Jeff - Investing

Jeff needs your help. Follow him along on a financial journey, as he makes mistakes, fixes them, and learns his lesson.

Jeff’s story covers the same material as FinStart’s Step-by-Step Toolkit. It’s not an evaluation or quiz, and there may be more than one correct answer.

The world of personal finance is not black and white - the right choice often depends on your circumstances. When you choose an answer, it will flash a certain color:

RED answers are wrong – you’ll never have to click these options if you recognize they’re incorrect.
GREEN means that answer is correct. So does YELLOW - but only under certain conditions. You must click both these colors to continue Jeff’s adventure.

Investing

Great Work!

Your savings account is a rainy day fund, used to pay for unexpected expenses or events.

Savings accounts are great for withdrawing money on short notice but, because of this convenience, earn less than other alternatives.

Fixed income investments pay more interest than savings accounts, but your money won’t be as readily available as cash in your savings account. For example, $100 invested in fixed income securities in 1927 would be worth just over $7,000 in 2017. The same $100, placed in a savings account, would be worth a bit over $2,000.

A 'security' is any investment product that has value and can be bought / sold.
'Fixed income’ refers to any investment that pays regular interest – like bonds and GICs. It’s the mirror image of debt – rather than borrowing money, you lend money to governments or companies, and they pay you interest.

If you don’t need your money for several years (10 or more is enough - you don’t have to wait 100 years), history suggests that investing in equities, like stocks, tends to be the most profitable. For example, $100 invested in equity securities invested in 1927 would be worth just over $400,000 dollars in 2017. The same $100 invested in fixed income securities would be worth just about $7,000.

A 'security' is any investment product that has value and can be bought / sold.
‘Equity’ means you own a small portion of a company – your investment’s value is tied to that company’s success. Some companies also pay dividends to shareholders (those who own equity) – anywhere from a few cents to a couple of dollars per share you own.

Investing fees reduce your investment income. It’s important to know what you’re paying for and keep costs low. The less you pay, the more effort you should expect to put in. Look out for:

Annual fees for the investment products you’ll be buying. They’re a small percentage of your investment’s value and are subtracted from your investment every year.
Annual account fees – these are additional fees for some ready-made investors.
Transaction fees, called ‘commission’. These are small, fixed, fees that do-it-yourself investors pay when they purchase / sell investments.

Asset mix is the proportion of equity and fixed income in an investment portfolio. It’s very important, but it’s not a feature of investment accounts – you’ll choose an asset mix after you open an investment account.

A prudent investor owns both equity and fixed income assets because they work well together in investment portfolios. Equity assets are more risky than fixed income - their prices tend go up and down more in the short term. In the long run though, equities tend to be much more profitable than fixed income. You can mix them in different proportions to match your risk appetite (whether you’re a conservative or an aggressive investor).

The less effort you put in, the more you’ll have to pay somebody to do it for you. You should never do more investing work than you feel comfortable with.

Ready-made investing is simple and good for beginners – your investment portfolio will be managed for you. It doesn’t take much to set up an account and keep up with it.
Do-it-yourself investing is good for those who want to do their own investing work. It takes longer to learn but tends to be more rewarding once mastered.

Minimum investment size varies depending on which strategy you choose – it’s the smallest amount of money you need to open a particular investment account.

If you’re a ready-made investor, you can start with as little as $100, and $1,000 opens more alternatives.
You’ll need at least $10,000 to start do-it-yourself investing. Most investment accounts you’ll be choosing from require a minimum balance in your account and may charge you fees if your balance falls below a certain amount.

GICs (guaranteed investment certificates) are fixed income investments. Jeff is investing in equities.

When you buy a GIC, you’ll start receiving regular interest payments, until it matures (expires). Once it matures, you get back the money you initially paid.
Interest can be automatically reinvested in your GIC. When a reinvested GIC matures, you get back the initial amount, plus all interest. Because you reinvested regular interest payments, you’ll earn more than if you cashed in your interest payment.
GICs are slightly more profitable than savings accounts.

With $100 to invest, Jeff could buy a portfolio index mutual fund.

A mutual fund is like an imaginary basket filled with equity and /or fixed income securities.
Buying individual securities is risky. Buying a basket of them reduces investment risk. This is called diversification.
A portfolio index mutual fund holds multiple fixed income/equity mutual funds that represent an index (a list of securities), in proportions that reflect your asset mix.

If Jeff had a little more money to invest, like $1,000, he could buy ETFs (exchange-traded funds).

ETFs are similar to mutual funds but have lower fees. You also end up paying less tax and their price is easier to monitor.

ETFs are baskets filled with equity and / or fixed income securities.
Buying individual securities is risky. Buying a basket of them through ETFs reduces investment risk. This is called ‘diversification’.
An asset allocation ETF holds multiple fixed income/equity ETFs that represent an index (a list of securities), in proportions that reflect your asset mix.

Future technology never malfunctions.

Prices of goods and services tend to increase overtime. This means the same amount of money will buy fewer goods in the future than it does today.

If prices did not change at all, inflation would be zero. Sometimes prices fall and inflation becomes negative (called ‘deflation’).

Inflation in Canada has averaged: 1.8% since 1993, 3.6% since 1950, and 3% over the last 100 years.

Inflation tends to affect the entire economy – relatively equally. It wouldn’t matter whether Jeff ate fancy food or bought his own groceries, he’d still be surprised by the increase in cost of each individual item.

When you work, you are entitled to save a portion of your earnings in a Registered Retirement Savings Plan (RRSP). An RRSP is used to save for retirement. You get two kinds of tax benefits:

Tax deduction - you don't have to pay income tax on the money you deposit.
Tax deferral – you won’t have to pay any tax until you withdraw money.

Because of this it makes sense to add money to your RRSP while you’re working (higher tax bracket) and withdraw it when you’re retired and no longer have as much income (lower tax bracket).

There is no such account.

By the way, registered accounts are called ‘registered’ because banks / financial institutions must register them with the federal government so that the CRA can monitor the tax benefits you receive.

RESP accounts are used by parents to save for their children’s post-secondary education. Parents / guardians can make contributions from the year their child is born, and the government will match the investment through educations grants – up to $7,200.

You can open a TFSA (tax-free savings account) as soon as you turn 18/19 (age of majority).

There is no tax on investment income earned, no matter when you withdraw the money.
You can only add after-tax income to this account, but it will grow tax-free.