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