Learning the ins and outs of investing can initially seem daunting. The learning curve can seem as difficult as a climb up Mount Logan. You’ve never done anything like this; others have been successful, but you have yet to be a successful investor. Some have tried in the past only to miss the mark because they did not know enough about the types of investments and how to make them work in their portfolio. To get started, let’s look at some types of investments to have in your portfolio.
For some people, investing is a way to improve their standard of living. Others might consider investing a chance to gain a controlling interest in a company. Others might think investing goes beyond their financial abilities. For example, it’s something only for the ‘well off.’ This article aims to help you learn more about the best types of investments in Canada.
What's in the Article:
What type of investment has the highest return?
Investment returns can fluctuate based on many factors, such as the type of investment, risk tolerance, market conditions, and the time horizon for investing. Traditionally, equities or stocks have been shown to provide the highest returns over the long term compared to other asset classes like bonds, real estate, or cash equivalents.
Specifically, small-cap stocks (companies with a market capitalization of less than $2 billion) have historically provided higher returns due to their higher risk profile. However, these investments are also associated with greater volatility and risk. Therefore, investors need to align their investment choices with their financial goals, risk tolerance, and investment horizon.
What is the best investment to get into?
The “best” investment can vary depending on an individual’s financial goals, risk tolerance, investment horizon, and investment knowledge. A diversified portfolio that contains a mix of asset classes like stocks, bonds, and cash or money market securities can reduce the risk while potentially increasing gains. For beginners, firms like Vanguard offer low-cost, highly diversified, and transparent funds that are especially suitable.
If you are conservative, you may want to stick with ETFs and Mutual Funds, whereas a riskier portfolio might contain some dividend stocks and small-cap plays in addition to low-risk assets.
Real estate is an excellent investment if you have the initial capital and can generate high returns through rentals and capital appreciation if purchased in the right area.
How to invest money for beginners?
Investing can seem intimidating for some beginners, but a methodical and educated approach can make the process more manageable. A good starting point is to set clear financial goals to understand why and what you aim to achieve through investing. A beginner’s portfolio can start with simple, low-risk investments such as high-yield savings accounts or exchange-traded funds (ETFs). Another way to get into low-risk investments is with the best robo-investor Canada has, which will allocate your funds for you in a low-risk way through ETFs.
Maintaining an emergency fund equivalent to roughly three to six months’ worth of ordinary expenses is essential before investing additional funds. Diversification across different asset classes can help minimize risk and potentially increase returns. Learn more about investments for beginners.
Is a 10% return on investment realistic?
A 10% annual return on investment is considered a good return in many financial contexts. However, achieving such a return consistently over the long term is challenging due to market volatility and economic fluctuations. Historical averages for the stock market have been around 7-8% when adjusted for inflation, although this varies significantly from year to year and depends on the specific stocks or funds chosen. Therefore, while a 10% return is achievable in some cases, it is by no means guaranteed, and investors should be realistic about potential returns and risks.
Types of Investments
Here are all types of investments, from low-risk to high-risk, that you could consider.
Low-Risk Investments:
As the name implies, low-risk investments do not give you a significant return, although you do get some return. The return for every CAD you invest is very small. The risk is low, and so is the return—for example, short-term government bonds. The risk is low, the cost is low, and the return is low. This type of investment might not pay much, but the investment is a safe strategy. The benefit is short term government bonds are very stable, low-cost, and consistently rising. Vanguard Canadian Short-Term Government Bond Index is a low-risk investment you might want to consider.
Annuities
Annuities are investment contracts that pay income at regular intervals, usually after retirement. They’re considered low-risk because they provide guaranteed income. The return on annuities can vary significantly depending on the terms of the contract, the health of the issuer, and current interest rates. As of 2020, annuity returns ranged between 3% and 5%.
Guaranteed Investment Certificates (GICs)
GICs are very safe investments in which you agree to lend money to a financial institution for a set period. In return, you are guaranteed to receive the amount you invested plus interest. GICs tend to offer higher returns than savings accounts but lower returns than riskier investments. For example, as of 2021, a 1-year GIC from a major Canadian bank provided a return of about 0.5%.
High-Interest Savings Account
A high-interest savings account is a type of savings account that offers higher interest rates compared to traditional savings accounts. For instance, as of January 2023, high-yield savings accounts offered returns in the range of 1.4% to 1.5%.
Medium-Risk Investments:
An example of a medium-risk investment is an index fund such as Scotia Canadian Index Fund. This type of investment is a barometer of the equity market. In an index fund, you invest in an entire market instead of a single company. If you can handle some risk, you will find this type of investment might be right for you. The risk should be equal to your tolerance, or you just might not be able to manage the ups and downs.
Bonds
Bonds are certificates you receive for a loan you make to a company or government. While generally safer than stocks, there’s still risk involved if the issuer fails to pay back the loan. Historically, bonds have delivered returns between 4% and 6% since 1926.
Mutual Funds
Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The risk in mutual funds can vary widely based on the assets they’re invested in. The returns on mutual funds can also vary significantly, but a moderate-risk mutual fund might have returned around 5% to 8% annually over the past decade.
ETFs (Exchange Traded Funds)
ETFs are similar to mutual funds but can be bought and sold throughout the day, like individual stocks. The risk level depends on the underlying assets. For instance, a broad-based, low-cost ETF tracking the S&P 500 has historically returned about 10% annually. There are ETFs for every type of asset and commodity you can imagine, such as water ETFs.
Real Estate Investment Trusts (REITs)
REITs are companies that own, operate or finance income-generating real estate. They offer a way to invest in real estate without buying property. The return on REITs can vary significantly based on the properties they own and the state of the real estate market. On average, publicly-traded REITs have historically returned about 10-12% annually over the long term.
High-Risk Investments:
Simply put, if you are not careful can lose your investment. You take a risk that your investment will not shrink based on the performance and other factors that you cannot control.
A perfect example is cryptocurrency. With on-and-off popularity and losing some traction in the last year, crypto is the newest asset class. Investors risk vast sums of money in hopes of getting a big return. For instance, let’s say you invested CAD 1,000 last year; you might have realized a 10% return on investment or CAD 10,000 today. On the other hand, you could lose all your investment. Why? Cryptocurrency has no long history or track record, so investors speculate it will grow. If the investment does not grow but begins to drop, there goes your investment.
If you do not have the tolerance for market volatility, this is not for you. On the other hand, if you can manage the day-to-day discipline to watch your investment, this high-risk investment might suit you.
Stocks
Stocks represent shares of ownership in a company. They’re considered high risk because their value can fluctuate widely, and there’s no guarantee of return. Despite this risk, the U.S. stock market has been considered the source of the greatest returns for investors, offering an average historical return of 8% to 10% since 1926.
The value of each share of stock is based on what a company is worth. Each percentage of the company that a business owner gives up as a share is how much less they own of their own company.
You can buy shares of stock in publicly traded companies. If the stock does well, you will get a nice return on your investment. Consider investing in stock in Canadian banks. Another example of a good stock to invest in is Coca-Cola. This company has continued to rise since it became a publicly traded company years ago. Stocks tend to be an excellent long-term safe investment, especially when you invest in the best long-term Canadian stocks and companies that have been around for a long time.
Here are two types of stocks we think are good to focus on.
Dividend Paying Stocks
Dividend-paying stocks are usually consistent companies that pay shareholders based on their performance; some stocks (funds) invest in dividend-yielding companies to provide high monthly dividends from their stock.
Growth Stocks
Growth stocks can potentially gain a significant return via increased share price from company performance, market capitalization and more. These are early to mid-stage companies offering innovation that will help their company grow significantly over the medium to long term.
Cryptocurrencies
Cryptocurrencies are digital or virtual currencies that use cryptography for security. The high-risk nature of cryptocurrencies is due to their high volatility and the lack of regulation. If you face difficulties in recovering your assets or become a victim of unfair practices, regulatory bodies may be unable to help.
Bitcoin, Ether, and Litecoin are examples of popular cryptocurrencies. Bitcoin, for instance, has shown remarkable returns, with a surge of nearly 40,000% since April 2013, amounting to an annualized return of approximately 110%. However, this has come with an annualized volatility of 81%, showcasing the high-risk nature of this investment.
Options and Futures
Options and futures are financial contracts that derive value from an underlying tangible asset, like a stock or commodity. They’re complex and highly speculative, which contributes to their high-risk nature. You can learn more about trading options and futures in day trading courses or from diligent study, you should also be aware of CRA day trading rules with a TFSA.
Venture Capital
Venture capital involves investing in start-ups or small companies with growth potential. The risk is high due to the substantial failure rate among start-ups. Providing specific examples of historical returns is challenging, as it highly depends on the success or failure of individual start-ups. But as you may see in the media, it can be a windfall when a startup makes it.
For example, let’s say you own a small home-based clothing business and want to start a retail store that will cost CAD 100,000, but you only have CAD 10,000. You could look for investors to put up the remaining CAD 90,000 to come up with the rest of the money. So, you give up 90 percent ownership of your own company. You sell stock in the company. The company is worth CAD 100,000.
So, you get nine of your friends to invest CAD 10,000 each. In five years, your company is doing great. Now the value is CAD one million. That initial CAD 1,000 that your friends invested is now worth CAD 100,000.
What Type of Investment Will You Choose?
In conclusion, choosing the right investment depends on an individual’s financial goals, risk tolerance, investment horizon, and knowledge about investing. In the Canadian context, several popular investment options can cater to different types of investors.
For those with a low-risk appetite, bonds or Guaranteed Investment Certificates (GICs) can be an attractive choice. They provide regular income and guarantee the return of the principal amount at maturity. However, the returns can be relatively low compared to other investments.
Equities or stocks listed on the Toronto Stock Exchange can offer higher potential returns. These returns come with a higher risk, but diversification and a long-term investment perspective can help manage this risk.
Real Estate Investment Trusts (REITs) are another popular option in Canada. They offer the opportunity to invest in real estate without direct property ownership, providing a balance between potential returns and risk.
Mutual Funds and Exchange-Traded Funds (ETFs) are excellent for beginners and those who prefer a hands-off approach to investing. They offer diversification and professional management of your investment. ETFs, in particular, have gained popularity due to their low fees and flexibility in buying and selling like stocks.
Finally, tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are excellent vehicles for Canadians to save for retirement or other financial goals. They offer tax benefits that can greatly enhance investment returns over the long term.
In summary, the best type of investment in Canada would depend on your individual circumstances, and it’s always recommended to consult with a financial advisor to tailor a strategy that suits your needs. As an investor, educating yourself, staying informed about market trends, and regularly reviewing your investment strategy will play a significant role in your investment success.