Common investments include stocks, mutual funds, exchange-traded funds (ETFs), bonds, and guaranteed investment certificates (GICs). They have different characteristics, different risk profiles, and can play unique roles in an overall portfolio.
With GICs, you lock your money with the bank until the maturity date. In return, you earn interest. Typically, the longer the term of the GIC, the higher the interest rate. Your principal is safe in a GIC.
Some GICs allow you to get your money back before the maturity date, but you’ll get lower interest. For GICs, investors should determine if they can lock in the money for that period of time and if they’re satisfied with the interest rate.
You can buy government or corporate bonds, which means you’re lending money to a government or company. In return, you earn interest. The interest rates from corporate bonds are typically higher, indicating they’re riskier than GICs and government bonds.
At the maturity date, you should get your principal back from the government or company. Before the maturity date, you can also sell the bond. However, investors should know that the price of the bond fluctuates with the interest rate. That’s why the further out the maturity date, the higher the risk and higher the rate are.
ETFs and mutual funds
Traditionally, ETFs such as iShares S&P TSX Capped REIT Index Fund aim to replicate the performance of an index. ETFs cost less than mutual funds because the latter is actively managed. By buying ETFs and mutual funds, investors can immediately diversify because the funds hold a basket of securities.
Some investors keep it really simple by choosing funds that are sufficiently diversified, such as SPDR S&P 500 ETF Trust and dollar-cost averaging into them over time as a part of their long-term strategy.
Stocks are viewed as risky because they are volatile, and you buy one company compared to funds that hold many. So, investing in stocks requires the most attention from investors.
At the same time, the risk of investing in stocks can be greatly reduced if investors stick to quality companies, such as Canadian Utilities Limited (TSX:CU), which have a tendency to increase their dividends every year and buy them after dips of 20-30%. For example, it was a good opportunity to buy Canadian Utilities when its share price fell 25% from a high of $40 to below $30 last year.
GICs, bonds, ETFs, mutual funds, and stocks are common investments you can consider. You should stick to investments that you feel comfortable with, but you should also determine which combination allows you to achieve your financial goals.
The equity market is viewed as risky, but historically, it generates higher long-term returns than fixed-income investments such as GICs and bonds. If you’re still unsure what you should invest in after doing your due diligence, you can consult a qualified financial advisor.