Investing Your Money Wisely (Part 2/2)

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Setting Up Your Portfolio

Read Part 1: Understanding the Types of Assets

When you deposit money in an account, it doesn’t just sit there. Indeed, the bank will always use the money for its operational and investment activities. Since the institution borrowed those funds from you, it credits you with a small interest payment less management fees. So the question is can you have more control over those investment activities? For example, you can decide how and when your money should be invested.

  • Option 1: Investing with a financial advisor: If like many people you are not willing or able to manage your investments; you may require the help of an advisor from a financial services company. It may be your local bank, an insurance group or a financial advisory firm. Those institutions offer a wide range of products depending on your objectives, your risk aversion and the initial amount invested. Once you buy an investment product through a financial advisor, your money goes to an investment fund. This is a collective scheme where money is pooled from many investors to purchase securities and redistribute profits and losses. Investment funds gather investors who are willing to invest in the same kind of securities (money market, fixed income, equity or hybrid); a popular example is mutual funds. Since your money will be mixed with other individuals’ assets, you can benefit from economies of scale and risk diversification advantages that come from investing as a group.

If investment funds seem too risky for you, you may consider guaranteed investments, which comprise all products that ensure a specific rate of return on your principal. Examples are Certificate of Deposits and Guaranteed Investment Certificates (names may vary by country). Typically you will have to lock in your money for a pre-determined period of time for the guarantee to apply. In this case your funds are still invested in the financial markets, the difference here being that the bank commits itself to give you a certain amount of money after a period of time.

Tip: When crafting your investment strategy, consider using tax-friendly vehicles like tax-free savings accounts, Individual Retirement Accounts (IRA) or Registered Savings Plans (RSP) to host your portfolio of securities.

  • Option 2: Direct investment. You may want to make your own investment moves, tackle an industry that is not offered in packaged products or avoid management fees that are common with investment funds. In this case, one interesting option is to open an account with a brokerage firm (or the brokerage department of your bank) to buy and sell instruments of your choice. The broker will trade on the market on your behalf, based on the orders you placed. You may get assistance and counseling over the phone or online. A discount broker is a company that exclusively works online, allowing you to trade at a lower commission. You can then pick and trade specific stocks, commodities, REITs, currencies or derivatives, depending on the specialty of the brokerage.

Popular instruments these days are Exchange Traded Funds (ETFs), that you can also buy through a brokerage. ETFs are units of investment funds that trade on the market. They generally track indices on stocks, bond or commodities, which limits your company-specific risk and gives you the flexibility of getting in and out of some markets by buying or selling your units.

Tip: Regardless of the option you choose, make sure you always stay aware of the global economic dynamics, geo-political events and industry-related issues. These may affect your portfolio directly or indirectly through the resulting changes in inflation, interest rates and growth rates.


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