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What you need to know about investments

  1. Protect yourself from scams
  2. Define your investment goals
  3. Find out your investor profile
  4. Learn about different investment types
  5. Choose the right investments for you

Got long-term goals? Saving your money is good, but investing it is better. Even though investing can involve risk, it often brings in more than savings.

If you don't know where to start, check out these 5 steps everyone should take before investing

In recent years, we've seen some major financial fraud cases. Several investors have lost a lifetime of savings. Even knowledgeable people can be tricked by manipulative con artists.

Whether you feel concerned about fraud or not, here are a few simple precautions you should take before investing in any financial product.

Check the register of the Autorité des marchés financiers

If a financial planner, broker or representative offers you their services, verify if they're registered with the Autorité des marchés financiers (AMF). Firms or individuals giving financial advice or selling financial products are required to be in the register kept by the AMF.

The AMF oversees financial markets and protects investors in Quebec. It administers the Fonds d'indemnisation des services financiers (financial services compensation fund), which compensates fraud victims if the fraud was committed by an individual or firm authorized to practice by the AMF.

It's easy to check the Register of firms and individuals authorized to practice online. Just enter the name of the individual or firm. If they're a member, the register will show what services they're authorized to provide, e.g., group savings, group insurance, life insurance, financial planning.

If you can't find the representative or advisor in the AMF register, just walk away: your money wouldn't be covered in case of fraud. Also, remember that the AMF won't reimburse you for losses due to unintentional faults, errors, negligence or omission committed by an authorized representative.

Read the prospectus

When financial securities are issued, the issuer must prepare a prospectus. If you're planning to buy bonds or stock, make sure you get a copy of this document. It contains essential information about the company issuing the securities and the investment's risks (e.g., company history and past activity, audited financial statements, growth strategy).

If you want to invest in a mutual fund, the representative is required to give you a prospectus. Take time to read it through, even if it seems complicated. If it's unclear, ask your representative or financial planner to explain it. Reading the prospectus will help you find out if an investment is right for you.

Watch out for promises of easy money

If someone claims an investment will bring high returns without any risk at all, alarm bells should go off in your head. If something sounds too good to be true, it usually is. According to the AMF, you should be skeptical if you hear statements like these:

  • I have an inside source. This investment is guaranteed to skyrocket!
  • The company will soon be going public.
  • You need to invest today or you'll miss your chance.
  • All my clients have put their money in this investment.

There's no such thing as AMF-approved investments

Be on your guard if you're told an investment has been "approved" by the AMF. The AMF issues a prospectus receipt once it has verified that a securities issuer's prospectus is accurate and comprehensive, but it never states an opinion on the quality of an investment. It's up to you to decide if an investment is right for you.

To find out more, read this anti-fraud guide from the AMF (PDF, 408 KB).

Useful link

AMF offers a few informational brochures on its website to help you recognize and avoid fraud.

Why do you want to invest your money? Do you have several goals? Are they short-term or long-term goals?

Maybe you'd like to:

  • save for a trip you'd like to take 2 years from now
  • save for your children's education
  • get ready to retire 10 to 15 years from now
  • be rich someday

Whatever your goals are, no single investment strategy applies to all investors. The investment strategy you choose will also depend on which life stage you're at.

Here are 2 examples:

Mary Lou is 32 and has a steady income. She's interested in saving for retirement. Her goal is to retire at age 60. Since Mary Lou is young and has a long investment horizon, she can afford to take a few more risks as she invests for long-term growth. She'll have a longer time to recover from ups and downs in the value of her investments.

Mark is 58 and plans to retire in 4 years. He hopes his investments will provide him with a regular and steady source of income throughout his retirement years. Mark should review his investment strategy to reflect his financial objectives and investment horizon.

Tools and tips

When it comes to saving, time is money

See how your savings could grow, with different scenarios.

Do the math - Save in a systematic way

RRSP 101

Understand the fundamentals of registered retirement savings plans.

Read tip - RRSP 101

How much will your regular instalment savings be worth?

Calculate how much you could save if you made regular, fixed deposits to a savings account for a specific time.

Do the math - How much will your regular instalment savings be worth?

Are you a prudent or aggressive investor? It's important to know the answer to this question before setting up your investment strategy.

Determining your investor profile means determining your investment risk tolerance. As a general rule, when it comes to investments, the higher the return, the higher the risk.

Factors that influence your risk tolerance

Investment horizon: Your investment horizon is the time you have set to meet your objectives. If you have a long investment horizon, you can take more risks because you have more time to recover from any losses.

Liquidity needs: How great is your need to have assets that can be quickly converted to cash?

Attitude towards market ups and downs: Each one of us may have a different reaction to investment losses and fluctuations. It's up to you to determine if a potential loss in the value of your portfolio could make you lose sleep.

Term savings

Capital invested in term savings is 100% guaranteed and can be invested for anywhere between 30 days and 10 years, at interest rates that are higher than those of regular savings accounts.

Some savings products are redeemable (or cashable), meaning you can withdraw your capital before maturity. But most term savings products are not redeemable, and investors are charged a penalty if they withdraw their funds before the maturity date.

Market-linked guaranteed investment

An investment similar to term savings, but with a rate of return that, instead of being fixed, fluctuates with the market. The yield is generally higher than term savings, but of course, it all depends on how well the stock market performs.

Bonds

A type of equity security that brings in variable returns. When you purchase shares in a company, it's as if you become a part owner.

Stocks

A type of equity security that brings in variable returns. When you purchase shares in a company, it's as if you become a part owner.

If the company does well, your shares' value increases. You can then sell your shares and make a profit. In some cases, companies may pay dividends–a part of the company's profits–to shareholders. If the company experiences financial difficulty, you may end up with less money than you originally invested if you sell your shares. It's better to wait it out until your shares go up in value.

Mutual funds

Mutual funds provide access to markets usually reserved for seasoned investors. Your investment is pooled with those of other investors and placed in the hands of experts who manage the fund according to the investment policy. You can buy or sell shares at any time.

Mutual funds are described by the types of investments they contain. Here are a few:

  • Money market funds: low returns, very low risk.
  • Fixed income funds: variable returns based on interest rates, low to moderate risk.
  • Balanced funds: variable returns, low to moderate risk.
  • Equity funds: variable returns, moderate to high risk.
  • International funds: variable returns and risk.
  • Specialty funds: variable returns and risk.
  • Index funds: returns and risk depend on the index chosen.
  • Socially responsible mutual funds: variable returns and risk.
  • Labour-sponsored funds: variable returns, moderate to high risk, tax advantages.

For seasoned investors only

Has someone recommended you invest in hedge funds, derivatives, futures or income trusts? Be aware that these investments are complicated and often very risky. Make sure you understand all their features before buying.

Tools and tips

Understanding the stock market

Find out more about stock basics.

Read tip - Stock basics

How bonds work

When you buy a bond, you're lending money to a government or company.

Read tip - How bonds work

What you need to know about mutual funds

Managed by professionals, mutual funds let you pool your money with other like-minded investors.

Read tip - What you need to know about mutual funds

You're now on the final step of your investment approach: choosing the investments that best meet your investment objectives and investor profile.

When it comes to investments, diversification is the golden rule. Diversification consists in having a portfolio with investments with different features so your overall portfolio is less risky.

You can invest in different industry sectors (financial services, natural resources, technology, and so on) and diversify their maturity dates (1 year, 2 years, 5 years, etc.). How you choose your investments will also depend on your investment horizon (how long you plan to invest your money for). The sooner you will need to withdraw your money, the more you need to choose investments that guarantee your capital.

Example of diversification

You have $20,000 to invest. If you put it all in an international equity fund, your portfolio then becomes vulnerable to foreign market fluctuations.

If, on the other hand, you spread out the amount among several types of investments—term savings, bonds, dividend funds, Canadian and foreign equity funds–you increase your chances of obtaining a good overall return no matter what the market conditions.

A specialist at your service

A financial planner can provide a structured action plan to help you meet your personal and financial objectives. If your objectives are unrealistic, your financial planner can help you adapt them to your financial circumstances.

For example, your financial planner can check if it would be to your advantage to try leveraging. Leveraging means borrowing to invest. You can, for example, borrow to contribute to your RRSP.

A financial planner will also help your review your investment strategy regularly, ideally once a year. If, in the meantime, however, your circumstances change drastically–an unexpected inheritance, a separation or divorce, a baby on the way–you should also carefully review your investment strategy.

Tools and tips

Retirement: The advantages of diversification

Good diversification will help you get the best returns from your investments.

Read tip

3 questions to ask before choosing a financial planner

The answers to these questions will help you decide if you want to trust this person's advice for managing your money.

Read tip - 3 questions to ask before choosing a financial planner

An RRSP loan can help you increase your contribution

Borrowing $10,000 for your RRSP could pay off in a big way.

Read tip - Borrowing to contribute to your RRSP

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