What's the best thing about a buffet dinner?
The selection, of course!
You're bound to find something that hits
the spot no matter what your tastes,
dietary needs, or appetite level.
Not into the pork back ribs?
No problem – the salmon fillets are divine.
In the mood for something more adventurous?
Then try the Thai red curry!
Different items on the menu
satisfy different cravings – and that's exactly
how financial products work in your portfolio.
Think of them like the menu items in the
buffet dinner of your financial future.
Your portfolio is your plate, and you fill
it up with a unique mix of investments
that suit your goals and risk tolerance.
Or should I say, risk appetite!
(Rim shot)
Thankfully for hungry investors,
there's a veritable smorgasbord of
investment options to choose from.
Let's see what we're cooking with.
Broadly speaking, we can break them
down into two major categories.
Equity and fixed income.
Equity investments offer investors
partial ownership of a financial asset such as
a company or fund in exchange for their money.
The most common example is company stock.
When an investor buys shares in a company,
they're actually buying a
tiny stake in the business.
They're hoping the money they provide helps the
company grow and therefore increase in value.
If the business grows and its stock price
rises far above what the investor paid,
they can earn a high return.
But if the business doesn't succeed
and its share price falls, then the investor can
also lose a lot – or even all – of their money.
So, we can see equity as the Thai
red curry of our buffet example.
It's the riskier or spicier investment class.
When investors talk about equities, you'll often
hear the term "market cap" brought up.
It's short for "market capitalization,"
which is a fancy way of saying how
much money the business is worth.
Generally, the larger the market cap, the
more established and predictable the business.
But larger companies also tend to grow more
slowly and may not have as much room for
share price growth as smaller ones.
Smaller caps, on the other hand,
can be less established and more volatile.
They might grow more rapidly and have more
room for share price gains, but they can
also carry more risk and uncertainty,
especially those companies that
have yet to generate a profit.
Some like it hot – but for others, a
milder alternative is more appropriate.
One way investors can potentially turn
down the heat is through equity investments
called mutual funds or exchange-traded
funds – often referred to as an ETFs.
Investors can purchase units
of the fund to gain exposure
to a small slice of many different assets.
Sort of like a pizza with a lot of toppings on it.
Mutual funds and ETFs spread out an
investor's risk across many investments,
so even if some falter,
others can pick up the slack.
The key difference between the two is that
mutual funds tend to be more actively managed.
They're run by professional managers
who try to achieve higher returns by
buying and selling assets within the fund
based on a predetermined fund objective.
Meanwhile, some ETFs are designed to
mimic the makeup of a specific market
index or fund and aren't tinkered with much.
You can learn more about the differences between
ETFs and mutual funds by watching our video
course, "Investing in ETFs and Mutual Funds."
So, if equities are one side of the
buffet table, on the other side is
the second major investment category: fixed
income. This is often referred to as debt.
Bonds are a common example of fixed income.
You can think of these products as loans from
investors to borrowers for a set period.
In exchange, they receive their money back
once the time is up plus regular
interest payments along the way.
Fixed income investments provide a steady rate
of return that is typically unspectacular.
And, they're generally considered
lower risk than equities.
This is because they are often backed
by real assets owned by the borrower,
like product inventory, equipment or real estate.
So, if the borrower were to default on
their obligation, investors would
receive at least some compensation.
Now, not all bonds are created equal – there
are different grades with varying levels of risk
typically associated with them.
For instance, government bonds tend
to be safer than corporate bonds
and carry less risk of default.
But the trade-off is that they
sometimes offer lower interest payouts.
Generally speaking, though, bonds are predictable,
safe, and a little bit boring –
sort of like roasted potatoes.
Of course, they can also be very satisfying
to investors who crave more certainty!
Guaranteed Investment Certificates, or
GICs, are a form of fixed income that
many Canadian investors hold.
Like bonds, they require investors
to tie up their funds for a defined period
in exchange for regular interest payments.
The key difference is that the investment
is covered by the Canada Deposit Insurance
Corporation (CDIC) for up to 100-thousand dollars.
So, there's very little risk involved,
but may also offer lower interest in return.
There is another trade-off.
If investors want to yank their
money out before the end of the term,
they may have to pay a penalty and possibly
forgo all interest earned during that period.
One other asset class we'll touch
on is money market investments.
Treasury bills, bank certificate deposits, and
corporate commercial paper are a few examples.
They're sometimes called "cash equivalents"
because they don't offer much of a return
beyond what an investor would
receive simply holding cash.
But they carry very little
risk and are highly liquid,
meaning they're easy to buy and sell on a whim.
So, investors often hold them when they want to
be certain their money will
be there when they need it.
Equities, mutual funds, ETFs, fixed
income, and money market products
are the main dishes of many portfolios.
But there are many other alternatives –
side plates, if you will.
Real estate is one that's familiar to many investors.
They can purchase a residential property to
rent out to tenants in exchange for monthly rent.
But that often requires a sizeable down payment,
so some investors opt for Real Estate
Investment Trusts instead.
They invest in either properties
themselves or in mortgages written
to property owners or developers.
And, they provide investors with
regular payments called distributions.
There are so many more we could touch on,
but we'll leave the rest of our tour of
the investing buffet table for later.
Now that you have a sense of what
goes into a portfolio, you can start
to imagine how you'd like to fill yours up.
Just keep in mind how you'll be paying for it all.
Because it's not just what you buy that
matters,
but which currency and account you use
to pay for it as well.
And that's the subject of our lesson,
"How to use U.S. Dollar accounts to
reduce currency conversion fees."
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