news&views Autumn 2018 | Page 16

Financial Gerhard Sawatzky, MEd, CFP ® Investing 101: Back to Basics The world of investments is an environment of change. New fi nancial products are created, government policy changes, business cycles, world politics, and market volatility keep members of the fi nancial industry awake at night. Regular folks with confi dence in their fi nancial plan should not lose sleep as a result of listening to the daily news. With a basic understanding of how and where our money is invested, we may rest easy. The basics of investing has not changed with fi xed income and equity investing remaining as two common investment strategies. The fi xed income component of a portfolio is the most resilient to daily market infl uences. Guaranteed investment certifi cates (GICs) will continue to pay the pre-determined interest returns despite market changes. Compared to many other investments, GICs will earn lower returns over the long term, and the interest return they generate is 100% taxable as income each year. Locked-in (or non-redeemable) GICs over fi ve-year terms earn the best interest returns. However, the locked-in feature is a form of risk since the owner cannot access this money until the term is over. Bonds are also fi xed income instruments most commonly classifi ed as government or corporate. Government bonds are loans to municipal, provincial, or federal governments, or to governments of other countries. Governments are rated by their ability to repay these loans. Investors earn higher returns from government bonds when the ratings are less positive, that is, when the possibility of a default is greater. Corporate bonds are loans to corporations that enable them to do business or expand their operations. The more established and secure the corporation, the lower the interest return will be for the bond. High-yield bonds pay higher rates of return but also have a higher 16 | arta.net risk of default. Though governments or corporations are subject to default, the bonds that have been issued will always be repaid before equity shareholders are paid; hence, there is less risk with a bond investment than with an equity investment. Interest for GICs and bonds is paid monthly, quarterly, or annually. This interest return is 100% taxable as income for the year in which it was received. Equity investors are often more interested in the long-term growth of their funds rather than receiving a regular income from them. Dividend paying equity investments and return-of-capital funds can be a source of regular income. Alternatively, the distributions are reinvested. Individual stocks and equity mutual funds are considered equity investments. They are divided into a variety of asset classes including Canadian equity, Canadian small caps (smaller corporations), U.S. large caps, U.S. small caps, and international equity. Within each asset class, the investment can be divided by sector. Examples of sector allocation are fi nancial services, technology, energy, consumer goods, health care, and so on. Another breakdown could be geographic allocation, such as North America, Asia, Europe, Japan, and Latin America. A mutual fund is a pool of money collected from many investors that allows the small investor access to all fund types including fi xed income funds, equity funds, dividend funds, and balanced funds. Each mutual fund is operated by professional portfolio managers who are guided by the fund’s investment objectives. Investors may begin investing with as little as $500. Since mutual funds can include investments from many diff erent companies, sectors, asset classes, and geographic regions, they reduce risk through diversifi cation. Another