A Season and A Reason for Your Investments

At one time or another, you may have heard the familiar Ecclesiastes verses, “There is a time for everything and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot.”   I bet you never thought this could apply to your investments. 

Throughout life’s journey, your reasons for saving will vary.  You save for a vehicle, children’s education, retirement, home renovations, and vacations.  No doubt your list is endless.   The important strategy is choosing the appropriate investment vehicle and type of investments.  This is where the confusion begins.  Investment vehicles are different from types of investments. Investment vehicles, Registered Retirement Plans, Tax Free Savings Accounts (TFSA), and Non-Registered Accounts, have specific features and benefits.  Once you understand their uniqueness, you can determine a suitable fit for you.  

One way to explain investment vehicles is to associate them with the automotive industry.  We understand the differences between a truck, car, and van.  Each one services our needs differently. You may require a truck for work, a car for family purposes, and a van for travelling with young hockey players and their equipment.  You may prefer one versus another specifically because of fuel mileage, comfort,  or  safety.  Whatever your reason, you match your choice to your need.  Therefore, if you can relate investment vehicles to the vehicles you drive, you will be one step closer to differentiating Registered Retirements Plans, Tax Free Savings Accounts, and Non-Registered Savings.

Another element which adds to the confusion is the types of investments held under the respective investment vehicles. The diagram above shows that the types of investments are the same.  Whether you strictly hold GICs (Guaranteed Investment Certificates), specific bonds, stocks, or mutual funds will depend on your time horizon and risk tolerance.  {Does this sound familiar? I covered this topic in my previous blog, Can Investing Actually Be Easy.}  Again, consider types of investments linked to automotive industry as a “make” of vehicle: Ford, General Motors Canada (GMC), Toyota and Honda.  You can purchase either a truck, car, or van in your preferred "make".  GICs, bonds, stocks and mutual funds, are all different investments, yet you can purchase them as a Registered Plans, TFSA, and Non-Registered Accounts.  Once you grasp this analogy, your choice of appropriate investments will be made easy.

In order to choose the right investment vehicle, you need answers to these questions:

What is your purpose for saving?  This crucial question is important for your plan to succeed. Money set aside for retirement is invested differently than money set aside for emergencies.

What is your annual income today and what will be your annual income in retirement?  This important information determines whether utilizing a Registered Retirement Savings Plan is preferred over the Tax Free Savings Account. 

Understanding the investment vehicles’ distinct features helps you identify the benefit you can derive from its use.  Just as your vehicle has special “must-have” features like cruise control, 8-way power adjustment driver’s seat, and push button start, your investment choice also has special “must-have” features. The chart below explains some of the features to help you determine whether you can benefit from each specific investment vehicle.

Registered Investments	Tax Free Savings Account	Non-Registered Savings
Contribution room calculated as a percentage of earned income.  RRSP contribution limit reported on Notice of Assessment.	Contribution room became available in 2009 with an annual limit of $5,000.  In 2013, the annual limit increased by $500 to $5,500 indexed by the inflation rate.	Contribution limits do not apply. The sky’s the limit.
Contributions when applied reduce taxable income.	Contributions do not reduce taxable income.
Eligible to contribute the maximum amount with the option to apply the deduction to your taxable income in any given year.	Once the maximum contribution is made, the amount is reported to ensure contributions remain within the limits.
Contribution room varies according to earned income.	Contribution room is set the same for all Canadians. The exception may occur as a result of income earned on the principal.  When TFSA proceeds are withdrawn in its entirety, the new contribution limit is then equal to the principal and earnings.
If contributions are not made in current year, then the contribution room is carried forward to future years.	If contributions are not made in current year, then the contribution room is carried forward to future years.
When a withdrawal is processed, contribution room is lost and cannot be restored.	When a withdrawal is made in the current year, contribution room is restored in the following year for the same amount.
Contributions end at the end of the year of 71st birthday.	Contributions permitted from age 18 to any age.	Contributions can be made at any age.
Earnings are tax-sheltered.	Earnings are tax-sheltered.	Earnings are not tax-sheltered.
Withdrawals will be included in your income and taxed accordingly.	Withdrawals will not be included in your income and are taxed.	Withdrawals will not be taxed.  Earnings are taxed annually.
Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will not affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.	Income will affect federal income-tested benefits and credits such as Guaranteed Income Supplement (GIS) and Child Tax Benefit.
Purpose for savings: retirement, financing your first home under the Home Buyers Plan, training or post-secondary education under the Life Long Learning Plan, or as a tool for tax deferral.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.	Purpose for saving: vacations, vehicle, furniture, emergency, renovations, and even a home.  May be used for children’s education if your RESP (Registered Education Savings) have been maximized.

Understanding your investment vehicle helps you fulfill your purpose for investing and gain the greatest advantage from your investment selection. The most satisfying reward is to discover an easy way to achieve your goal by implementing smart investment strategies.  Just as all vehicles come with many options, so, too, do investment vehicles.  Using appropriate investment vehicles will allow you to drive your future dreams.      



Can Investing Actually Be Easy?

Most people have the perception that investing is complicated.  Making decisions about suitable investments, anticipating whether the markets are headed north or south, and then timing the sale to reap a profit can be overwhelming.   

Investors often hear common phrases such as:

“It’s not timing the market; it’s time in the market.”

“Buy low. Sell high.”

“Buy and hold”. 

Although there is truth in these messages, everyone’s investment strategies are different.  When considering appropriate investments for you, you want to take the appropriate steps.  Confucius, a philosopher, said, “What you hear, you forget. What you see, you remember. What you do, you understand.”  You need to arrive at the point where you understand investing; this will only happen when you take some interest in the process.

To help understand the world of investments, let’s follow a few basic steps.

 1^st Step: Set the Ground Rules

Making choices about the appropriate investments clearly starts with identifying your goals, dreams, and aspirations.  This important step cannot be ignored.  For obvious reasons, your goals will dictate the appropriate investments to align within your time horizon.

2^nd Step: Define the Time Lines

Knowing when you want to accomplish something for the purpose of investing is important if you want the money to be ready when you are.  Whether you are buying a new vehicle next year, planning your elaborate vacation in five years, or saving for retirement over thirty years, you must pace your investment strategy.  Gradually tucking money aside for each important activity is vital, so you are not cramming to save as the deadline looms closer.    

3^rd Step: Select the Appropriate Investments

Diversify, diversify, diversify!  Don’t keep all your eggs in one basket!  How many times have you heard that phrase?

When you are starting to invest, you may not understand the world markets.  The terminology may be enough to either scare or intimidate you.  The word, “risk”, makes you want to run.  Yet if you think about different types of investments as food, investing is not so intimidating.  Here’s your menu:

Light Stuff = Salad

Medium Stuff = Vegetables and Potatoes

Heavy Stuff = Meat and Fish (food with more substance)

Now compare this menu to your present diet. Common sense says you should eat a balanced diet. That’s true.  Yet everyones’ likes are different.  You are unique.  You are not like your neighbor, your best friend, or any of your family members.  Therefore, you select your portion size based on your needs and health requirements.  This holds true for selecting your investments.

In the investment world as in your food world, your choices are the same: light, medium, and heavy stuff.

Deposit-Based investments (Light Stuff) consist of savings accounts, guaranteed investments, and money market funds.  These are your “liquid investments” or investments you can turn quickly into cash.  When you use these types of accounts, your intention is to ensure your money remains safe and the value does not fluctuate.

Income-Based investments (Medium Stuff) are also referred to as fixed income investments.  These investments can be fairly liquid because they are primarily invested in government and corporate bonds.  With income-based investments, you are lending your money to the government or a corporation who in turn pays you interest.  Although a loss on these investments is possible, the threat is minimal.     

Equity-Based investments (Heavy Stuff) involve ownership in publicly traded corporations.  You own a piece of these companies, either directly by purchasing common shares or indirectly through mutual fund investments. Your expectation is either to be paid dividends for your vested interest in companies or to have your investment increase in value. 

4^th Step: Choose the Weighting to Match Your Investment Needs

Do you get queasy when markets fluctuate?  The ride experienced in the markets can be compared to the same ride experienced on a roller coaster: peaks and valleys, highs and lows, good and bad times! Your reaction provides a clear indication of how much risk you are willing to take with your money.  How well you handle the rise and fall in the value of any investment is a measurement of risk tolerance.  

Choosing the percentage allocated to each investment (or asset class) is matched closely with your risk tolerance.  Each investment type is gauged according to low, medium, or high risk. This in turn is linked closely to the rate of return earned at any given time in the market.  When you hear, “asset allocation,” this, in essence, is what you are doing.  You determine how much money you will allocate to bonds versus stocks. You determine your comfort level.

Remember the portions of your balanced diet are similar to the portions of your investments which are related to your saving purpose, time horizon, and risk tolerance. Some examples are:

• You may choose to invest 100% in strictly deposit investments if your vehicle purchase occurs in a year.
• You may choose to invest 25% in deposit investments and 75% in income investment for your trip to Hawaii occurring in five years.
• You may choose to invest 20% in income investments and 80% in equity investments for your retirement occurring in thirty years.     

Understanding the different types of investors helps you recognize who you are so you can select the appropriate investment strategy; BUT remember you can be several investor types simply because you have different purposes for investing with different time horizons.  It’s like having multiple personalities, depending on the situation, yet you are still the same person.  

Here are some examples of investor types with respective allocations (estimated). Determine which aligns with your investment needs.  

Investor Type	Investor Description	Investment Allocation
Safe Investor	Very Conservative	100% Deposit Investments
Income Investor	Conservative	80% Income-20% Equity
Income-Growth Investor	Moderately Conservative	60% Income-40% Equity
Balanced Investor	Moderate	40% Income-60% Equity
Growth Investor	Moderately Aggressive	20% Income-80% Equity
High Growth Investor	Very Aggressive	100% Equity

Final Step: Payoff–Getting Your “Big Toe” Wet

Taking an active part in your investment strategy by understanding the different types of investments will help accomplish your dreams. 

•      The dream retirement
•      The dream vacation
•      The dream vehicle

You need to ensure your investments are going to make your dreams a reality.  There’s two parts to growing your investments.

           ONE: The money you put into the investment account.

           TWO: The money you earn on the money you invest.

You do your part.  The markets will do theirs in helping you build wealth to fuel your dreams.