If you seek a return higher than the interest rates available on GICs, you’ll need to look at non-guaranteed or ‘variable’ investments.
Bonds, mortgages, stocks and real estate all have values which fluctuate over time, and may not return all of your investment when you want to sell them. This uncertainty results from various risks associated with these investments. Generally, the higher the potential return of an investment, the higher its inherent risks.
Bonds and Mortgages:
With bonds and mortgages, you are lending your money to a person or government or corporation. While both bonds and mortgages guarantee an interest rate over a specified term, and the return of your principal investment at the maturity date, there is no deposit insurance, and you may not get all the interest promised – or all your principal at maturity – if the borrower is unable or unwilling to pay. Government bonds generally have lower risk than corporate bonds or private mortgages, but pay lower rates of interest. You can usually sell a bond anytime, provided someone else wants to buy it, but you may not be able to sell it for the same price you paid for it. Bonds trade in various markets, and you can look up the most recent prices at which similar bonds have traded.
With stocks, you are buying a share of the ownership of a business corporation. You may receive a share of the business profit in the form of a dividend payment, but these are not guaranteed. You can usually sell your shares anytime, provided someone else wants to buy them, but you may not be able to sell them for the same price you paid for them. Stocks trade in various markets, and you can look up the most recent prices at which shares have traded.
With real estate, you are buying land and buildings. There will be ongoing expenses to hold the investment, such as property taxes, utilities and maintenance, but you may be able to earn rental income to cover those costs, and perhaps earn a profit. Owning a rental property will also require your time to manage the upkeep and collection of rent, and the finding of new tenants as leases expire. Over long periods of time, real estate prices generally rise with inflation, but you may not be able to recover your principal investment because certain locations may fall out of favour, and recessions generally cause a retreat in market prices. Since the price of any one property may be substantial, your risk will often be concentrated in a single property or a small number of them. There will usually be significant costs to sell a property, and it may take considerable time to find a buyer. Since each property is unique, it may be difficult to look up the price at which a similar property has recently sold.
With any of these investments, a considerable effort is usually required upfront to evaluate the risks of lending to a certain borrower, or of acquiring ownership of a particular company or real property. Also, there are usually costs to enlist the services of a broker to make transactions for you in the markets in which these investments are bought and sold.
While we do not act as brokers for any of these investments directly, we do offer exposure to all of these asset types through private investment pools, investment funds and mutual funds. We also have referral arrangements with various investment counselling firms which can build and manage a portfolio of individual stocks and bonds for you.
For most of our clients, the use of a mutual fund, or pooled fund, is a cost effective way to invest in the underlying stocks or bonds without the need to spend the time researching the merits of each stock or bond. There are several thousand different such funds available in Canada, issued by various investment management firms, and with a portfolio manager or management team assigned to select the stocks or bonds held by the fund. Each fund expresses a ‘mandate’ or investment policy which determines what kind of stocks or bonds it will hold, and what criteria will be used to select the individual holdings. The costs of hiring the portfolio manager and analysts is shared by all investors in the fund through a management fee charged by the fund. This approach is usually less costly than having each individual investor duplicate the time and expense of acquiring analyst research, evaluating the merits of each stock and bond, and then buying and selling each of many holdings multiple times each year to maintain the target asset mix and appropriate diversification.