Investment Goals & Emergency Funds

• Investment goals require being specific, measurable, and written

Establishing Investment Goals

• Useful questions for setting goals include determining the money's purpose, how long it takes to obtain, and how you will secure it
• "Is the investment approved by your financial planner?" is not a useful question for setting goals

Emergency Fund

• An emergency fund needs to cover 3 to 9 months of living expenses
• For instance, with $2,000 in monthly expenses, the emergency fund should be at least $6,000
• An emergency fund's purpose is for quick access to money for immediate needs

Types of Goals

• Long-term goals examples are saving for retirement or buying a house
• Saving for a car or a vacation are examples of intermediate goals

Insurance and Investment

• Assess your insurance needs before starting an investment program
• Starting to invest before being concerned about insurance is not advised

Installment Payments

• Limit installment payments to 10% of your monthly after-tax income

Types of Investments

• Safe investments examples are government bonds and certificates of deposit
• Select mutual funds
• Speculative investments examples are options, precious metals, commodities, and collectibles
• Growth companies don't pay dividends, so reinvest profits for growth
• Liquidity is the ability to buy or sell an investment quickly without affecting its value
• Savings and checking accounts are liquid investments
• GICs, mutual funds, and government bonds are non-liquid investments

Risk and Safety

• Risk is the uncertainty of an investment's outcome
• Safety is when there’s minimal risk of loss
• Speculative investments assume a high level of risk

Dividends and Stocks

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

Bonds

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

Mutual Funds

• Offers professional management
• Can range from very conservative to very speculative

Segregated Funds

• A type of annuity that combines features of mutual funds and insurance policies

Real Estate Investments

• REITs (Real Estate Investment Trusts) own properties and earn revenue from rents

REIT Details

• 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 may pay little or no corporate tax if they meet certain conditions, such as a 90% passive revenue test or publicly traded test

Speculative Investments

• Examples are options, precious metals, commodities, and collectibles
• Have a high level of uncertainty, not suitable for inexperienced investors
• Commodities are grain, soybean, pork, etc; 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, income (dividends, interest payments), and fees or commissions paid
• Helps monitor investments, spot opportunities, and reduce losses

Tax Treatment

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

Financial Advisors and Regulatory Bodies

• Fee-based planners charge you directly and typically offer the most objective advice

Regulatory Bodies

• CIFP (Canadian Institute of Financial Planners)
• Advocis
• CFA Canada is not a regulatory body

Diversification

• Spreading assets among different investments to reduce 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
• Saving first, then paying bills is a better approach

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

• Refers to how quickly and easily an investment can be converted into cash without affecting its value
• Savings accounts, checking accounts, and stocks are examples of high liquidity
• Real estate, collectibles (e.g., art, coins), and certain bonds are examples of low liquidity
• Liquid investments are good for emergencies because you can access your money quickly

Risk

• Refers to the uncertainty of an investment's outcome, the chance that you could lose some or all of your money

Types of Risks

• Market risk is the risk of that the entire market will decline (e.g., stock market crash)
• Business risk is the risk that a specific company will perform poorly
• Inflation risk is the risk that your investment returns will not keep up with inflation
• Safe investments have low risk of loss (e.g., government bonds, certificates of deposit)
• Risky investments have high chance of loss but also high potential returns (e.g., stocks, speculative investments)

Dividends

• Payments made by a corporation to its shareholders, usually as a share of the company's profits

Types of Dividends

• Cash dividends are paid in cash
• Stock dividends are paid in additional shares of stock
• Common stock may or may not pay dividends
• Corporations are not legally obligated to pay dividends (they can choose to reinvest profits instead)
• Preferred stock typically pays dividends before common stockholders

Bonds

• A bond is a loan you give to a company or government where they promise to pay you back the loan amount (principal) plus interest over time
• Corporate bonds are issued by companies
• Bonds are generally considered safer than stocks because they provide fixed interest payments
• You can hold a bond until it matures (end of the loan term) 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
• Mutual funds are managed by professionals who make investment decisions (professional management)
• Mutual funds invest in many different securities, they spread out risk (diversification)
• Mutual funds can range from conservative (low risk) to speculative (high risk)

REITs

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

Speculative Investments

• High-risk investments with the potential for high returns in a short period of time based on market speculation (guessing future price movements)
• Options are 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 include gold, silver, etc
• Collectibles are art, coins, rare items
• Speculative investments are very risky and not suitable for everyone, not predictable, and can result in significant losses