Investing For Canadians All-in-One For Dummies E-Book

Andrew Dagys

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch

Seitenzahl: 991

Veröffentlichungsjahr: 2024

Beschreibung

Make smart financial decisions with the simplified science of investing

Investing For Canadians All-in-One For Dummies helps take the confusion and worry out of growing your money with investments. Investing can be complicated, but it doesn't have to be. This book helps you put your finances in order and get ready to become an investor. It also shows you how to step into the world of stocks and bonds, in the Canadian marketplace and beyond. Discover the benefits of investing in ETFs, precious metals, cryptocurrency, and real estate. You'll even learn how to make money in day trading. Whatever your financial situation and goals, this Canada-specific guide has the jargon-free information you need to move forward. Use your newfound investing knowledge to make your money work for you!

• Understand how investing works and explore your investment choices
• Grow your wealth with stocks, bonds, real estate, and other investment types
• Learn the basic rules, regulations, and tax codes for investing in Canada
• Get a primer on cryptocurrency, day trading, and other hot topics

For Canadians who want to get started with investing or learn more about ways to invest, this Dummies All-in-One is a clear and valuable resource.

Leseprobe

Investing For Canadians All-in-One For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Investing For Canadians All-in-One For Dummies Cheat Sheet” in the Search box.

Table of Contents

Cover

Title Page

Copyright

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond the Book

Where to Go from Here

Book 1: Entering the World of Investing

Chapter 1: Grasping the Fundamentals of Investing

Getting Started with Investing

Setting Financial Goals

Exploring Your Investment Choices

Considering Investment Strategies

Diversifying Your Investment Assets

Determining Your Investment Tastes

Chapter 2: Weighing Risks

Understanding Market-Value Risk

Examining Individual-Investment Risk

Financial Risk: Loading Up on Debt

Understanding Interest Rate Risk

Inflation Risk: New Kid on the Block

Market Cycle Risk: A Roller Coaster

Liquidity Risk: Help, Let Me Out!

Exploring Tax Risk: The Uninvited Guest

Political and Governmental Risk: Vote for Me!

Chapter 3: Evaluating Investment Returns

Analysing Returns

Managing Debt to Maximize Your Returns

Chapter 4: Understanding How Different Investments Are Taxed

Examining Interest Income

Understanding Dividend Income

Eyeing Capital Gains and Losses

Looking At Foreign Exchange Gains and Losses

Exploring Deferred-Income Tax Shelters and Plans

Determining Whether to Invest Inside or Outside Your RRSP or TFSA

Grasping Taxation of Dividend Income

Focusing on Taxation of Funds

Considering Taxation of REITs

Detailing General Tax Rules for Bonds

Identifying Taxation of Fixed-Income Securities

Book 2: Investing in Stocks

Chapter 1: Understanding Stock Tables, Charts, and Other Indicators

Looking to Stock Exchanges for Answers

Grasping the Basics of Accounting and Economics

Staying on Top of Financial News

Reading and Understanding Stock Tables

Using News about Dividends

Chapter 2: Going for Brokers

Defining the Broker’s Role

Distinguishing between Full-Service and Discount Brokers

Choosing a Broker

Discovering Various Types of Brokerage Accounts

Judging Brokers’ Recommendations

Comprehending Robo-Advisors

Checking Out Canadian Robo-Advisors

Dealing with Bond Brokers

Doing It Yourself with Online Bond Investing

Chapter 3: Investing for Long-Term Growth

Tactful Tips for Choosing Growth Stocks

Chapter 4: Investing for Income

Understanding Income Stocks Basics

Analysing Income Stocks

Exploring Some Typical Dividend Income Payers

Dividend Payers: Not Without Risk

Chapter 5: Using Accounting Basics to Choose Winning Stocks

Recognizing Value When You See It

Accounting for Value

Book 3: Investing in ETFs, Mutual Funds, and Bonds

Chapter 1: Investing in Exchange-Traded and Mutual Funds

Understanding What Funds Are

Comparing Funds and Individual Stocks

Comparing ETFs and Mutual Funds

Considering Reasons to Buy Mutual Funds

Identifying Perils and Pitfalls of Funds

Comparing Load versus No-Load

Keeping It Simple with Indexes

Chapter 2: Getting to Know the ETF Players

Creating an Account for Your ETFs

Introducing the Shops

Presenting the Suppliers

Familiarizing Yourself with the Indexers

Meeting the Intermediaries

Chapter 3: Shuffling Papers and Remaining Vigilant

Getting Set Up

Dealing with Prospectuses

Introducing the Management Report of Fund Performance

Understanding Your Account Statement

Reading Annual and Semi-Annual Financial Statements

Chapter 4: Exploring More Mutual Fund and ETF Options

Exploring Equity Funds

Addressing Income Funds

Focusing On Balanced Funds

Understanding Sector-Focused Funds

Chapter 5: Bonding with Fixed Income

The Good Old GIC: You Know Where You Sleep

Introducing the Major Players in the Bond Market

Going Solo or Buying Bonds in Bulk

Dealing with Brokers and Other Financial Professionals

Doing It Yourself Online

Book 4: Investing in Gold and Silver

Chapter 1: Exploring the World of Gold and Silver

Considering Gold and Silver for Your Situation

Acting before You Invest in Gold and Silver

Chapter 2: Adding Gold and Silver to Your Portfolio Mix

Defining Saving, Investing, Trading, and Speculating

Building Your Financial Profile

Making Other Portfolio Considerations

Chapter 3: Investing in Gold

Comparing Gold to Other Investment Assets

Understanding the Gold Market

Going Over Gold’s Recent Bull and Bear Markets

Making the Case for Gold Today

Chapter 4: Surveying Silver

Looking at What’s Similar and Different

Digging into the Silver Market

Picking Apart Silver’s Performance during 2000–2020

Discovering Resources for Informed Silver Investors

Book 5: Day Trading

Chapter 1: Waking Up to Day Trading

Defining Day Trading

Committing to Trading as a Business

Working with a Few Assets

Recognising Personality Traits of Successful Day Traders

Knowing the Difference Between Trading, Investing, and Speculating

Busting Some Myths

Chapter 2: Making a Day Trade

Planning Your Trading Business

Planning Your Trades: Just the Basics, Please

Closing Out Your Position

Chapter 3: Signing Up for Asset Classes

Recognizing What Makes a Good Day Trading Asset

Taking a Closer Look at Stocks

Examining Bonds

Cashing in with Currency

Considering Commodities and How They Trade

Chapter 4: Investing, Trading, and Gambling

Understanding Risk and Return

Defining Investing

Talking about Trading

Getting a Grip on Gambling

Managing the Risks of Day Trading

Testing Your System to Gauge Risk

Chapter 5: Understanding Regulations

Knowing Who Regulates What

Understanding Brokerage Basics for Firm and Customer

Examining Hot Tips and Insider Trading

Book 6: Cryptocurrency Investing

Chapter 1: Understanding What Cryptocurrency Is

Beginning with the Basics of Cryptocurrencies

Gearing Up to Make Transactions

Chapter 2: Figuring Out Why to Invest in Crypto

Gaining Capital Appreciation

Increasing Income Potential

Fuelling Ideological Empowerment

Chapter 3: Recognizing the Risks of Cryptocurrencies

Reviewing Cryptocurrency Returns

Risk: Flipping the Other Side of the Coin

Glimpsing Cryptocurrencies’ Reward versus Risk

Digging into Different Kinds of Risk

Exploring Risk Management Methods

Chapter 4: Explaining How Cryptos Work

Explaining Basic Terms in the Cryptocurrency Process

Cruising through Other Important Crypto Concepts

Stick a Fork in It: Digging into Cryptocurrency Forks

Chapter 5: Buying Crypto: The How-To

Identifying Different Types of Cryptocurrencies

Naming Cryptocurrencies by Category

Overviewing the Steps in Buying Cryptocurrencies

Distinguishing Crypto Exchanges

Book 7: Investing in Real Estate

Chapter 1: Considering Investing in Real Estate

Investigating Real Estate Investing

Figuring Out Whether You’re Right for Real Estate Investing

Getting into Real Estate Investing

Fitting Real Estate into a Financial Plan

Understanding First Home Savings Account (FHSA)

Leveraging the Home Buyers’ Plan

Choosing between a FHSA or HBP for a Down Payment

Chapter 2: Exploring Real Estate Investments

Homing In on Residential

Securing Commercial and Industrial Properties

Considering Canadian Condos

Dreaming of Recreational Properties

Developing a Taste for Raw Land

Researching Real Estate Investment Trusts

Chapter 3: Establishing Your Investment Strategy

Studying Market Cycles

Knowing the Market, Knowing Yourself

Selecting an Investment Type

Selecting Advisors

Chapter 4: Pulling Together the Cash: Assessing Your Resources

Assessing Your Financial Situation

Identifying Resources

Working with Professional Financial Partners

Optimizing Saving Strategies and Leverage

Index

About the Authors

Advertisement Page

Connect with Dummies

End User License Agreement

List of Tables

Book 1 Chapter 2

TABLE 2-1 Most Depressing Canadian Stock Market Declines

*

TABLE 2-2 Largest U.S. Stock Market Declines

*

Book 2 Chapter 1

TABLE 1-1 A Sample Stock Table

TABLE 1-2 The Life of the Quarterly Dividend

Book 2 Chapter 3

TABLE 3-1 Grobaby, Inc., Income Statement

TABLE 3-2 Grobaby, Inc., Balance Sheet

Book 2 Chapter 4

TABLE 4-1 Comparing Yields

Book 2 Chapter 5

TABLE 5-1 XYZ Balance Sheet — December 31, 2024

TABLE 5-2 XYZ Income Statement for Year Ending 12/31/2024

Book 3 Chapter 1

TABLE 1-1 Canada’s 10 Biggest Fund Companies and How They Sell Their Funds

Book 3 Chapter 2

TABLE 2-1 Canadian ETF Providers

Book 4 Chapter 3

TABLE 3-1 Gold’s “Tale of the Tape”

Book 5 Chapter 2

TABLE 2-1 Different Types of Orders

Book 7 Chapter 3

TABLE 3-1 Advisor Costs

List of Illustrations

Book 1 Chapter 2

FIGURE 2-1: Even the bull market of the 1990s wasn’t kind to every company.

Book 1 Chapter 3

FIGURE 3-1: A historical view of U.S. bond performance: Inflation has eroded bo...

FIGURE 3-2: History shows that stocks have been a consistent long-term winner.

FIGURE 3-3: Canada represents just a small fraction of the world’s total stock ...

Book 3 Chapter 3

FIGURE 3-1: Management report of fund performance showing performance informati...

FIGURE 3-2: Management report of fund performance showing portfolio holdings in...

FIGURE 3-3: Management report of fund performance showing some of the financial...

Book 6 Chapter 4

FIGURE 4-1: Three main elements of a block.

FIGURE 4-2: Simplified version of how a blockchain works.

FIGURE 4-3: An example of a hard fork.

FIGURE 4-4: An example of a soft fork.

Guide

Cover

Table of Contents

Title Page

Copyright

Begin Reading

Index

About the Authors

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Investing For Canadians All-in-One For Dummies®, 2nd Edition

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright © 2025 by John Wiley & Sons, Inc. All rights reserved, including rights for text and data mining and training of artificial technologies or similar technologies.

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Published simultaneously in Canada

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Introduction

Making investment decisions can be intimidating and overwhelming. Investors have a ton of options available to them, and sorting through the get-rich-quick hype can be exhausting. Investing for Canadians All-in-One For Dummies is here to help you with an overview of the investing landscape unique to Canada.

Since the last edition of this book, the Canadian economy evolved in ways that impacted how most of us invest. High interest rates may make life difficult for debtors but are embraced by risk-averse bond investors. New innovations in artificial intelligence (AI) made stock investors who were willing to take some risks quite happy, especially if they invested in AI computer chip manufacturers early on. For those Canadian investors who wish to keep things a bit more simple, exchange-traded funds (ETFs) of all types are always out there to research. Investment options are available for virtually every risk appetite, and this book explains the nuts and bolts of these options, all in the context of a changing investment landscape.

Importantly, this book is meant for you to consider and research the world of investing, and the common as well as unique investment options available to you. This book isn’t written to provide you with personal investment advice. That’s because the goals and financial objectives of every Canadian, like you, are bound to be different. Only a personal qualified financial advisor or tax expert who knows your personal situation very well can make investment, tax, or other financial recommendations to you.

About This Book

Investing for Canadians All-in-One For Dummies provides guidance, tools, and resources for determining and making the right investments for your needs. Here, you get tips on investment choices, risks, and returns as well as the basics on stocks, bonds, mutual funds, precious metals, day trading, cryptocurrencies, and real estate.

A quick note: Sidebars (shaded boxes of text) dig into the details of a given topic, but they aren’t crucial to understanding it. Feel free to read them or skip them. You can pass over the text accompanied by the Technical Stuff icon, too. The text marked with this icon gives some interesting but nonessential information about investing.

One last thing: Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.

Foolish Assumptions

Here are some assumptions about why you’re picking up this book:

You’re a millennial or novice investor and eager to find out more about saving, investing, and taking care of long-term needs.

You’re an experienced investor who wants even more sound guidance and trusted investment strategies.

You want to improve your financial situation and build your wealth.

You’re interested in methods beyond stocks, such as mutual funds, day trading, gold and silver, and cryptocurrencies.

You recognize the importance of seeking personal face-to-face advice from a qualified investment and tax professional, especially regarding the fast-changing world of taxation.

You’re intrigued by real estate investing and want to know more about available opportunities in Canada and abroad.

Icons Used in This Book

Like all For Dummies books, this book features icons to help you navigate the information. Here’s what they mean.

If you take away anything from this book, it should be the information marked with this icon.

This icon flags information that digs a little deeper than usual into a particular topic.

This icon highlights especially helpful advice about investing.

This icon points out situations and actions to avoid as you enter and move through the world of investing.

Beyond the Book

In addition to the material in the print or e-book you’re reading right now, this product comes with some access-anywhere goodies on the web. Check out the free Cheat Sheet for information on Canadian ownership investments, Canadian stock exchanges, and the risks of real estate investing in Canada. To get this Cheat Sheet, simply go to www.dummies.com and search for “Investing for Canadians All-in-One For Dummies Cheat Sheet” in the Search box.

Where to Go from Here

You don’t have to read this book from cover to cover, but you can if you like! If you just want to find specific information on a type of investment strategy, take a look at the table of contents or the index, and then dive into the chapter or section that interests you.

For example, if you want the basics of investing, flip to Book 1. If you want to explore stock and mutual fund investing, check out Books 2 and 3. If you prefer to find out more about investing in gold and silver, day trading, and cryptocurrencies, flip to Books 4, 5, and 6. Or if you’re considering real estate, Book 7 is the place to be.

No matter where you start, you’ll find the information you need to enter the world of investing and make the right decisions for your needs. Good luck!

Book 1

Entering the World of Investing

Contents at a Glance

Chapter 1: Grasping the Fundamentals of Investing

Getting Started with Investing

Setting Financial Goals

Exploring Your Investment Choices

Considering Investment Strategies

Diversifying Your Investment Assets

Determining Your Investment Tastes

Chapter 2: Weighing Risks

Understanding Market-Value Risk

Examining Individual-Investment Risk

Financial Risk: Loading Up on Debt

Understanding Interest Rate Risk

Inflation Risk: New Kid on the Block

Market Cycle Risk: A Roller Coaster

Liquidity Risk: Help, Let Me Out!

Exploring Tax Risk: The Uninvited Guest

Political and Governmental Risk: Vote for Me!

Chapter 3: Evaluating Investment Returns

Analysing Returns

Managing Debt to Maximize Your Returns

Chapter 4: Understanding How Different Investments Are Taxed

Examining Interest Income

Understanding Dividend Income

Eyeing Capital Gains and Losses

Looking At Foreign Exchange Gains and Losses

Exploring Deferred-Income Tax Shelters and Plans

Determining Whether to Invest Inside or Outside Your RRSP or TFSA

Grasping Taxation of Dividend Income

Focusing on Taxation of Funds

Considering Taxation of REITs

Detailing General Tax Rules for Bonds

Identifying Taxation of Fixed-Income Securities

Chapter 1

Grasping the Fundamentals of Investing

IN THIS CHAPTER

Understanding what investing is

Setting your sights on your financial future

Checking out your investment options

Distinguishing between growth and income investing

Protecting your assets with diversification

Gauging your tolerance for risk

In many parts of the world, life’s basic necessities — food, clothing, shelter, and taxes — consume the entirety of people’s meagre earnings. Although some Canadians do truly struggle for basic necessities, the bigger problem for other Canadians is that they consider just about everything — eating out, driving new cars, hopping on airplanes for vacation — to be a necessity. However, you should recognize that investing — that is, putting your money to work for you — is a necessity. With today’s inflationary environment, careful and risk-aware investing is a necessity to just keep up with inflation. If you want to accomplish important personal and financial goals, such as owning a home, starting your own business, helping your kids through university or college (and spending more time with them when they’re young), retiring comfortably, beating inflation, and so on, you must know how to invest well.

It’s been said, and too often quoted, that the only certainties in life are death and taxes. To these two certainties you can add one more: being confused by and ignorant about investing. Because investing is a confounding activity, you may be tempted to look with envious eyes at those people in the world who appear to be savvy with money and investing. Note that everyone starts with the same level of financial knowledge: none! No one was born knowing this stuff! The only difference between those who know and those who don’t is that those who know have devoted their time and energy to acquiring useful knowledge about the investment world. In this chapter, you begin to build your understanding of investing on a firm foundation of the fundamentals.

Getting Started with Investing

Before this chapter discusses the major investing alternatives, consider a question that’s quite basic yet important. What exactly does “investing” mean? Simply stated, investing means you have money put away for future use.

You can choose from tens of thousands of stocks, bonds, mutual funds, exchange-traded funds, and other more exotic investments. To help you on this journey, this book takes you through your options, explains those options to you, and provides you with tips, warnings, and reminders of key points and more. Even after you’ve read this book, in whole or piecemeal, you’ll have only touched the tip of the investing knowledge iceberg. In the meantime, congratulations on the start of your journey and desire to figure out even more about investing than you already do!

If you wanted to and had the ability to quit your day job, you could make a full-time endeavour out of analysing economic trends and financial statements and talking to business employees, customers, suppliers, and so on. However, you shouldn’t be scared away from investing just because some people do it on a full-time basis. Making wise investments need not take a lot of your time. If you know where to get high-quality information and you purchase well-managed investments, you can leave the investment management to the best experts. Then you can do the work that you’re best at and have more free time for the things you really enjoy doing.

An important part of making wise investments is knowing when you have enough information to do things well on your own versus when you should hire others. For example, foreign stock markets are generally more difficult to research and understand than domestic markets. Thus, when investing overseas, investing in a mutual fund where a good money manager decides what stocks to hold is often a wise move.

In most cases, you can reap competitive returns while only paying minimal fees by investing in exchange-traded funds, or ETFs. ETFs are what’s known as index funds. They’re designed to give investors the same return as a particular stock market index, such as the Toronto Stock Exchange. (A stock market index is a measurement of the overall performance of a basket of stocks. The S&P/TSE Composite Index, for example, measures the overall performance of about 250 large companies in a variety of different industries.) If an index rises by 8.5 percent in 12 months, investors in an ETF that tracks that particular index will see their investment gain by a similar amount, minus a fraction of a percent for the fees paid to the fund’s managers.

This book gives you the information you need to make your way through the complex investment world. The rest of this chapter helps you identify the major investments and understand the strengths and weaknesses of each.

Setting Financial Goals

You need to set your personal financial goals for a variety of reasons. The overall reason is that a goal represents a North Star for you to follow when economic and corporate events get choppy and unpredictable. Goals stabilize your emotions which in turn can help you avoid poor investment decisions, such as selling an investment vehicle too soon at an unfavourably low price or buying something at too high of a price. Here are other reasons why goal setting is critical:

Goals help you define your investment objectives and what you want to achieve with your investments in terms of returns (profits). This also in turn lets you figure out the appropriate amount to invest and the timeline needed to reach your goals, whether that’s saving for a car, a down payment on a house, or retirement or for saving for retirement.

Specific, realistic, and measurable goals within preset timelines let you better track your progress (and the performance of your investment portfolio) and help you make necessary course corrections to your investment strategy. This could involve reevaluating your risk tolerance or asset allocation if market conditions take a turn for the worse. Goals keep you on track to meet your targets.

Setting investment goals motivate you to stick to your plan and therefore help you avoid impulsive and ill-timed decisions. Aligning your investments to defined objectives also gives you a sense of financial purpose.

Exploring Your Investment Choices

Investments come in a variety of shapes, sizes, and colours. Yup, shape and colour too! Think precious metals like gold and silver or real estate. In some cases, investments have no shape at all because they don’t physically exist. Bitcoin, Ethereum, or Solana anyone? The list of financial instruments and other investable assets is endless. This book presents the most common five, six, or seven investment types. You get the picture. We start here with only a snapshot. Detailed discussion of each of these is unpacked in great detail in various other chapters.

Stocks

Stocks represent ownership (a piece of the action and slice of the ownership pie) in publicly traded companies. Stocks provide the potential for high returns, but they also come with significant volatility and a real risk of losing all or a part of the money you originally put in. Investing in stocks lets you take part in the growth and profitability of businesses, though stock prices can fluctuate greatly based on market sentiment and company performance. Book 2 is all about stocks.

ETFs and mutual funds

An exchange-traded fund (ETF) is a pooled financial instrument (a basket of stocks, bonds, commodities, and more) that can be bought and sold like an individual stock. ETFs can be designed to track anything, including a specific investment strategy (for instance a basket of investments that grow fast but are risky or investments that earn income but are safer).

Mutual funds are similar to ETFs. Mutual fund companies pool money collected from investors like you and invest those funds in a diversified portfolio of securities. As with ETFs, they provide diversification. Mutual funds also come in various styles and risk levels, making them a popular choice for both beginner and experienced investors alike.

Book 3 discusses both of these funds in detail, including contrasting the differences and teasing out the similarities between each other and among other investment types.

Precious metals

Precious metals like gold and silver are often considered a hedge against inflation and protection during uncertain economic times. Metals don’t generate regular income. However, precious metals are expected to act as a store of value and are relied upon to provide stability to an investment portfolio, especially during times of turbulence, volatility, and inflation. Book 4 discusses precious metals in greater detail.

Real estate

Real estate investment allows you to build wealth through ownership of residential, commercial, industrial, and other property types. This asset class can provide rental income; and if you were lucky enough to own residential property early on, give you capital gains (when proceeds exceeds your cost). However, real estate also requires significant upfront capital, loads of ongoing maintenance, and types of management responsibilities and headaches that stocks and mutual funds don’t usually trigger.

Real estate also offers you several investment options beyond just buying and renting out properties. Real estate investment trusts (REITs) provide a more hands-off approach, allowing you as a REIT investor to get exposed to various types of real estate, without contractually or traditionally owning or physically managing properties. Book 7 explores REITs and real estate.

Considering Investment Strategies

Investment strategies generally fall into one of two broad categories:

Growth investing:

Where an investor wishes to make profits quickly but in doing so takes on more risk. In this case that may mean losing money just as fast.

Income investing: This type is more cautious in nature and involves a lower tolerance of risk of loss.

Other investing approaches (like value investing) exist but growth and income investing are the foundational ones.

Here we cover the nuts and bolts of these core investing approaches.

Growth investing

A growth investing strategy involves targeting companies with high growth potential. This strategy prioritizes future earnings growth over current stock valuation. Investors focus on sectors like technology and healthcare among other sectors. They seek companies with innovative products (like weight loss pills), patents, and growing market share. Successful growth investing requires assessing management quality, market trends, and balancing risk through diversification across companies and sectors.

The bottom line here is that investors want their money to grow (versus just trying to preserve it). Growth investors look for investments that appreciate. The faster the better. Appreciate is just another way of saying grow. If you bought a stock for $8 per share and now its value is $30 per share, your investment has grown by $22 per share — that’s appreciation. We know we would appreciate it.

Appreciation (also known as capital gain) is probably the number-one reason people invest in stocks. Few investments have the potential to grow your wealth as conveniently as stocks. If you want the stock market to make you loads of money (and you can assume some risk), head to Book 2, Chapter 3, which takes an in-depth look at investing for growth.

Stocks are a great way to grow your wealth, but they’re not the only way. Many investors seek alternative ways to make money, but many of these alternative ways are more aggressive than stocks and carry significantly more risk. You may have heard about people who made quick fortunes in areas such as commodities (for example wheat, pork bellies, or precious metals), options, and other more sophisticated investment vehicles. Keep in mind that you should limit these riskier investments to only a small portion of your portfolio, such as 5 or 10 percent of your investable funds, and you should always understand the type of security (stock, bond, and so on) you’re invested in. Experienced investors, however, can go higher.

To succeed in growth investing, investors must understand the differences between growth and value investing:

Value investing

is all about finding undervalued stocks trading below their inherent worth, with the expectation that the market will eventually recognize their true value and the stock price will rise. Value investors focus on a company’s fundamentals, such as low price-to-earnings (P/E) and price-to-sales (P/S) ratios, to identify value stocks. They believe that the market often overreacts to negative news, creating opportunities to buy quality stocks at bargain prices. Just like Warren Buffett does. Value stocks tend to be stable in price action.

Growth investing

focuses on companies with strong earnings growth potential, even if they’re presently trading at higher valuations. Growth investors prioritize future growth over current valuation. Growth stocks are often volatile in terms of day-to-day prices.

Income investing

Income investing is a strategy designed to create an overall investment portfolio (that can contain a mix of stocks, bonds, and everything in between) that generates regular income for you. The main purpose of income investing is to give you a steady stream of income through dividends, bond yields, interest payments, and even rent in the case of REITs.

Typical income-investing portfolios include dividend-paying stocks, government or corporate bonds and money market funds including ETFs. Income investing strives to maximize income while minimizing risk. However, there are still risks involved, such as poor bond yields or returns of the type experienced in 2022 and 2023. Nevertheless, income investing is a good way to grow wealth over the long term. Many Canadian investors use a healthy combination of both growth and income strategies to balance more immediate cash flow needs with long-term wealth accumulation goals.

The balance between income or growth investing depends on your financial goals, risk appetite, and time horizon. For example, income investing may be more suitable for Canadians in or close to retirement, while a heavier emphasis on growth investing may suit younger investors with more time on their side.

Not all investors want to take on the risk that comes with making a killing. (Hey … no guts, no glory!) Some people just want to invest in the stock market as a means of providing a steady income and preserving wealth. They don’t need stock values to go through the ceiling. Instead, they need dividend-paying and stable stocks that perform well consistently.

If your purpose for investing in stocks is to create income, you need to choose stocks that pay dividends. Dividends are typically paid quarterly to stockholders on record as of specific dates. How do you know if the dividend you’re being paid is higher (or lower) than other vehicles (such as bonds)? To answer that question and other questions about income investing, turn to Book 2, Chapter 4.

Diversifying Your Investment Assets

A key concept behind investing is the need to diversify your holdings. In other words, don’t put all your eggs in one basket. Diversification places a floor on the amount of money you can lose if things don’t work out as you expected with your investments. This can mean that you start to experience real losses, or you think that potential losses are just around the corner. We explore a couple of ways for you to diversify your investments to manage your risk.

Reducing risk

Diversification is a strategy for reducing risk by spreading your money across different investments. It’s a fancy way of saying, “Don’t put all your eggs in one basket.” But how do you go about divvying up your money and distributing it among different investments? The easiest way to understand proper diversification may be to look at what you shouldn’t do:

Don’t put all your money in one stock.

Sure, if you choose wisely and select a hot stock, you may make a bundle, but the odds are tremendously against you. Unless you’re an expert on a particular company, allocating your money across several different stocks is a good idea. As a rule, the money you tie up in a single stock should be money you can do without.

Don’t put all your money in one industry or country.

We know people who own several stocks, but their stocks are all in the same industry. Again, if you’re an expert in that particular industry, it might work out. But just understand that you’re not properly diversified. If a problem hits an entire industry, you may get hurt. Similarly, and as we mention earlier in this chapter, don’t have all your stock holdings in the stock market of one country.

Don’t put all your money in one type of investment.

Stocks may be a great investment, but you need to have money elsewhere. Bonds, bank accounts, Treasury securities, real estate, and precious metals are perennial alternatives to complement your stock portfolio. Some of these alternatives can be found in mutual funds or exchange-traded funds (ETFs). We really love ETFs and think that every serious investor should consider them; see

Book 3

for more information.

Okay, now that you know what you shouldn’t do, what should you do? Until you become more knowledgeable, follow this advice:

Keep only 5 to 10 percent (or less) of your investment money in a single stock.

Because you want adequate diversification, you don’t want overexposure to a single stock. Aggressive investors can certainly go for 10 percent or even higher, but conservative investors are better off at 5 percent or less.

Invest in various industries and hold several stocks in each industry (four or five stocks, and no more than ten, in each).

Which industries? Choose industries that offer products and services that have shown strong, growing demand. To make this decision, use your common sense (which isn’t as common as it used to be). Think about the industries that people need no matter what happens in the general economy, such as food, energy, and other consumer necessities. See Book 2,

Chapter 1

for more information about analysing stocks.

Understanding asset classes

To diversify your investment portfolio, the first step is to understand asset classes, which include stocks, bonds, cash, and other types of financial instruments.

Common types of financial instruments and assets by which to diversify your investment portfolio include

Stocks

Bonds

Cash and cash equivalents such as savings accounts, short-term GICs, and term deposits, all with low returns but high liquidity

Real estate

Commodities and natural resources like timber, oil, wheat, and precious metals that can do well during inflation

Cryptocurrencies as a new asset class with high volatility and potential for significant returns, but also extremely high risk to the downside

Alternative investments such as private equity and hedge funds that can provide diversification but incur a higher cost and have low liquidity

Canadian investors can diversify by asset class by allocating a mix of stocks, bonds, and cash. They can be a combination of domestic and foreign holdings. For example, a growth-oriented portfolio might consist of 75 percent stocks, 20 percent bonds, and 5 percent GICs. The stocks may further be a 50/50 Canadian-to-foreign source in nature. You can also mix things up by diversifying within asset classes by selecting different sectors, industries, or themes such as green investing (investing in companies who say they have the environment in mind).

Rebalance your investment portfolio from time to time (at least consider it semi-annually) to maintain your target asset allocation and remain aligned with your investment strategy, something that we discuss in the “Considering Investment Strategies” and “Diversifying Your Investment Assets” sections of this chapter. The end game for you is to create a diversified investment portfolio that can withstand various economic cycles and unexpected global or domestic unwanted events.

Determining Your Investment Tastes

Many good investing choices exist: You can invest in real estate, the stock market, mutual funds, exchange-traded funds, or your own or some else’s small business. Or you can pay down mortgage debt more quickly. What makes sense for you depends on your goals as well as your personal preferences. If you detest risk-taking and volatile investments, paying down your mortgage, as recommended earlier in this chapter, may make better sense than investing in the stock market.

To determine your general investment tastes, think about how you would deal with an investment that plunges 20 percent, 40 percent, or more in a few years or less. Some aggressive investments can fall fast. You shouldn’t go into the stock market, real estate, or small-business investment arena if such a drop is likely to cause you to sell low or make you a miserable, anxious wreck. If you haven’t tried riskier investments yet, you may want to experiment a bit to see how you feel with your money invested in them.

A simple way to “mask” the risk of volatile investments is to diversify your portfolio — that is, to put your money into different investments. Not watching prices too closely helps, too — that’s one of the reasons real estate investors are less likely to bail out when the market declines. Stock market investors, on the other hand, can get daily and even minute-by-minute price updates. Add that fact to the quick phone call or click of your computer mouse that it takes to dump a stock in a flash, and you have all the ingredients for short-sighted investing — and potential financial disaster.

INVESTING AS COUPLES

You’ve probably learned over the years how challenging it is just for you to navigate the investment maze and make sound investing decisions. When you have to consider someone else, dealing with these issues becomes doubly hard given the typically different money personalities and emotions that come into play.

In many couples, usually one person takes primary responsibility for managing the household finances, including investments. As with most marital issues, the couples that do the best job with their investments are those who communicate well, plan, and compromise.

Here are a couple of examples to illustrate this point. Martha and Alex scheduled meetings with each other every three to six months to discuss financial issues. With investments, Martha came prepared with a list of ideas, and Alex would listen and explain what he liked or disliked about each option. Alex would lean toward more aggressive, growth-oriented investments, whereas Martha preferred conservative, less volatile investments. Inevitably, they would compromise and develop a diversified portfolio that was moderately aggressive. Martha and Alex worked as a team, discussed options, compromised, and made decisions they were both comfortable with. Ideas that made one of them very uncomfortable were nixed.

Henry and Melissa didn’t do so well. The only times they managed to discuss investments were in heated arguments. Melissa often criticized what Henry was doing with their money. Henry got defensive and counter-criticized Melissa for other issues. Much of their money lay dormant in a low-interest bank account, and they did little long-term planning and decision making. Melissa and Henry saw each other as adversaries, argued and criticized rather than discussed, and were plagued with inaction because they couldn’t agree and compromise. They needed a motivation to change their behaviour toward each other and some counselling (or a few advice guides for couples) to make progress with investing their money.

Aren’t your long-term financial health and marital harmony important? Don’t allow your problems to fester! One of the most valuable — and difficult — things for couples stuck in unproductive patterns of behaviour to do is to get the issue out on the table. For these couples, the biggest step is making a commitment to discuss their financial management. Once they do, it’s a lot easier for them — or their financial advisor — to explain their different points of view and then offer compromises.

Chapter 2

Weighing Risks

IN THIS CHAPTER

Understanding different types of risk

Developing a sense of your risk tolerance

Avoiding and mitigating risks

Canadian stock investors face many types of risks, which we cover in this chapter. The simplest definition of risk in the context of investing is “the possibility that your investment will lose some (or all) of its value.” Yet you don’t have to fear risk if you understand it and plan for it. You must understand the oldest equation in the world of investing — risk versus return. This equation states the following:

If you want a greater return on your money, you need to accept more risk. If you don’t want to accept more risk, you must expect a lower rate of return.

This point about risk is best illustrated from a moment in one of our investment seminars. One of the attendees told us that he had his money in the bank but was dissatisfied with the rate of return. He lamented, “The yield on my money is pitiful! I want to put my money somewhere where it can grow.” We asked him, “How about investing in common stocks? Or what about growth-oriented exchange-traded funds? They both have a solid, long-term growth track record.” He responded, “Stocks? ETFs? I don’t want to put my money there. It’s too risky!” Okay, then. If you don’t want to accept and tolerate more risk, don’t complain about earning less on your money. Risk (in all its forms) has a bearing on all your money concerns and goals. That’s why understanding risk before you invest is so important.

This person — as well as the rest of us — needs to remember that risk is not a four-letter word. (Well, it is a four-letter word, but you know what we mean.) Risk is present no matter what you do with your money. Even if you simply stick your money in your mattress, risk is involved — several kinds of risk, in fact. You have the risk of fire. What if your house burns down? You have the risk of theft. What if burglars find your stash of cash? You also have relative risk. (In other words, what if your relatives find your money?)

Be aware of the different kinds of risk that we describe in this chapter, so you can easily plan around them to keep your money growing. And don’t forget risk’s kid brother … volatility! Volatility is about the rapid movement of buying or selling, which, in turn, causes stock prices to rise or fall rapidly. Technically, volatility is considered a “neutral” condition, but it’s usually associated with the rapid downward movement of stock because this causes anxiety and means a sudden loss for investors.

Understanding Market-Value Risk

Although the stock market can help you build wealth, most people recognize that it can also drop substantially — by 10, 20, or 30 percent (or more) in a relatively short period of time. After peaking in 2000, Canadian and U.S. stocks, as measured by the major Indexes representing the value of large companies (for Canada, the S&P/TSX Composite Index, and for the United States, the S&P 500 Index), dropped about 50 percent by 2002. Stocks on the Nasdaq, which is heavily weighted toward technology stocks, plunged more than 76 percent from 2000 through 2002!

After a multiyear rebound, stocks peaked in 2007 and then dropped sharply during the “financial crisis” of 2008. From peak to bottom, Canadian, U.S., and global stocks dropped by some 50 — or more — percent.

In a mere six weeks (from mid-July 1998 to early September 1998), large-company Canadian and U.S. stocks fell about 20 percent. An Index of smaller-company U.S. stocks dropped 33 percent over a slightly longer period of two and a half months.

If you think that the stock market crash that occurred in the fall of 1987 was a big one (the market plunged by about a third in a matter of weeks), look at Tables 2-1 and 2-2, which list major declines over the past 100-plus years that were all worse than the 1987 crash. Note that two of these major declines happened in the 2000s: 2000 to 2002 and 2007 to 2009.

TABLE 2-1 Most Depressing Canadian Stock Market Declines*

Period

Size of Fall

1929–1932

80% (ouch!)

1937–1942

56%

2000–2002

50%

2007–2009

48%

1980–1982

44%

1973–1974

38%

2020

37%

1987–1987

31%

1956–1957

30%

* As measured by changes in the TSE/TSX Composite Index

TABLE 2-2 Largest U.S. Stock Market Declines*

Period

Size of Fall

1929–1932

89% (ouch!)

2007–2009

55%

1937–1942

52%

1906–1907

49%

1890–1896

47%

1919–1921

47%

1901–1903

46%

1973–1974

45%

1916–1917

40%

2000–2002

39%

2020

37%

* As measured by changes in the Dow Jones Industrial Average

After reading this section, you may want to keep all your money in the bank — after all, you know you won’t likely lose your money, and you won’t have to be a nonstop worrier. Since the Canada Deposit Insurance Corporation (CDIC) came into existence, which protects deposits at banks and trust companies up to $100,000, people don’t lose 20, 40, 60, or 80 percent of their bank-held savings vehicles within a few years, but major losses prior to then did happen. Just keep in mind, though, that just letting your money sit around would be a mistake.

If you pass up the stock market (or any other market like the longer-term real estate or bond markets) simply because of the potential market-value risk, you miss out on a historic, time-tested method of building substantial wealth. Instead of seeing declines and market corrections as horrible things, view them as potential opportunities or “sales.” Try not to give in to the human emotions that often scare people away from buying something that others seem to be shunning.

The following sections suggest some simple things you can do to lower your investing risk and help prevent your portfolio from suffering a huge fall (or “drawdown”).

Examining Individual-Investment Risk

A down-draft can put an entire investment market on a roller-coaster ride, but healthy markets also have their share of individual losers. For example, from the early 1980s through the late 1990s, Canadian and U.S. stock markets had one of the greatest appreciating markets in history. You’d never know it, though, if you held one of the great losers of that period.

Consider a company now called Navistar, which has undergone enormous transformations in recent decades. This company used to be called International Harvester and manufactured farm equipment, trucks, and construction and other industrial equipment. Today, Navistar makes mostly trucks.

In late 1983, this company’s stock traded at more than US$140 per share. It then plunged more than 90 percent over the ensuing decade (as shown in Figure 2-1). Even with a rally in recent years, Navistar stock still trades at less than US$20 per share (after dipping below US$10 per share). Lest you think that’s a big drop, this company’s stock traded as high as US$455 per share in the late 1970s! If a worker retired from this company in the late 1970s with $200,000 invested in the company stock, the retiree’s investment would be worth about $6,000 today! On the other hand, if the retiree had simply swapped his stock at retirement for a diversified portfolio of stocks, which you find out how to build in Book 2, his $200,000 nest egg would’ve instead grown to more than $5 million!

© John Wiley & Sons, Inc.

FIGURE 2-1: Even the bull market of the 1990s wasn’t kind to every company.

Like most other markets, the Canadian stock market paled by comparison with the U.S. juggernaut in the 1990s, but this country has had its share of stocks that have plummeted in value. How about Dylex, which through its many brand-name outlets, such as Suzy Shier, at one time took in one out of every ten dollars consumers spent in retail clothing outlets? The stock, which began the 1990s at $24, ended the decade languishing beneath the $10 mark, dwindling lower and lower until the company eventually went under in 2001.

And then, of course, there’s Nortel. In the late 1990s, many investors happily recounted how well they’d done by buying Nortel. They often had made two, three, even ten times or more on their original investment. Nortel, or so people were told, just couldn’t keep up with the internet-driven demand for its products. At its peak, Nortel employed 90,000 workers worldwide and was worth nearly $300 billion.

Well, in a matter of months, the company’s cheerleaders were proven to be completely, hopelessly wrong. Nortel crumbled, and by October 2002 it had literally turned into a penny stock, trading at under a buck. Many investors were now calling Nortel one of their “worst moves.” By the end of 2008, the stock was taken off the New York Stock Exchange because it had had an average closing price below U.S.$1 for more than 30 days. By the end of the decade, Nortel had been also delisted by the Toronto Stock Exchange and went bankrupt.

Just as individual stock prices can plummet, so can individual real estate property prices. Today, real estate prices for many property types (like residential and industrial) are sky high. Is a drop in prices over the next few years in the cards? Price volatility can exist in any asset class, which is a topic discussed in Chapter 1.

Here are some simple steps you can take to lower the risk of individual investments that can upset your goals:

Do your homework.

When you purchase real estate, a whole host of inspections can save you from buying a money pit. With stocks, you can examine some measures of value and the company’s financial condition and business strategy to reduce your chances of buying into an overpriced company or one on the verge of major problems.

Book 2

gives you information on researching your stock investment.

Diversify.

Investors who seek growth invest in securities such as stocks. Placing significant amounts of your capital in one or a handful of securities is risky, particularly if the stocks are in the same industry or closely related industries. To reduce this risk, purchase stocks in a variety of industries and companies within each industry. (See

Chapter 1

for more about diversifying your investments.)

Hire someone to invest for you.

The best funds offer low-cost, professional management and oversight as well as diversification. Stock funds typically own 25 or more securities in a variety of companies in different industries.

THE LOWDOWN ON LIQUIDITY

The term liquidity refers to how long and at what cost it takes to convert an investment into cash. The money in your wallet is considered perfectly liquid — it’s already cash.