Learn How to Build Wealth Volume 3–Parking Investments
When building wealth with paper assets, fees and taxes play an important role. Whether we pay an ongoing yearly fee to have our funds professionally managed or pay a transaction fee to buy or sell stock shares the affect these “friction costs” have on our returns can be drastic. Likewise, the amount of taxes we pay as a result of our investments making money can be substantial.
Although the fees often associated with working with financial professionals can be costly, the amount paid in taxes is usually higher. Choosing the right garage to park our investment vehicles will help control costs.
The three most common investment garages are Registered Retirement Savings Plans (RRSP), Tax Free Savings Account (TFSA), and non-registered savings account (Open). Each program offers a variety of benefits when it comes to taxes.
Choosing the appropriate garage
will usually depend upon which financial goal we are trying to accomplish. Regardless of whether we use a RRSP, TFSA, or an Open (non-registered) account, these programs can house almost all forms of asset classes.
IMPORTANT LINK
Tax Free Saving Account
Registered Retirement Saving Plan
Learn How to Build Wealth Volume 2–Introduction
Course Overview
Investing in paper assets like stocks, bonds, and mutual funds form the cornerstone to building wealth. Once SMART financial goals are determined paper assets can be used to help meet needs. Selecting the right paper asset class that corresponds to the right risk and reward tolerance will play an important role.
Within this course students will discover how to build wealth to pay for their goals by using paper assets (stocks and bonds). Upon successful completion of this course students will be able to understand saving, investing, and retirement planning by learning:
Course Outcomes
After completing this course, students will have learned:
- Financial resources needed for specific goals including retirement lifestyles.
- Options for purchasing financial assets to achieve goals.
- To analyze the relationship between risk and reward.
- Effective investment practices.
- To compare short and long term investments.
- To identify types of investment vehicles.
- To compare risks and rewards of savings and investments.
- To select appropriate financial products to achieve different financial goals.
Learn How to Build Wealth Volume 2–Mutual Fund Types
There are thousands of mutual funds available to choose from. Selecting appropriate investment vehicles to meet our needs mostly depends upon:
- How S.M.A.R.T. our goals are
- How well we understand what we are investing in
- The strategies we use to have S.M.A.R.T.E.R. goals.
Once we have identified the approximate rate of return needed to reach our goal, we should determine if an investment will meet our needs. One way to do this is to look at a companies 10 year rate of return history. Although this does not mean past history will predict future returns, it does provide most investors with a certain level of comfort.
Factors that help identify mutual funds that best meet our needs can be found on the fund fact sheet under investment objectives/strategies, top holdings and asset allocations.
To further help choose the right mutual fund(s), each mutual fund can be broken down into asset classes such as equity or growth, money market, fixed-income funds, as well as varies combinations of investments that form what are known as hybrid funds.
In addition, there are mutual funds that includes commodities (gold, precious metals, etc), real estate, exchanged traded funds, and mutual funds within mutual funds. With so many funds to choose from it is important that clear goals are defined and lots of research is done prior to investing.
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Learn How to Build Wealth Volume 2–Mutual Funds Asset Classes
Another way to purchase bundles of stock is to buy mutual funds. A mutual fund is a basket of investments that containing stocks, bonds, and other asset classes.
Mutual funds are formed when investors pool their money together to focus on a specific investments. The fund is generally sponsored by a financial institution who then forms a company and hires a fund manager. Similarly to owning shares of a company when buying stocks, mutual fund investors own a portion of the holdings of the fund.
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Learn How to Build Wealth Volume 2–Sectors Bests
The Canadian economy is divided up into many sectors. A sector is another name for a large group of industries that have a common fiber. For example, within the financial and insurance sector there are companies such as Sun Life Financial and TD Bank. Each of these companies provides financial services to Canadians.
The industry sector can be broken up into sub-sectors to include companies within the mining industry, oil and gas industry, manufacturing industry, construction industry, and the utilities industry. The economic sector includes companies within the agricultural, manufacturing, and service fields.
What more information on Canadian sectors? Click Here
Learn How to Build Wealth Volume 2–Reading Stock Charts
One of the many reasons why investor use stocks to build wealth is because of the potential for high rates of return. By having money work hard for us, earning a high rate of return, our wealth will build more quickly allowing us to pay for financial goals sooner than expected. However, with high rates of return often comes high rates of loss as well. As fast as it can go into our pockets it can leave.
Learn How to Build Wealth Volume 2–Equities and Stocks
The equity asset class includes stocks or shares in a company. One way for a company to raise money is by selling part of its “stock” or ownership to investors. This stock of the company is then divided into shares or units. By purchasing shares we become owners in the company. As owners we become shareholders and get to share in the future profit of the company.
The stock market is one of the places where sellers and buyers meet to exchange shares of companies at a predetermined set price. Buying and selling stocks is one of the fastest ways to grow and build wealth.
There are two types of stocks we can purchase; common stocks and preferred stocks. Common stocks are the most frequently held type of stocks, that are owned by investors, and these stocks give them voting rights within the company. While preferred stocks holders are not given voting rights in the company, they are given dividends (or periodic cash payments) instead.
Learn How to Build Wealth Volume 2–Fixed Income & GIC
Another popular fixed income class product is Guaranteed Investment Certificates (GIC). A GIC is an investment vehicle that provides a guarantee rate of return over a specific period of time.
Like other fixed income products, GIC are issued with a fixed rate of return and length of time (term) to be held. Generally, the terms vary from 1 to 10 years.
The predetermined guaranteed rate of return hinges on the fact that the money remains within the GIC for the indicated length of time. Taking money out of the GIC early often results in forfeiting all of the interest earned. Once the term of the GIC is over the money is usually put back into a regular savings account.
Want to know more about GIC’s? Click Here
Learn How to Build Wealth Volume 2–Bonds…Moore Bonds
In previous activities we introduced bonds. Unlike buying shares in a company when bonds are purchased they are done by lending money to either a company or government. Often times when businesses or governments want to raise money they borrow it. The entity that wishes to borrow the money is called the issuer. When we buy bonds we are lending money to the issuer.
Like most other borrowing transactions there is a cost to using other people’s money. The borrowing cost is called the interest rate and is paid to the lender in fixed payments. The interest received can provide a fixed income to those that lend money.
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Learn How to Build Wealth Volume 2–Paper Asset Classes
There are three main paper asset classes; equities (stocks), fixed income (bonds) and cash accounts (savings account). The investments within each paper asset class generally have certain features in common.
When investing in equities the common feature is ownership. By purchasing stocks we have ownership interest in a company. Essentially when buying shares in a business we become a business owner.
Fixed income class assets are investments where the investors is lending money. The two most common form of fixed income investments are bonds and G.I.C.’s (Guarantee Investment Certificates).
Cash accounts are generally all short term investment vehicles. They are the largest asset class.
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