Are you putting some money away? That's great! But what do you do with it? Did you know you can invest it? Investing—now that's an impressive word! Stocks, RRSPs, returns, TFSAs, risk, FHSAs ... It can all get very confusing. Here are some basic concepts that can help.
When you start investing, take the time to learn about investment products and feel free to reach out to an advisor for help. This may seem complex at times, not to mention the fact that emotions may influence your decisions. An advisor has the objectivity and knowledge needed to make recommendations that meet your needs.
Key words to learn before you begin
Investor profile
This is your starting point. You have to know what kind of investor you are. It will determine how you should invest your money according to your needs and objectives. Determining your investor profile is the first step: Are you more cautious or a risk taker? Several factors can influence your investor profile (such as your age, investment knowledge, how much of your total net worth consists of investments, your risk tolerance, your ability to manage risk, and so on).
3 important concepts when determining your profile:
1. Investment objective
That’s your motivation: Why are you investing money? For a car, trip, home, retirement…
2. Investment horizon
It’s the time you give yourself to achieve a project, for example:
- Short term - A car
- Medium term - A home
- Long term - Retirement
3. Risk tolerance
This refers to your ability to tolerate investment highs and lows: How much do you like rollercoasters? When it comes to investing, you have to be honest with yourself so you can make the right decisions. How would you react if your $10,000 investment was suddenly only worth $8,000? Since no one can predict market movement, investing in the markets means accepting that there will be ups and downs. So it's better to stay focused on the long term, in accordance with your objectives, and stay the course during market fluctuations. Now that you've determined your investor profile, you can invest accordingly.
Performance
This is what you want to get from your investment. As a general rule, the return depends on the type of investment product. For example, some investments pay interest, while others pay dividends.
Investment products
There are several types of investments, for example:
- Term savings
- Market-linked guaranteed investments
- Bonds
- Stocks
- Investment funds
- Exchange-traded funds
Each product has features you need to understand to determine whether it’s right for you. Just because your friend likes a product doesn’t mean it suits your needs. You have to understand the characteristics of each product, the risk involved, the availability of funds and the potential return. Is the capital protected? Could it decrease? Is performance known, and is it guaranteed? Do you have to invest for a set or minimum period?
Investment vehicles
RRSPs (registered retirement savings plans) and TFSAs (tax-free savings accounts) are examples of investment vehicles. They're known for the tax benefits they offer. You could contribute to them, but if you want to grow the money you put away, you need to choose investment products based on your project, investor profile, objective and investment horizon, as well as your risk tolerance.
Another investment vehicle, the tax-free first home savings account (FHSA), and combines some of the benefits of RRSPs and TFSAs:
- The contributions you make to an FHSA are deductible, which reduces your taxable income.
- Withdrawals are not taxable, subject to certain conditions, if you use them to buy a qualifying home.
- You can contribute up to $8,000 a year to your FHSA (up to a total of $40,000 in your lifetime).
Are you contributing to your TFSA to buy a car? Are you contributing to your RRSP for retirement, but you'd also like to go back to school? What's important is to implement an investment strategy that's tailored to your needs. The right vehicle and investment product could be different depending on your goal.
Use our comparison tool to see the differences between TFSAs, FHSAs, RRSPs and their benefits. This will help you identify which is the best savings plan for you.
Our advisors are available to answer your questions and help you make investment decisions. For more information or to start investing, contact us online or by phone.