Some fundamentals for investing and building wealth

October 12, 2022

We all have lots of questions about our finances as we set goals and put plans in place to achieve our objectives through different phases of life. Two common questions advisors hear are “how do I save” and “how should I be investing my money”. These questions are the starting point of everyone’s financial journey. The approach taken can affect our success and financial well-being for years to come.

To answer the first question, you will need to know how much money is available for savings. The best way to find out is to create a budget that accounts for your fixed and discretionary expenses. Anything left over can be set aside for savings.

Answering the second question includes assessing which investment option is right for each of your future goals. Understanding your risk to return or taking risk with the hope of making a return is important. Generally, it has been shown that the greater the risk taken (well-considered risk), the higher the pay back or rate of return.

There are three common risk categories for individual investors to consider.

Inflation risk – the rising value of the cost of living weakens purchasing power and decreases the real returns on investments.

Interest rate risk – unexpected increases in interest rates can decrease the value of return on investments.

Market risk – the risk from the economy as a whole and uncertainty about general economic conditions.

Before making a decision on any investments:

• Consider your time horizon (when will the money be needed)

• Determine the objective for the money (growth or wealth preservation)

• Decide on your risk tolerance (willingness and ability to accept fluctuation to the value of the principal investment amount)

Investments come in two general categories. There are those with principal and interest guarantees, like a Guaranteed Investment Certificate (GIC) and those where the value and rate of return are linked to the markets, like mutual funds.

What is a GIC?

A GIC is a fixed-term investment that guarantees the principal and interest rate. Typically, the terms range from one to five years, and the interest rates are higher for longer periods of time. They can be redeemable which means they can be cashed out before maturity. Non-redeemable means they cannot be cashed out before maturity. GICs are low-risk investments and they tend to have lower rates of return than some other investment products.

What is a mutual fund?

Mutual funds are made up of pooled contributions from all investors in the fund. Professional fund managers invest the pooled funds into a variety of securities including stocks, bonds and money market instruments. The investors share in the income, gains, losses and expenses.

Mutual funds offer several advantages, with the main benefit being the ability to acquire a diversified portfolio at a low cost. Mutual funds are highly liquid and are generally redeemable on demand at the fund’s current market value. They are not recommended for short-term investing because they are impacted by market volatility, which is difficult to predict.

Mutual funds are an inexpensive way investors can access professional management of their investments with a wide range of mutual funds to meet a variety of objectives, from low risk in fixed income funds to high risk in aggressive equity funds.

What is an equity investment?

An equity investment is money that is invested in a company by buying their shares which are listed for purchase on a stock exchange. When a company offers equity, it is selling partial ownership of the company. Equities historically have more short-term volatility but greater long-term growth potential.

What is a fixed income investment?

Bonds are one type of fixed-income investment. They are issued by a corporation, municipality, government or government-sponsored agency and pay interest at a specific time and at fixed, agreed upon amounts. Historically, bonds have lower volatility short-term and less long-term growth potential.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.