Early On The Career Path

What Are Your Investment Options?

Generally, at this stage of life, your focus is on growing your wealth, while really learning about investing. Here are some of your investment options:

Bonds

As the world’s stock markets continue to show signs of volatility, many investors have started looking at good-quality corporate bonds, or debentures, for a certain percentage of their portfolio. Good-quality bonds — investment grade, rated BBB and higher — tend to have very low default rates (less than 1 per cent) and for the most part pay higher interest than government bonds.

Mutual Funds

Mutual funds are baskets that contain many different types of investments. The types of investments inside a fund dictate what type of mutual fund it is. If the basket contains more than 50 per cent large Canadian corporations, the mutual fund is called a Canadian equity fund. If it is composed of all Canadian bonds, it is known as a Canadian bond fund. Mutual funds have many different types of components, but it is the majority content that dictates the mandate and label of the fund. Owning a mutual fund is considered a more conservative approach than owning just one common stock, because it can be made up of so many diverse investments.

Stocks

The other investments that people commonly have in their portfolios are stocks. Most investors know that when they purchase shares (stock) of a publicly traded company, they become partial owners of that entity — in most cases a very, very small owner, but an owner nonetheless. Generally, most investors don’t have a problem with buying or owning individual stocks. Owning a portfolio of stocks makes sense if there is enough cash in the account to buy a number of different stocks, so that the account will be nicely diversified. It is difficult to build a portfolio out of stocks with only $5,000. So if a portfolio is smaller, it makes much more sense from a diversification standpoint to go with a managed product such as a mutual fund.

Exchange-Traded Funds

ETFs are similar to mutual funds in that you own a basket of investments, except that you are actually buying an index. If you own an oil ETF, you will be holding a basket of oil companies. For the most part, and unlike mutual funds, ETFs are passively managed. There is no manager to decide what stays in the ETF’s portfolio and what gets thrown out. Their mandate is to own a certain index of products that may contain good or bad performers. The index is already created before the investor buys in, so the individual retail investor has no say in the makeup of the ETF. If you compare ETFs with mutual funds, you will notice that, because of their active management, the fees for owning mutual funds are much higher. I believe, however, that you always get what you pay for.

RRSPs and TFSAs

Registered Retirement Savings Plans (RRSP) are personal savings plans that let you to accumulate savings for the future, and are tax sheltered. Tax Free Savings Accounts are a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.