It’d be a mistake to think you need to accumulate a certain amount of wealth before you start investing, says one expert.
Benjamin Croitoru, a finance professor and associate dean at McGill University, is offering his advice for the latest instalment of CTV News Edmonton’s “Saving and Spending” series, focused on helping viewers make smarter financial decisions.
He believes everybody, no matter their financial standing, should have basic investment knowledge.
“You do not need a huge amount of knowledge and, perhaps even more importantly, you do not need a lot to get started and to make a big difference in the long term as long as you are consistent,” he told CTV News Edmonton in a recent interview.
HOW TO LEARN
Croitoru says it is possible to learn the basics on your own.
He recommended starting with a free online course offered by his faculty at McGill. The course, called “Personal Finance Essentials,” is broken into short modules and requires participants to pass a test before each chapter.
“Don’t worry,” Croitoru said. “You can take the test as many times as necessary in order to pass. So no stresser.”
There are also many excellent books, he added. His favourite is The Elements of Investing by Burton Malkiel and Charles D. Ellis because it is easy, enjoyable reading.
If You Can: How Millennials Can Get Rich Slowly by William J. Bernstein (also available for free as a PDF) is written about the U.S. market, but explains the main principles of investing well, Croitoru said.
Of course, he noted, professional guidance is available at a price through financial advisors and banks.
“You just have to remember that the person you’re talking to doesn’t work for you. They work for the bank,” he said.
“There’s nothing wrong with that, of course… It does not mean that they cannot give you good advice.”
That’s why he recommends doing some reading first before paying for a service.
STARTING AS SOON AS POSSIBLE
Croitoru encourages even people with limited income to begin investing because of the power of consistency and compound interest.
A modest return rate over the long term will turn even a $10-a-day investment into tens, if not hundreds, of thousands of dollars, the professor told CTV News Edmonton.
“That idea of compound interest – it’s a simple idea – but most people don’t realize how powerful it is,” Croitoru said.
“It’s very important to keep your money invested as long as possible and of course in practice, that means starting investing even small amounts as early as possible.”
The first investments a person makes should be simple and diversified, he teaches.
“You don’t want to invest everything into just one kind of product like Bitcoin, or one one stock of a small number of stocks, because that’s very risky.”
Some financial products like index funds or mutual funds may be attractive to some people, but they get more complicated and come with fees, Croitoru pointed out. And he believes you should be minimizing expenses wherever you can.
Your investing strategy may be customized depending on why you are investing, the McGill professor said.
Usually, the main reason to invest is for retirement, or to support your family.
“On the other hand if you are investing because you want to buy a house in a couple of years or you want to go on vacation next year, you probably want to pick investments that are no risk because you don’t know what could happen to the stock market in the short term,” Croitoru said.
“You’re in for the long haul, the long game. It’s not a short game.”
STICK TO THE PLAN AND OTHER TIPS
“Don’t trust your instincts too much because your instincts are going to get you too excited,” Croitoru advises.
More dangerous, he said, emotions people believe are instincts can make them sell at the worst time, after a crash or collapse. Research shows the market will recover to do reasonably well over the long term.
“You’re going to sell that at the low price. That’s going to be a disaster for your long-term return.”
Likewise, he discourages following the crowd, which can influence your decision making.
“Don’t invest based on the dominant mood, the dominant sentiment, of the market. It’s much better to have a long-term plan and stick to it.”
Staying the course goes hand-in-hand with something that may seem contradictory: don’t try too hard.
“In order to be a good investor, I think you have to understand there are some things that are relatively easy to control and some things that are almost impossible to control, like forecast, for example… That’s incredibly challenging to forecast what stocks are going to become the big stock,” Croitoru said.
“Do not try to pick the best times to get in and out of the stock market because that’s very challenging and trying to forecast that is likely to cause more harm than good… Focus on the things you can control, even if they don’t look very exciting. For example, the fees.”
With files from CTV News Edmonton’s Katie Chamberlain
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Inflation has been putting a strain on just about every household budget. In some cases, it’s the increased cost of food. In other cases, it’s the higher cost of servicing debt as interest rates skyrocket.
If dipping into your retirement savings is the only alternative to make ends meet it’s important to know the tax consequences vary depending on where you draw the cash from.
Ideally, you will already have some cash in your retirement accounts, but your needs could require liquidating investments. Selling investments in a pinch can be tricky in a market where just about everything is in a slump. A qualified investment advisor can help trim profits, or separate the duds from those poised to realize their potential.
You might also want to consult a tax expert. Any tax pro will tell you to never make an investment decision based solely on tax implications, but the amount of tax you pay on withdrawals often depends on how the money is stored and your personal situation.
There is no tax on cash transfers from a regular, non-registered investment account. If a stock or equity fund is sold to generate cash, however, half of the capital gains are taxed at your marginal rate (the rate you pay based on your overall income).
A capital gain is a profit from the original investment. There is a bright side if you are selling an equity that has gone down from its original value, however. Half of capital losses can be used to recoup taxes paid on capital gains over the previous three years, or can be used to offset future capital gains.
TFSA: PROBABLY THE BEST IDEA
There is no tax on capital gains, and therefore no tax break from capital losses on investments sold in a tax-free savings account (TFSA).
In fact, there is no tax on any gains or contributions in a tax-free savings account.
Cash withdrawals from a TFSA can be made at any time but for those who contribute the maximum amount it’s important to know that allowable contribution space will not be renewed until the following calendar year.
HELOC: NO PLACE LIKE HOME
Like a TFSA, money withdrawn from a home equity line of credit (HELOC) or reverse mortgage is never taxed.
Both are loans against the equity in your home and interest is charged on the balance owed. That interest compounds over time until the full loan is paid back; either at the homeowner’s choosing, when the house is sold, or the owner dies.
Tapping into home equity has been the most common solution for homeowners who need quick cash but rising interest rates have increased the costs dramatically.
The interest rate on a HELOC is tied to the lender’s prime lending rate, which is tied to the Bank of Canada benchmark rate. With more central bank rate increases on the horizon, the interest rate on a typical HELOC has risen to about five per cent from under two per cent in less than a year.
Reverse mortgage rates are tied to conventional fixed mortgage rates, which are also rising dramatically. The fixed rates on reverse mortgages are currently around seven per cent.
If you repay the balance on the line of credit quickly, the interest cost is capped. If financing is a chronic problem, the best course of action from a tax perspective could be to sell the house. There is no capital gains tax on the sale of a principal residence.
RRSP: THE LAST RESORT
Registered retirement savings plan (RRSP) withdraws are fully taxable according your marginal income tax rate in the year of the withdrawal (unless borrowed for a fixed term for a down payment on a first home or continuing education).
If you are generating a full-time income from work, you will be taxed at a higher marginal rate than if your income is low.
If you have suffered a loss or drop in income, an RRSP withdrawal could make sense. If you are under 65 years old, a withholding tax will likely be imposed based on the size of the withdrawal. Any amount above the amount you actually owe will be refunded.
9 Types Of Investment Assets
When investing, stocks get the lion’s share of the attention. Investing in individual stocks is one way to grow your wealth, but there are plenty of other investment assets to explore and understand.
Depending on your financial goals, timeline and risk tolerance, you should invest in a well-diversified combination of the following nine assets to build your portfolio.
Stocks are the basic building blocks of investing. When you buy stocks—frequently referred to as equities—you receive shares of ownership in a public company.
As the company grows and earns greater profits, the value of your shares of stock should appreciate. You may even be entitled to dividend payments as a shareholder.
Here are four ways to think about the different stocks available:
- Growth stocks. These are companies that are growing their revenues, cash flow and earnings at rates that are much greater than their peers.
- Value stocks. Very often, the share prices of perfectly solid and healthy public companies drop well below where they should be, due to larger market developments outside of the company’s control. When a stock’s price is low like this but its business fundamentals are good, it’s called a value stock.
- Dividend stocks. Companies that pay dependable dividends are viewed as providing shareholder a steady stream of income.
- Blue-chip stocks. These are the stocks of large, established public companies that have become household names, like Apple, Disney and Microsoft. Blue-chip stocks have a proven track record of dependable performance and a history of regular dividend payments.
To buy stocks, you need an account. You can opt for a tax-advantaged account such as an individual retirement account (IRA), or a taxable brokerage account.
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Bonds are fixed-income securities that corporations and governments issue to raise money to fund projects. When you buy a bond, you lend money to the issuer. In exchange, the bond issuer pays you interest and, once the bond reaches its maturity date, the issuer returns your original investment.
Bonds are less risky than stocks, but they also offer lower returns. If interest rates rise, bonds become less valuable because new bonds offer higher rates.
To buy bonds, you can purchase them directly from an issuer, or you can buy them through a brokerage account.
When financial professionals refer to cash as an investment, they’re not talking about literal bills and coins. Instead, cash investments—commonly called cash equivalents—are short-term investments that provide stability to your investment portfolio.
Common examples of cash investments include the following:
- Money market funds. These mutual funds invest in government bonds, tax-exempt municipal bonds and corporate or bank debt securities.
- Treasury bills. Known as T-bills, these are short-term investments issued by the U.S. government with maturities ranging from four to 52 weeks.
- Certificates of deposits (CDs). CDs are deposit accounts that usually offer higher rates than savings accounts. CDs have terms ranging from a few months to several years, and the money cannot be touched before the end of the CD term without incurring significant penalties.
Cash equivalents are useful if you have short-term financial goals and will need the money within a few months. They are also appealing to retired investors that can’t afford to take on much risk.
You can invest in cash equivalents through banks or TreasuryDirect.gov. Some brokerage firms also offer brokered CD accounts.
4. Mutual Funds
A mutual fund pools money from investors to invest in groups of stocks, bonds and other securities. Its combined holdings, known as a portfolio, are managed by experienced financial professionals.
There are several types of mutual funds:
- Stock mutual funds. A stock mutual fund is a collection of stocks chosen by a professional money manager. The fund is typically designed to track a market index, such as the S&P 500.
- Bond mutual funds. Bond mutual funds invest solely in bonds rather than stocks. These funds provide stability to an investment portfolio and typically have lower returns than stock mutual funds.
- Balanced funds. These mutual funds own a mix of both stocks and bonds, typically with a fixed asset allocation such as 60% stocks and 40% bonds.
Compared with individual stocks, mutual funds are lower-risk investment assets. By investing in a mutual fund, you diversify your portfolio by owning many stocks or other securities at once.
There are thousands of mutual funds, but we’ve identified the best mutual funds to help you get started. If you’re ready to invest your money, you can buy mutual funds through your brokerage account.
5. Index Funds
Index funds are a form of mutual fund that’s passively managed and best suited for long-term investors.
While many mutual funds are actively managed by professionals who try to beat the performance of a market benchmark, index funds aim to replicate the performance of market indexes, such as the Dow Jones Industrial Average (DJIA) or the S&P 500.
Like standard mutual funds, index funds provide diversification since you invest in many companies or industries at one time. If one company within the fund performs poorly, the other companies within the portfolio may offset the losses.
You can buy index funds through your employer-sponsored retirement plan or your brokerage account.
6. Exchange Traded Funds (ETFs)
Like mutual funds, ETFs pool money from investors to buy baskets of securities, including stocks and bonds. ETFs can track market indices or they can be focused on particular sectors, such as foreign energy companies or domestic technology securities.
ETFs tend to have lower investment minimums than mutual funds, so they’re a good choice for new investors without a lot of cash on hand. Like stocks, they are bought and sold on market exchanges throughout the day.
You can buy ETFs through brokerage accounts and employer-sponsored retirement plans. If you are new to investing, our guide to the best ETFs could be a good starting point for you.
An annuity is a contract between an individual and an insurance company. When you purchase an annuity, you pay the insurance company in installments or a lump sum.
In exchange, the insurance company agrees to make periodic payments to you for a set period. Many people typically use annuities to get a steady stream of income in retirement.
There are three main types of annuities:
- Fixed annuities. A fixed annuity pays a guaranteed interest rate for a preset period. Once the accumulation phase is complete, you will receive payments for a set period, such as 10 to 20 years.
- Variable annuities. A variable annuity does not have a guaranteed interest rate. The interest rate and payments will fluctuate based on the performance of the underlying investments, such as stocks and bonds.
- Index annuities. With an index annuity, interest and payments are determined by the performance of a stock market index, such as the Nasdaq Composite.
You can invest in annuities by working with an insurance company, bank or investment broker.
Derivatives are financial instruments whose values are based on an underlying asset. The three most common types of derivatives are futures, options and swaps.
- Futures contracts. Futures contracts are agreements to buy or sell an asset at a future date and price. For example, you may agree to buy gold at $1,000 per ounce six months from now. If the price of gold goes up to $1,200 per ounce, you will profit from the difference. However, if the price falls to $800 per ounce, you will incur a loss.
- Options contracts. These contracts are much like futures, but buyers have the right—but not the obligation—to buy or sell an asset at a future date and price. Call options give you the right to buy an asset, while put options give you the right to sell an asset.
- Swaps. These are agreements between two parties to exchange cash flows in the future. For example, one party may agree to pay another party a fixed interest rate in exchange for a variable interest rate.
Derivatives can be used to speculate on future price movements or to hedge against losses. However, they tend to be complex, risky investment assets, so they may not be a good idea for the average retail investor.
As an investment asset, cryptocurrency has received a lot of buzz. The most well-known cryptocurrency is Bitcoin (BTC), but there are many others. Top cryptocurrencies include Ethereum (ETH) and XRP (XRP)
Investing in cryptocurrencies is risky, as their prices can be highly volatile. These assets are also not regulated like other investment assets, like stocks and bonds. But that may change as governments take a wider interest in applying more regulations to the sector.
Commonwealth trains Cameroonian officials to attract inward investment
A workshop, hosted by the Commonwealth Secretariat and the International Institute for investment Treaties, has trained Cameroonian government officials to attract foreign capital by better negotiating investment agreements.
Held in Yaoundé from 22 to 24 November, the workshop was a vital platform for senior legal affairs officials from various government agencies to strengthen their understanding of bilateral investment treaties and necessary policies to limit their negative impacts, including lawsuits.
Negotiating bilateral investment agreements is a policy issue for developing countries. Most such treaties are signed between capital-exporting developed countries and capital-importing developing nations.
Despite their positive impact, clauses of bilateral investment treaties can impose constraints on host countries. For instance, investors can sue governments if national policy harms their interests. These investor-state lawsuits are often unpredictable and can cost taxpayers a significant amount of money.
Opening the workshop, Chinmoun Oumar, Permanent Secretary of Cameroon’s Ministry of External Affairs, thanked the Commonwealth Secretariat and the International Institute for investment Treaties for hosting the “timely” workshop.
He informed the participants that Cameroon was involved in several ongoing negotiations related to investment facilitation, but it lacked sufficient expertise to fully engage with its foreign partners. Oumar hoped the workshop would enable “Cameroon to build a formidable team of legal experts who could contribute to the ongoing and future negotiations”.
Speaking at the workshop, Opeyemi Abebe, Head of the Commonwealth Secretariat’s Trade Competitiveness Section, said:
“This workshop will enable Cameroonian officials to better promote and protect their national economic and development interests. We hope officials will now have a greater awareness of the implications of bilateral investment treaties for national policy and how to mitigate them, ensuring that foreign investment flows contribute to their country’s development objectives.”
The workshop featured a series of plenaries and best practices to help Cameroonian officials rethink what obligations they should include in their future investment agreements and whether to reform existing treaties in line with national interests. Participants also discussed investor-state dispute settlement practices and a roadmap to reform Cameroon’s investment treaties, especially in view of the Africa Continental Free Trade Area (AfCFTA).
The workshop was hosted at the request of Cameroon’s Ministry of Mines, Industry and Technological Development and Ministry of External Affairs.
- Snober Abbasi Senior Communications Officer, Communications Division, Commonwealth Secretariat
- T: +442077476168 | E-mail
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