact poor performers may have on your portfolio, while taking advantage of the earning potential of the rest. This is called “diversification” but it’s really just putting into practice the old adage of “not putting all your eggs in one basket”.
First, you need to decide on the asset mix. The right balance will depend on your goals, when you need your money and how much risk you are willing to take. The next step is picking the specific investments in each asset class. If you’re not comfortable doing these things on your own then we would encourage you to give us a call.
BE AN INFORMED INVESTOR: One way to help protect your money is to be an informed investor. Whether you have an adviser or invest on your own, ask the following questions before you buy:
• How will the investment make money? Does it pay dividends or interest? Does it have the potential to go up in value? If so, what needs to happen for it to go up in value?
• What are the total fees to buy, hold and sell the investment? Do you have to pay a penalty or fee if you have to sell the investment quickly or before its maturity date? How easy would it be to sell the investment if you needed your money right away?
• What are the specific risks? Could you lose some or all of your investment? In general, the higher the expected rate of return, the greater the risk.
• Does the investment fit with your goals and risk tolerance?
At F1RST CHO1CE Investment Solutions were passionate about sharing our knowledge, experience and unbiased opinions with families and individuals that are looking for a trusted advisor to help them with their Investment Planning options.
ANY QUESTIONS?…Contact a Licensed Investment Advisor today!