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An Investment Primer
Your financial advisor will suggest a mix of investments to build a portfolio for your retirement. The kinds of products your advisor suggests will depend on the licence he or she holds. For most Canadians, a retirement or investment plan is built on GICs, Canada Savings Bonds and mutual funds. Any member of Advocis who is licensed to sell mutual funds can sell these products. However, they cannot offer advice on stocks unless they are registered as an investment dealer.
Some Advocis members are also members of the Investment Industry Regulatory Organization of Canada. They may sell a wider range of products, including stocks, bonds and more specialized mutual funds. While Canadians are becoming increasingly sophisticated about investment, not everyone is familiar with all these products. A financial advisor from The Financial Advisors Association of Canada will take the time to explain the potential risks and return of each type of investment. The Advocis Code of Professional Conduct demands that the consumer be fully informed.
Among the investments your advisor may suggest:
Guaranteed Investment Certificates: GICs, also called term deposits, are a fixed-term investment that pays a guaranteed amount on maturity. These are among the safest investments, but the return may not be high. The return depends on prevailing interest rates and how long you invest for - the period can be from three months to one year, two years, five years and up. GICs are guaranteed by the Canada Deposit Insurance Corporation for interest and principal totaling up to $100,000.
Mutual Funds: A mutual fund is a pool of investments that is owned by many people and managed by professional portfolio managers. Investors buy shares or units of the fund and can redeem them at any point. The money from the purchase of units is invested by professional fund managers in a variety of assets as described by the mutual fund prospectus. Mutual funds can invest in fixed term investments, such as bonds, in money market investments such as treasury bills, in stocks or stock indexes on Canadian or foreign markets. The return on mutual funds is not guaranteed.
Segregated Funds: Like a mutual fund, a seg fund pools investors' money so it can be managed by a professional and provide a good return. But seg funds are actually insurance contracts with two components: an investment that produces the return and an insurance contract that covers the risk. Unlike mutual funds, seg funds guarantee either 75% or 100% of your principal. A small part of the fund's assets goes to insure there will be enough cash to pay that guarantee. Seg funds have some other advantages over mutual funds, including creditor protection. Like all insurance contracts, they allow you to name a beneficiary. After your death the fund is paid to the beneficiary without tax or probate.
Canada Savings Bonds: Savings Bonds are issued by the Canadian and various provincial governments. They can only be purchased by residents of Canada or of the province of issue. Savings Bonds typically pay a specified interest rate annually and are cashable at any time within a few months after they are issued. The amount you receive when you sell a Savings Bond will always be its face value - your principal, plus the interest the bond has earned so far. They are a secure investment as they are backed by a government issuer.
Stocks: Stocks or shares, sometimes called equities, are pieces of a company. A company's stockholders or shareholders all have equity in the company and expect to profit when the company profits. There are two ways to profit from shares – by having the price of the shares rise on the market or by having the company return a portion of its profit to shareholders in a dividend. Blue-chip stocks or quality stocks are shares in companies with a long-established reputation for profits and dividends. Companies may offer common shares, which entitle shareholders to vote on company issues, or preferred shares.
Preferred Shares: Preferred shares are stocks that entitle shareholders to fixed dividends ahead of the company's common shareholders. If the company goes bankrupt, most common shareholders lose out, but preferred shareholders are entitled to a stated dollar value per share. Preferred shareholders usually cannot vote at company annual meetings.
Bonds: Corporate bonds, also called commercial paper, are loans by the investor to a corporation, with a fixed amount borrowed, at a fixed interest rate and with a set repayment date. Provincials and municipalities also issue bonds. A certificate is issued to secure the loan. The value of the bond at maturity is the principal plus interest. Bonds can be traded at any point, with the value fluctuating according to market conditions. The quality of both government and private bonds is usually assessed by a rating agency.
Strip bonds or coupons: Strip bonds are the coupons for semi-annual interest payments on a large government or corporate bond. They are stripped away from the bond itself and sold separately.
Treasury Bills: Treasury bills, or T-bills, are a short-term debt sold by the federal government, usually with maturity dates of three months to one year. They are sold at a discount and their face value is the return to the investor. These are ideal for investors seeking a short-term investment of one to 12 months.
Mortgage-backed securities: Mortgage-backed securities are shares in a pool of mortgages, usually residential mortgages. Canada Mortgage and Housing Corp. (CMHC) guarantees the most popular type of mortgage-backed securities in Canada, but there are other mortgage-backed securities that do not enjoy this guarantee. MBS come with periods of from six months to 25 years. Interest to investors is paid monthly based on the coupon rate of the security. There is a high minimum investment. A CMHC unit, Canada Housing Trust, began issuing a new product, mortgage bonds, in June 2001, for an investment of as little as $1,000. They also provide a pool of money for mortgages. The mortgage bonds come in terms of six months to 10 years and are tradable. They are issued quarterly. There is a full guarantee on principal and interest from the government of Canada.
Banker's Acceptances: Banker's Acceptances are a short-term promissory note issued by a corporation, bearing the unconditional guarantee (acceptance) of a major Chartered Bank. Banker's Acceptances usually offer superior yields to T-Bills and have higher quality and liquidity than most corporate bonds.
Annuities: An annuity is a contract between you and a life insurance company. You invest a sum of capital and the company provides you with a steady income for a fixed term or for the rest of your life. This is a popular alternative for Registered Retirement Income Funds, especially for people in their later years who no longer want to follow their portfolio. The insurance company invests the money and returns to you both a portion of your capital as well as the interest earned. The amount of your income will depend on the amount you invest, interest rates at the time you purchase the annuity, your sex, your life expectancy and your age at the time you bought it. There are many variations on annuities, including annuities for a single person, joint annuities for couples, annuities indexed to inflation and guarantees that your heirs will receive an inheritance if you die before exhausting the annuity. With so many options, you should seek the advice of your Advocis financial planner when you buy an annuity.
“What wise men do in the beginning, fools do in the end.”
Raymond E. Jackson, CFP, CPCA
Retired
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Simon J. Jackson, CFP, CPCA
Senior Financial Advisor, Manulife Wealth Inc.
Life Insurance Advisor, Manulife Wealth Insurance Services Inc.
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Jackson Financial Planning Group | Manulife Wealth
3310 South Service Rd. Suite 204, Burlington Ont. L7N 3M6
Phone: (289) 245-1003
Fax: (289) 245-1009
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