Investment Goals & Emergency Funds

Establishing Investment Goals

• Goals must be specific, measurable, and written for effective planning
• Setting goals include figuring out what the money will be used for
• Setting goals includes determining how long it will take to obtain the money
• Determining if an investment is approved by a financial planner is not relevant when setting goals.

Emergency Fund

• An emergency fund should cover 3 to 9 months of living expenses
• Example: With monthly expenses of $2,000, the emergency fund should be at least $6,000
• Purpose: to provide quick access to money in case of immediate needs

Types of Goals

• Long-term goals include saving for retirement or buying a house
• Intermediate goals include saving for a car or a vacation

Insurance and Investment

• It is important to consider your insurance needs before starting an investment program
• Do not begin investing before considering insurance

Installment Payments

• Should be limited to 10% of monthly after-tax income

Types of Investments

• Safe investments include government bonds and certificates of deposit
• Safe investments include selecting mutual funds
• Speculative investments include options, precious metals, and commodities
• Speculative investments include collectibles like gemstones and hockey cards
• Growth companies reinvest profits, and do not pay dividends
• Liquidity means someone can quickly buy or sell an investment without affecting its value
• Liquid investments include savings accounts and checking accounts
• Non-liquid investments include GICs, mutual funds and government bonds

Risk and Safety

• Risk is the uncertainty of an investment's outcome
• Safety signifies minimal risk of loss
• Speculative investments have a high level of risk

Dividends and Stocks

• Common stocks have potential for growth and dividends
• Preferred stocks receive dividends before common stockholders
• Dividends are a distribution of money, stock, or other property paid to stockholders
• Corporations are not legally obligated to pay dividends

Bonds

• Corporate bonds allow a corporation's written pledge to repay a specific amount with interest
• Government bonds allow a government's written pledge to repay a specific sum with interest
• Bond investors can keep the bond until maturity or sell the bond to another investor

Mutual Funds

• Mutual funds offer professional management
• Mutual funds range from very conservative to very speculative
• Segregated funds combine features of mutual funds and insurance policies

Real Estate Investments

• REITs (Real Estate Investment Trusts) include equity, mortage, and hybrid
• Equity REITs own properties and earn revenue from rents
• Mortgage REITs loan money to real estate owners and earn interest
• Hybrid REITs invest in both properties and mortgages
• REITs pay little or no corporate tax if they meet certain conditions (e.g., 90% passive revenue test, publicly traded test)

Speculative Investments

• Speculative investments include options, precious metals, commodities, and collectibles
• Speculative investments involve a high level of risk, not suitable for inexperienced investors
• Commodities include grain, soybean, pork, etc, and you may have to purchase the item if you fail to sell before the delivery date

Record Keeping

• Minimum requirements include records of the dollar amount of investments
• Minimum requirements include records of income (dividends, interest payments) and records of fees or commissions paid
• Importance: record keeping helps monitor investments, spot opportunities, and reduce losses

Tax Treatment

• Favorable tax treatment in Canada includes dividends and capital gains
• Fully taxed items include interest income and net rental income
• Non-eligible dividends are subject to a 15% federal gross-up for tax purposes

Financial Advisors and Regulatory Bodies

• Fee-based planners charge directly and typically offer the most objective advice
• Regulatory bodies: CIFP (Canadian Institute of Financial Planners) and Advocis
• CFA Canada is not a regulatory body

Diversification

• Spreading assets among different investments reduces risk
• A diversified portfolio might include municipal bonds, income stocks, and growth stocks

Future Value of Investments

• Future value depends on the rate of return and the length of time invested

Pay Yourself First

• A strategy where you save a reasonable amount of money before paying your monthly bills
• A better approach is to save, then pay bills

Employer-Sponsored Retirement Programs

• Many employers match contributions to retirement programs
• Matching programs receive favorable tax treatment

Hedge Funds and Derivatives

• Hedge funds use derivatives (e.g., options, futures) to reduce risk
• Derivatives are securities whose value depends on the performance of an underlying asset

Liquidity

• Liquidity refers to how quickly and easily an investment can be converted into cash without affecting its value
• High liquidity: Savings accounts, checking accounts, and stocks, and can be sold quickly
• Low liquidity examples are real estate, collectibles, and certain bonds
• Liquid investments are good for emergencies because you can access your money quickly

Risk

• Risk refers to the uncertainty of an investment’s outcome and the chance that you could lose some or all of your money
• Market risk involves the risk that the entire market will decline
• Business risk involves the risk that a specific company will perform poorly
• Inflation risk means that your investment returns won’t keep up with inflation
• Safe investments: Low risk of loss like with government bonds, certificates of deposit
• Risky investments: High chance of loss but also high potential returns like stocks, speculative investments

Dividends

• Dividends are payments made by a corporation to its shareholders, usually as a share of the company’s profits
• Cash dividends: Paid in cash
• Stock dividends: Paid in additional shares of stock
• Common stock may or may not pay dividends
• Preferred stock typically pays dividends before common stockholders
• Corporations are not legally obligated to pay dividends, and they can choose to reinvest profits instead

Bonds

• A bond is a loan you give to a company or government, and in return, they promise to pay you back the loan amount (principal) plus interest over time
• Corporate bonds are issued by companies
• Government bonds are issued by governments like U.S. Treasury bonds and Canadian government bonds
• Bonds are generally considered safer than stocks because they provide fixed interest payments
• You can hold a bond until it matures, or sell it to another investor

Mutual Funds

• A mutual fund is a pool of money from many investors that is used to buy a diversified portfolio of stocks, bonds, or other securities
• Professional management, mutual funds are managed by professionals who make investment decisions
• Diversification is achieved because mutual funds invest in many different securities, and they spread out risk
• Mutual funds can range from conservative (low risk) to speculative (high risk)

REITs (Real Estate Investment Trusts)

• A REIT is a company that owns, operates, or finances income-producing real estate, and allows individuals to invest in real estate without having to buy property themselves
• Equity REITs own and manage properties
• Mortgage REITs loan money to real estate owners and earn interest
• Hybrid REITs invest in both properties and mortgages
• REITs often pay high dividends because they are required to distribute most of their taxable income to shareholders
• They are liquid because you can buy and sell REIT shares on the stock market

Speculative Investments

• Speculative investments are high-risk investments with the potential for high returns in a short period of time, and are often based on market speculation (guessing future price movements)
• Options, Contracts that give you the right to buy or sell a stock at a specific price
• Commodities are physical goods like gold, oil, or grain
• Precious metals involve gold, silver, etc
• Collectibles include art, coins, and rare items
• Speculative investments are very risky and not suitable for everyone
• They are not predictable and can result in significant losses