Beyond the Basics: Investing 201 March Presented by: Janet Gray, CFP Money Coaches Canada

Transcription

1 Beyond the Basics: Investing 201 March 2016 Presented by: Janet Gray, CFP Money Coaches Canada

2 Objectives: Review factors to consider when designing your investment portfolio: Risk tolerance Diversification Investment types Economic trends Provide information about ethical/responsible investing Answer questions and provide further resources

3 What is a Money Coach Why Save & Invest? Your Life & Financial Goals Design Your Investment Plan in 4 Steps Managing Your Investments Diversification Taxes Keys to Success Next Steps

4 What is a Money Coach?

5 Why Save & Invest? Reach your goals and live the life you want Higher housing costs, education costs Longer life expectancy longer retirement Fewer company pensions Life events divorce, caring for family In and out of workforce family, school, health reasons Take Control of Your Finances

6 Your Life and Financial Goals What s important to you? What are your priorities? What do you want out of life?

7 Your Life and Financial Goals An Example 1. Eat healthy, organic food 2. Travel to south east India in 2 years - $10, Save down payment to purchase a home in 5 years - $40, Retire in 20 years with an annual retirement income of $40,000

8 Your Life and Financial Goals An Exercise $ Amount Timeframe Goals are dreams with a deadline. Dreams without a deadline are just wishes.

9 Design Your Investment Plan Four Keys to Building Your Investment Portfolio 1. Investment objectives 2. Risk tolerance and investment preferences 3. Asset classes/asset allocation 4. Choosing individual securities

10 Step 1: Investment Objectives What is my reason for investing? What do I want my money to do for me? When do I need the money?

11 RRSP= Registered Retirement Savings Plan A legal trust registered with the Canada Revenue Agency and used to save for retirement. RRSP contributions are tax deductible and taxes are deferred until the money is withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity.

12 TFSA= Tax Free Savings Account An account that does not charge taxes on any contributions, interest earned, dividends or capital gains, and can be withdrawn tax free. Tax-free savings accounts were introduced in Canada in 2009 with a limit of $5,000 per year, which is indexed for subsequent years. In 2013, the contribution limit was increased to $5,500 annually. The contributions are not tax deductible and any unused room can be carried forward. This savings account is available to individuals aged 18 and older and can be used for any purpose.

13 RRSP vs TFSA- what s the difference? Minimum Age RRSP = No minimum age, as long as there is earned income TFSA= 18 years or older Maximum Age RRSP= Must cash out, convert to RRIF or purchase an annuity by December 31st of the year the participant turns 71 TFSA= No maximum age Tax Deductible Contributions RRSP= Yes TFSA= No Tax-Free Accumulation RRSP= Yes TFSA= Yes Tax-Free Withdrawals RRSP= No TFSA= Yes Contribution Limit RRSP= 18% of earned income, (up to $25,370 for 2016) plus previous years unused contributions, TFSA= $5,500, plus previous years unused contributions. Limits will rise in $500 increments to account for inflation Contribution Room RRSP= Withdrawals do not make room for more contributions TFSA= Withdrawals do make room for the next year s contributions Allowable Investments RRSP= Stocks, bonds, mutual funds, index funds, ETFs, GICs, savings accounts, etc TFSA= Stocks, bonds, mutual funds, index funds, ETFs, GICs, savings accounts, etc

14 Step 2: Risk Tolerance and Investment Preferences Identify the risks you are looking to control Do you have investment preferences?

15 Step 3: Determine Asset Allocation Strategy to balance risk and reward What percentage of portfolio will be invested in each asset class? Three basic investment classes to consider Cash Fixed Income (Bonds/Debt) Equities

16 Step 3: Determine Asset Allocation - Examples Balanced Portfolio Conservative Portfolio Fixed Income Cash Equities Fixed Income Cash Equities

17 Step 3: Determine Asset Allocation - Categories Cash Fixed Income Equity Liquidity Income Growth Savings and Chequing Accounts, CSBs, GICs, Money Market Funds Bonds, Mortgages, Fixed Income Mutual Funds Common Stocks, Equity Mutual Funds Risk: Long-run Inflation Risks: Mid-term Volatility, Longrun inflation Risks: Short-term volatility Advantage: Liquidity Advantages: Fixed Income/ Maturity Advantage: Inflation Hedge

18 Step 3: Determine Asset Allocation - Success Asset Allocation Security Selection Other (currencies, hedging, etc.) Market Timing #1 Contributor to Investor Success

19 Step 4: Choose Individual Securities How do you know which investments are right for you?

20 Step 4: Choose Individual Securities Cash: Liquid and short-term in nature Examples: Savings accounts Canada Savings Bonds Short-term GICs, cashable GICs Term Deposits (TDs) Money Market accounts

21 Step 4: Choose Individual Securities Fixed Income: Debt instruments, specified payment schedule, provide income Examples: Bonds Government and corporate Bond funds Longer-term GICs Mortgages (Mortgage-backed securities)

22 Step 4: Choose Individual Securities Question: GICs vs Bonds? Answer: It depends. Consider the following factors before deciding which to choose: When are the funds needed? Re liquidity/access What is the NET return on your investment? Re Fees Is it a bond? Or a bond fund? Again- fees Are they held in RRSP? Or TFSA?

23 Step 4: Choose Individual Securities Equities/Stocks/Shares: A share of ownership in a company Examples: Common stocks Preferred stocks

24 Step 4: Choose Individual Securities Mutual Funds: buy units of a pooled investment, wide variety to choose from Examples: Money Market Funds Bond funds Equity funds Balanced funds

25 Step 4: Choose Individual Securities Alternatives: Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Examples: REITs- Real Estate Investment Trusts Hedge funds Derivative funds Commodities Futures contracts

26 Evaluating funds before purchase You say, Wow, that mutual fund did great!" Well, yes it did great last year, but look at the three-year performance, which is lower, and the five year, which is yet even lower. Here is a real example from a large mutual fund's performance: 1 year 3 year 5 year 53% 20% 11%

27 Evaluating your funds vs the Benchmark index or peers If the index returned 75% for the 1 year time period, that 53% from the fund doesn't look quite so good. On the other hand, if the index delivered results of 25%, 5%, and -5% for the respective one, three, and five-year periods, then the fund's results look rather fine indeed. Benchmark index include S&P/TSX Composite index, Dow Jones, FTSE and others.

28 Finding fund information The Fund Library has information on all mutual funds in Canada For the novice investor Morningstar is an investment research firm that is particularly well known for its fund information of investment funds in Canada. CA

29 Managing Your Investments Who will manage your portfolio? Yourself? Bank? Broker? Financial planner? Portfolio manager? How do advisors get paid? How do you choose and evaluate an investment advisor?

30 Responsible Investing What is the 'Environmental, Social And Governance (ESG) Criteria' The Environmental, Social And Governance (ESG) Criteria is a set of standards for a company s operations that socially conscious investors use to screen investments. Environmental criteria Social criteria Governance criteria Investors who want to purchase securities that have been screened for ESG criteria can do so through socially responsible mutual funds and exchangetraded funds.

31 Responsible Investing Ethical investing depends on an investor's views; some may choose to eliminate certain industries entirely (such as gambling, alcohol, or firearms, also known as sin stocks) or to over-allocate to industries that meet the individual's ethical guidelines. Investors should keep in mind that "ethical" does not imply "outperform."

32 Responsible Investing DEFINITION of 'Green Fund' A mutual fund or other investment vehicle that will only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses, such as alternative energy, green transport, water and waste management, and sustainable living.

33 Diversification Investing in more than one asset can increase your opportunities for success. Some ways to diversify: Time (dollar cost averaging) Maturity Industry Geographic market Asset class

34 Investments -Active vs Passive (index)? The passive approach to investing is predicated on the theory that markets are efficient, or smarter, than any single person. Studies have shown that the passive strategy on average beats about 80% of professional active money managers over time. Active managers try to beat the market by buying and selling individual securities in hopes of making enough profit in the overall portfolio that it will beat its benchmark, for example, the S&P/TSX Composite Index or the S&P 500 Composite Index.

35 Investments- Growth vs Value Growth stocks are considered stocks that have the potential to outperform the overall markets over time because of their future potential, while value stocks are classified as stocks that are currently trading below what they are really worth and will therefore provide a superior return due to their discounted price. Value stocks tend to do better during recessions, while growth stocks will often outperform during strong periods of expansion. This factor should therefore be taken into account by shorter-term investors or those seeking to time the markets

36 Taxes Interest income: Fully taxable at your marginal tax rate Payable annually as interest income is paid Dividend income from Canadian companies: Qualifies for the dividend tax credit Payable annually as dividends are paid Capital gains: Only 50% of realized capital gains are taxable Payable when investment is considered di-vested (sale or switch).

37 Keys to Remember Invest regularly and make saving a habit Diversify your portfolio business cycles affect asset classes differently An effectively diversified portfolio should cover the full spectrum of equity, debt and cash options Review and rebalance your portfolio on a regular basis You may need to adjust your portfolio as you move through your personal life cycle

38 A Recap Four Keys to Building Your Investment Portfolio 1. Investment objectives 2. Risk tolerance and investment preferences 3. Asset classes/asset allocation 4. Choosing individual securities

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40 Janet Gray B.A., B. Admin., CFP, CHS, EPC, CPCA, Fee for Service Financial Planner/Money Coach/Educator/Speaker Ottawa, ON Specialization: people struggling with debt and cash flow, life transitions (retirement, career change, divorce). Money is a tool to achieve your goals. By working smarter not harder, you ll ensure money is never your master. Get started on the path to financial freedom today! To book your complimentary consultation, please contact me via: janet@moneycoachescanada.ca Telephone:

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