What Can I Invest In?
September 26, 2020
By: Hanson Feng
DISCLAIMER: The information in this article is not provided by a certified financial advisor or financial planner. Returns expressed in this article are not guaranteed and The Written Revolution takes zero responsibility for lost capital. Please speak with a certified financial advisor, investment planner, or financial planner regarding products best fit for you.
I want to make money from money, what can I go for? For everyday investors, the main risk mitigation strategy is portfolio diversification and allocating your assets to reflect the stage in your life. There are no right answers for this, some people do this with the consultation of a financial advisor or investment advisor, others (like me) do it independently and bounce ideas off my peers. Another choice is to go hands-off with their investments by using professionally managed portfolio solutions through their bank or an investment firm like WealthSimple or Edward Jones.
Get to know the Different Asset Classes
Let’s start off with understanding the different asset classes. The information below reflects Canadian banking, however, most countries offer similar or identical products under different names. Talk to your relationship manager today for more information. All interest rates are annualized. They’re listed in the order of riskiness:
Chequing and Savings Accounts: These have zero risks as they are insured by the Government of Canada (up to $100,000 per account) as long as your bank is under CDIC protection. Interest rates are annualized and paid out monthly, check with your bank if the interest is compounded daily or monthly. Remember a Chequing account is designed for spending, so no interest is accrued on the balance.
Return: 0% to 1.0%
Risk: No risk
Pros: Liquidity with no risk
Cons: Low-interest rate
GIC – Guaranteed Income Certificate (or CD – Certificate of Deposit): These products are also guaranteed by the government of Canada under CDIC insurance. These products are when you borrow money to your bank and lock them in for a period of time. You cannot access this money.
Return: 0.5% to 3.5% (depending on the BoC overnight lending rate)
Risk: No risk (CDIC insured)
Pros: Higher rate than most Bonds/T-Bills, safe
Cons: Low-interest rate
Everything below is considered a ‘security’ under American and Canadian legalization:
Money Market Funds: These are funds that are fully under ETFs and Mutual Funds but hold onto cash with a highly liquid nature. While these are not insured by the government, most funds have never had a negative year. Like RBC’s Canadian Money Market Fund (RBF271) has never had a negative balance since its inception.
Return: 0.25% to 1.5%*
Risk: Very low risk
Pros: Liquid investment
Cons: Low-interest rate, same as most savings account
Bonds/ T-Bills: When you buy a bond, you’re buying ownership of debt. This makes you the payee of debt – there is corporate, government, and personal bonds. Government and corporate debt can be bought in single certificates, personal debt is usually bought through funds like ETFs and Mutual Funds like Mortgage-Backed Securities (mortgage debt) and Asset-Backed Securities (packages of consumer debt – lines of credit, credit cards, etc.). In all cases, the longer the maturity date of the bond, the higher the return. If this isn’t the case, it’s usually a sign of a looming recession.
Return: 0.75% to 5.0%*
Risk: Low Risk
Pros: Low risk with a higher interest rate
Cons: Low-interest rate for the risk when compared to GICs
Mutual Funds and ETFs: Most people invested in the stock market are invested through these funds. There are two types; actively managed and passively managed. There are thousands of these funds out on the marketplace for investors, each with their own goals; Socially responsible investing, Large-Cap Stocks, mimicking the US stock market, technology fund, Canadian Equity, etc. These funds can be a collection of bonds, cash, derivatives, etc. Each fund has different goals and risk. Consult the fact sheet for information on performance, returns, and risk.
Both Mutual Funds and ETFs charge some form of management fee and in some cases an MER. Actively managed funds typically charge between 1% to 3% of your entire balance, while passively managed funds charge between 0.05% to 0.5% of your entire balance. This means if you lose money, you are still charged.
Check out your bank’s personal investment sites (these are sometimes referred to as “Global Asset Management”, Blackrock iShares, or Vanguard.)
Return: Varies on the fund and its contents
Balanced portfolios (diverse contents): 3% to 15%*
Bonds: 0.5% to 4%
Domestic Equity: -15% to 30%*
Risk: Varies on the fund and its contents
Pros: High exposure to large companies whose stocks are unaffordable like Tesla, have a portfolio professionally managed, and buy into certain funds that do risk mitigation for you (ex. an education 2030 fund will gradually move to less risky investments as it moves closer to 2030)
Cons: High management fees (depending on your deposit, you could be losing up to 6 digits over the course of 10 to 20 years)
Stocks and Equity/ Equity Security: The two names can be used interchangeably but refer to buying a portion of the company. You earn income either by receiving quarterly payouts call dividends (not all stocks offer these) and/or by selling the stock at a higher price. You have two options when buying stocks/equity;
'Long position' is the most common purchase, you expect the company’s value to rise. If you’re ‘bullish’ you place long bets as you expect the market to rise.
'Short position' is when you believe the price of the stock will decrease in value. If you’re ‘bearish’ you trade shorts as you expect markets to fall.
Options are a contract that provide you with the right to purchase a stock at a certain price
Return: -20% to 40%*
Risk: Mid to High
Pros: High Returns with an average annualized return of about 7% to 10%*
Cons: Can be high-risk dependant on the companies you purchase
Want higher gains? Take on more risk
The General rule of thumb with asset allocation is the more equity a portfolio has, the more risk it holds. Risk should reflect your values and current goals. I personally do not intend on cashing out my investments for at least 5 to 10 years, hence why I can take on more risk. However, if I needed to retire within the next 3 to 5 years, I’d begin moving my investments to safer assets like cash, bonds, and GICs.
For those who live in developed countries. Emerging country assets like stocks and bonds are always riskier than developed market bonds; an African ETF fund is far riskier than an American ETF fund in most cases. However, an African ETF fund has the potential to return far higher returns.
Most investors (including myself) have a ‘model portfolio’ for asset allocation and industry allocation, this means the percentage of the money you place in each basket. So today my portfolio is;
~65% cash and equivalent investments
~30% US Equity and Stocks
~10% Canadian Equity and Stocks
However, as I move money and place trades, I want to have a portfolio;
25% US Equity
25% Canadian Equity
25% International Equity
20% GIC investments and Cash
5% Fixed Income
This ‘model portfolio’ is what would be considered to be higher risk. For someone beginning to enter retirement, they’d begin to move their RRSP savings into more conservative asset classes like Fixed Income and GIC Investments.
Most upper-middle-class Canadians don’t simply trade their time for money, they also make money from money.
*Returns are not guaranteed and The Written Revolutions does not take legal responsibility for financial loss through these products. The financial institutions, wealth management companies, and mutual fund providers do not sponsor this post and are used for illustrative purposes only. Please consult with your financial advisor before making any financial decisions.
Types of Registered Accounts
DISCLAIMER: The information in this article is not provided by a certified financial advisor or financial planner. Returns expressed in this article are not guaranteed and The Written Revolution takes zero responsibility for lost capital. Please speak with a certified financial advisor, investment planner, or financial planner regarding products best fit for you. All taxation information, percentages, and numbers are for reference only, this information is not provided by a certified accountant. Please consult a certified accounting firm on tax deductions and deferral options before making any investment decisions in tax-deferred accounts.
I’m ready to invest but there are different types of investment holding accounts?! Let’s Talk Registered Accounts. In most countries when someone makes money from money, that income is taxed, typically at a lower rate. In Canada that’s called a capital gains tax, this is applied onto gains you receive on any investment from a financial institution when someone sells a non-primary residency and experiences a gain in value. In Canada, the capital gains tax is 50% of the gained amount. This is also how high-level management at big companies are compensated as they’re taxed less on their income. So, here’s a sample of numbers;
You make $30,000 at work in Alberta,
All $30,000 is taxable at the 25% rate
Making your average tax rate 15.67%
Your take-home pay is just over $25,000
You make $30,000 through trades in the stock market in Alberta,
Only $15,000 of the $30,000 is taxable at the 25% rate (and you’re not taxed in Alberta)
Making your average tax rate 0.89%
Your take-home pay is about $29,700
You can avoid or defer capital gains taxes
Registered Accounts are a type of account that defers or avoids capital gains tax in a variety of ways. However, they have complex rules and fines/interest if these specific rules are not followed. Consult a tax advisor for more information. You can hold most types of securities, stocks, bonds, and funds in a registered account.
Registered Educational Savings Account (RESP): This account is typically set up by an adult for a minor’s benefit (it does not need to be a guardian or parent). The contribution is tax-deferred with government contributions (AKA free money) through grants. When the beneficiary withdraws the money from the account, they’re taxed at their income level (typically very low).
Contribution Scheme: Parent Contributions and government Contributions
Canada Education Savings Grant: a match of 20% on the first $2,500 annually to a maximum of $500 a year and $7,200 per lifetime (source: RBC Royal Bank)
Canada Learning Bond: for low-income households, an initial $500 is contributed into the account with $100 paid every year until the age of 15 to a maximum lifetime benefit of $2,000 (Source: RBC Royal Bank)
Provincial government contributions: Select BC, Quebec, and Saskatchewan account holders qualify
Contribution Limit: $50,000 per lifetime
Restrictions: An RESP can only be open for 35 years, following that it must identify a new beneficiary or liquidate it into cash (minus taxes and grants) or transfer over to an RRSP (minus grants)
Tax-Free Savings Account: This account allows any person that is the age of the majority in their province to invest and not be charged capital gains tax. There are yearly contribution limits and all gains within a TFSA are tax-free.
Contribution Limit: in 2019 a maximum of $6,000 can be deposited
Restrictions: You must be over 18 (or 19) to contribute
Registered Retirement Savings Account: This is the most common type of registered account for Canadians. This account is designed for retirement (as in the name). You contribute to the account while you’re working and invest the money inside. The capital gains tax is not eliminated but deferred, in theory when you withdraw from the account once you retire your income will be lower, lowering the overall tax. When you contribute to an RRSP when you’re working and paying income tax, you receive tax benefits on contributing.
Contribution: Maximum of 18% of income per year or $26,500 – whichever comes first.
Spousal RRSP: a joint account with two partners
Employer contribution scheme: most employers contribute if not match dollar for dollar your contributions into the account
Transfer from other accounts: in some cases, you can transfer funds from other registered accounts into your RRSP, like from an RESP, pension plan, REIF, etc.
Defined Contribution Pension Plan (DC Pension): This is a pension set up by one’s employer. The DC pension plan is known as the less generous brother of the traditional pension plan. You and your employer decide on a contribution amount. The contributions are then invested in select funds at the pension plan holder (typically held by a financial institution that is separate from the company). You take on the investment risk in this pension plan and manage withdrawals. The benefit of a DC pension is you can take it from employer to employer rather than withdraw lump sum payments if you leave the company.
Contribution Scheme: Employee + employer contribution
Contribution Limit: 9% of base pay
Defined Benefit Pension Plan (DB Pension): This is known as a more generous pension plan. It typically entails a pre-determined contribution scheme between the employee and employer. This money is collected from all employees and pooled. Off of a formula (typically off years of service and pensionable income), you receive a monthly payment for life. These are typically far more generous then DC pension plans and removes the investment risk from the induvial. However, if an organization is to collapse, legal battles have taken place for employees to claim their pension as the pension fund is not held individually but rather pooled into a group fund.
Contribution Scheme: Employee + employer contribution
In some cases, the employee contributes nothing to the fund. Example TD Canada Trust offers a fully employer-paid DB pension plan for all eligible employees.
Contribution Limit: none
Registered Retirement Income Fund (RRIF): Once you turn 71, your RRSP account must be closed. So, most retirees withdraw their RRSP funds into an RRIF to mitigate tax obligations. The intention of an RRIF is to create a flow of income and is not designed as a savings or growth account, however, growth is tax-deferred.
Contribution: From RRSP
Restrictions: there are minimum withdrawal rates depending on age from an RRIF. The minimum withdrawal rate is 7.38% at the age of 71 and levels off at 20% at 94 (source: CIBC)
These are some of the more common registered accounts with LIRAs (for liquidated pension plans), LIFs (life income fund – same as LIRA), RLIFs (flexible LIRA), etc. all of which have their own purpose. It’s important to explore options to both invest while mitigating tax obligations.