Investment: Tips and Advice for Success
When you are investing, a large return takes a long time to achieve; any “get rich quick” scheme is just as likely to lose your money. We have a variety of investment products and advice to help you set up a methodical approach to your investing. The best time to get started is always “today”. Please contact us to set up an initial meeting, which is always free of charge.
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Your Risk Tolerance
Higher return investments such as equities and mutual funds are typically more volatile, meaning that the value of your investment may fluctuate frequently and significantly. Some people are not comfortable with that, and would rather invest in more stable investments even though it means a lower rate of return. Reacting to short-term market events by making dramatic portfolio changes is usually counterproductive to the long-term rate of return. History shows that a disciplined and patient investor, by staying invested through temporary market downturns, will often be the one rewarded the most when markets recover. Understanding your comfort level with risk enables us to recommend a suitable mix of fixed income investments and mutual funds. Then you don’t have to worry about your investments; you can leave that to us.
Diversification means including a variety of asset types into your investment portfolio. This helps reduce overall volatility because different types of investments change in value in different timing patterns that tend to offset each other. Effective diversification may include fixed-income investments (GICs, Term Deposits, Bonds etc.), equities or mutual funds, and real estate. The relative weighting of asset classes in your portfolio will depend on your time horizon and your risk tolerance. Knowing what you currently own enables us to help you to determine how to diversify to achieve your long-term goals.
Everyone Needs Diversification
If you invest regularly, you will have the following benefits:
• It sets the priority of “savings first” and your disposable income comes after that. Provided you can still live the type of lifestyle you want, it is a good thing to do.
• Regular investing prevents you from having to come up with a large lump sum of money to get “caught up” to your investment objectives.
• Regular investing provides dollar cost averaging, which tends to reduce the volatility of your achieved investment returns.
Regular Investing
In each stage of your life you will have some financial goals or needs to invest and save for, such as:
• Education
• Home Purchase
• Entrepreneurial Venture
• Retirement
• Estate Planning
Each of these has a likely or defined timeline for when the money will need to come out from your investments. The time horizon determines what kind of investments is appropriate. Equities are appropriate for long-term investing without a fixed end date. If you may need to cash out of your investment on an urgent basis regardless of whether its value is temporarily down, you will risk incurring a loss and equities may be less appropriate. Conservative investments are better suited to short time horizons, or those with an inflexible date of having to sell the investment asset.
Determining Your Time Horizon
Tax Effective Investing: Where You Hold Investments Matters
There are three types of investment income, and they are treated differently from a tax standpoint:
• Interest income is taxable at a high rate, investments that produce interest income are best held in an RRSP or a TFSA.
• Dividend income is taxable at a modest rate, and investments that produce dividend income can be held either within or outside of an RRSP or TFSA. However, the frequent distribution of dividends can cause a lot of tax paperwork. Holding dividend producing investments inside of an RRSP simplifies the paperwork as you don’t need to declare the dividend income until disposing of the asset. Holding dividend producing investments inside of a TFSA simplifies the paperwork even better because you don’t have to declare the income at all.
• Capital gains are taxable at the lowest rate. If there is limited room in your RRSP, you should use that room for other investment types and hold equities and mutual funds outside of the RRSP. You will not incur the capital gain until the time you sell the investment asset.
• If you are investing in a Qualified Small Business Corporation (a privately held company, often the one a person works for), a lifetime capital gains exemption applies and until the exemption limit is reached by the value of the equity sold, there is no tax payable. This type of investment should be held personally, unless you have already used up your lifetime capital gains exemption.
IIA Financial Services has tax advisors in our network of affiliates to help you obtain more detailed tax advice to optimize the tax efficiency of your investments.
Disclaimer
Mutual fund investments are provided through TeamMax Investment Corporation. and may be associated with commission charges, services fees or trailing commissions, management fees and expenses. Before investing, an investor is advised to read the simplified prospectus or Fund Facts carefully. The value of mutual funds may fluctuate frequently and past performance may not be repeated. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned. The extent of the risk involved is a determination to be made by each purchaser and will vary depending on the circumstances of the purchaser and the funds invested, and purchases are subject to suitability requirements. Please discuss the risks associated with mutual fund investments with a mutual fund representative before investing.
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