Evan Davies - Oct 28, 2020
An overview of investing basics & terminology, a look into investment styles and markets, learn the different types of accounts and find out how (and how much you need) to get started.
What is a stock?
A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called "shares.“ Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors' portfolios.
What is a bond?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debt holders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.
• A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities.
• Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
• Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
• Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns.
• The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.
• An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
• ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes.
• ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
• ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.4
RRSP (Registrered Retirement Savings Plan) Quick Facts:
• The allowable contribution room for 2020 is 18% of your earned income from 2019 to a maximum of $27,230
• Your allowable RRSP contribution room factors in your pension adjustment(s), past service pension adjustment(s) and pension adjustment reversals, if applicable. It also includes any unused carry forward room. Your RRSP deduction limit can be found on your most recent notice of assessment.
• RRSP contributions made during the first 60 days of 2021 can be used towards either your 2020 or 2021 RRSP limit.
RRSP contributions can minimize income taxes in two ways:
1. Contributions up to your RRSP contribution limit can be treated as a deduction from your annual income.
2. Capital gains and income can compound tax-free inside your RRSP. Taxes are payable only when the funds are withdrawn – typically in retirement, when you may
Two options to avoid the consequences of early RRSP withdrawals:
1. Home Buyers Plan: The Home Buyers’ Plan (HBP) allows first-time home buyers to borrow up to $35,000 in a calendar year from their RRSP to buy or build a qualifying home. The en2. Lifelong Learning Plan: The Lifelong Learning Plan (LLP) allows you to borrow up to $20,000 from your RRSP to pay for full-time training or education at a qualifying institution. A maximum of $10,000 may be withdrawn from the RRSP per calendar year and the total amount withdrawn must be repaid over 10 years, with the timing of the repayment period based on the length of enrolment of the student.
2. Lifelong Learning Plan: The Lifelong Learning Plan (LLP) allows you to borrow up to $20,000 from your RRSP to pay for full-time training or education at a qualifying institution. A maximum of $10,000 may be withdrawn from the RRSP per calendar year and the total amount withdrawn must be repaid over 10 years, with the timing of the repayment period based on the length of enrollment of the student.
TFSA Quick Facts
• The Tax-Free Savings Account (TFSA) has been in existence since 2009.
• In 2020, the total available contribution room is $69,500 for those eligible Canadians who have not yet contributed.
• The annual TFSA dollar limit from 2009 to 2012 was $5,000. In 2013 and 2014, the limit increased to $5,500, the limit for 2015 increased to $10,000 and from 2016-2018 $5,500 and for 2019-2020 $6000.
• One of the most compelling reasons for investing in a TFSA, is the opportunity for tax-free growth.
• The main difference between the TFSA and Registered Retirement Savings Plan (RRSP) is that TFSA contributions are funded with after-tax dollars, so any investment income or capital gains earned within the plan are not taxed upon withdrawal.
• One beneficial feature of the TFSA is that withdrawals will be added back to the following year’s contribution room, whereas RRSP withdrawals cannot be re-contributed.
• An investor who invested the full contribution amount annually since the TFSA’s inception in 2009 of $69,500 (including the 2020 contribution) and then stopped will have accumulated well over $100,000 after 25 years, assuming a rate of return of 5 percent
/The Power of Compounding
How an annual investment of $1000 can grow over time at different rates of annual return.
Investing is the act of forgoing consumption today for consumption at a later time. No matter what you call it, the nest egg, rainy day, or retirement fund, it’s about saving now, for later.
Can you forgo $1,000 per year? What about $2,000 per year, or more? And what could you do with all the money saved by not spending that annual savings
/PAC - Getting Started
How do I get started?
To get started with investment the best thing you can do, is start a PAC - a pre-authorized contribution that takes funds automatically from your bank account to your investment account in a preset amount on a pre-set date once or twice a month.
•Keep Contributing Monthly
•Don’t take money out of the account
How much do I need to get started?
Budget for a dollar amount that you can afford – start with $50-$100 monthly, and build from there
Ready to get started? Book a consultation with Evan.