Investing Money as a Beginner
If you are just starting to venture into the investment market, there are plenty of investment assets available to you. That said, you need to start by determining your risk appetite. You can start by investing in options with low to minimal risk, or you can take a larger risk.
When it comes to investing, it’s important to remember that markets fluctuate. Some forms of investment may not yield a higher return right away. You may need to invest for the long term to get your money’s worth.
Other times, you could actually risk losing a lot of money. That’s why some types of investing are better for more experienced Canadian investors with diversified portfolios to hedge their bets.
That brings us to another important part of investing, diversifying your portfolio. Having your money spread across different investments rather than just one investment not only mitigates your risk but can also increase your returns more than risking it all on a single high-return investment.
While you can win big on those, it isn’t always the case or the smartest financial decision. Especially if you haven’t done the research to help mitigate your risk.
One thing you should definitely remember as a new investor is capital gains taxes. These taxes need to be paid on certain investments that have been sold. The most common assets people pay capital gains tax on are real estate investments and stocks.
Best Low Risk Investments with High Return
When it comes to investing, the number of options available to you can be scary. With all the choices out there, you just don’t want to put a large sum into an investment and then lose money when you intend to gain more.
Whether you are a beginner or an experienced investor, low-risk investments are always a great idea, even if it’s just to help diversify your portfolio. They are also great for those with a low risk tolerance but still want to invest.
High Interest Savings Accounts
One of the lowest-risk investments out there is a high-interest savings account. These types of savings accounts offer higher interest rates than traditional savings accounts. With these accounts, you can add money as often as you like and earn interest on it.
Another thing you need to consider is whether your money is safe. With a high-interest savings account, you don’t have to stress about whether your initial investment is safe. When you invest your money in a registered financial institution, your funds are insured by the CDIC (Canada Deposit Insurance Corporation).
Keep in mind, though, that most financial institutions are insured only up to $100,000 per account, as per the Canadian Deposit Insurance Corporation. It’s the closest to a guaranteed principal investment you can get.
GICs
GICS, also known as Guaranteed Investment Certificates, offers some of the best returns for an investment with a guaranteed interest rate and a set term. The term for GICs is typically 1 to 5 years. They are actually very similar to term deposits.
When it comes to GICs, the higher the term, the better the return. That said, one drawback of GICs is that there are penalties for cashing them in early. This can result in you actually losing money. These types of investments are meant to be specifically used to save for specific goals.
Cashable Vs. Non-Redeemable GICs
GICs offer you several options. Cashable GICs, also known as redeemable GICs, allow you to withdraw the funds early. That said, though, because of this, they do have lower interest rates. Depending on where you get the FIC, there might also be a short lock-in period of 30-90 days. This type of GIC is a good idea for those looking to access the funds sooner or use them as emergency funds.
Non-redeemable GICs, also known as non-cashable GICs, are suitable for those who don’t plan to use their funds anytime soon. These often have higher interest rates, and any early withdrawals incur a penalty.
Market-Linked GICs and If They’re Worth It
For conservative investors who are seeking safety, market-linked GICs can be a great option. They offer the potential to earn higher returns than a traditional GIC by tracking the performance of the stock market. Just like regular GICs, they offer 100% principal protection so you won’t lose your initial investment, but they also usually come with lower returns.
GIC Laddering Strategy and How it Works
When building a financial plan, some investors tend to use a GIC ladder strategy rather than investing in other options with short-term volatility. This strategy allows you to invest in multiple low-risk options (different GICs) that have staggered maturity dates. For example, you could have 5 GICs with maturity dates of 1, 2, 3, 4, and 5 years.
You’ll start by dividing your investment into 5 equal parts. Not only is it more tax-efficient, since this added taxable income is now spread over 5 years, but you also get consistent access to cash every year without incurring a penalty. You can then choose to reinvest that for 5 more years and just keep the investment cycle going.
Government of Canada Treasury Bills
Treasury Bills, or T-bills as you might know them as, are a great way to get a return on your money. The returns may not be as high as other investment forms, but they are low risk, and a return is a return. In fact, many wealthy investors make more of their money with a large number of low-risk investments than with a small number of higher-risk, higher-return investments.
Purchasing Treasury Bills is actually a very simple process. It can be purchased at most Canadian banks, but there are a few things that you should pay attention to. The most important being the T-bill’s interest rate. This is because these are determined by the Bank of Canada’s overnight interest rate.
How These Differ From Mutual Funds
While treasury bills are a form of lending the government money, mutual funds are essentially pools of capital managed by financial professionals across a diverse range of assets, including securities traded on the stock exchange.
Mutual funds are commonly used for long-term investments, such as Registered Retirement Savings Plans (RRSPs). While your income from these investments is based on market fluctuations, the returns aren’t guaranteed. If you’re investing your mutual funds in an RRSP, you need to be sure that the cash flow going into this account doesn’t exceed your contribution room to avoid penalties.
Index Funds
Index funds are a type of mutual fund. That said, they differ in that they passively track a specific market index. These can be made up of different things such as funds, stocks and bonds. These are already made up and add a lot of diversity to a portfolio.
Index funds aren’t a way to make cash fast, though. They focus more on long-term growth. This is because they are a great way to provide access to all stocks in a single market.
The way they are set up also prevents large losses when stocks drop drastically, and is an easy way to invest because they are mostly passively managed. The fees are also quite low. The most common type of index fund purchased is an ETF (Exchange-Traded Fund).
Bonds
Bonds are among the most common ways for investors to diversify their portfolios. This helps them to mitigate their loss. This is because bonds are a way for you to essentially lend money to the company. You purchase the bond and then get paid interest payments gradually. When you receive the payments depends on the bond.
There are different types of bonds that you can purchase. The ones available in Canada are:
- Government Bonds (Provincial or Federal Governments)
- Municipal Bonds
- High-Yield Bonds/Junk Bonds
- Investment Grade Corporate Bonds
- Strip Coupon and Residual Bonds
- Provincial Bonds
They differ from stocks because stocks depend on a company’s overall value. This doesn’t influence bonds. Plus, with bonds, the longer you keep them, the higher your return. The length of the bond really depends, but you can choose to hold one for 1 year to 30 years.
Mutual Funds
Mutual funds are a popular way for people to invest in RRSPs and save for retirement. They are essentially a combination of money from investors, stocks, bonds, and/or other kinds of assets. This makes them an inexpensive way to save money and diversify their portfolio, mitigating the risk of loss.
The reason they are so popular, specifically for saving for retirement, is that you are then invested in the stock market without having to actively manage your portfolio. They also let you choose specific niches, such as technology or the biotech industry. You can also choose corporations that pay high dividends. Either way, the long-term nature of this type of investment helps ensure stock market returns.
Fixed Annuities
These are another form of investment people use to save for retirement. Unlike other forms of investment, these aren’t purchased from a financial institution; they can be purchased from an insurance company. The lump sum that you pay to life insurance companies is then given back to you in smaller payments for the rest of your life.
Some benefits of fixed annuities are:
- Higher interest rates
- They offset the cost of inflation
- Guaranteed income stream
- Taxes are deferred until you start receiving payments
That said, it’s important to keep in mind that when you put your money into annuities, you may not be able to pull it out. At least not until you start receiving your payments. Also, unlike RRSPs or mutual funds, you can’t put money into annuities until you have reached retirement age. This means you would have had to save the money elsewhere before you could invest in annuities.
Dividend ETFs
ETFs, also known as Exchange-Traded Funds, are another great way to diversify your portfolio because you are essentially a way to invest in a variety of assets at one time. These are actually quite similar to index funds. In fact, many ETFs are actually index funds.
The lowest-risk ETFs are dividend ETFs. These ETFs offer the highest interest rates and a steady source of income with monthly, quarterly, or annual payments. ETF dividends are made up of companies with a strong history of paying dividends, making them a lower-risk way to earn interest on your money. They also have low fees, referred to as MERs (Management Expense Ratios).
Just like any other type of investment, you still need to do your research when investing in dividend ETFs. They may be lower risk, but that doesn’t mean that they hold no risk. Be sure to do your research before investing. The research can tell you a lot about the investment.
Dividend-Paying Stocks
When it comes to investing in stocks, there are many different types of stocks to choose from. That said, if you are looking for a high reward, low risk stock investment, then dividend-paying stocks are what you are looking for. This is because with dividend stocks, you receive regular cash payments.
The reason these are considered lower risk is that these types of stocks are usually stable, profitable companies. When it comes to purchasing these stocks, you can purchase them from a broker.
Best Method of Investing Based on Amounts
When you invest, the vehicle you choose isn’t the only thing to consider. You should also consider how much you are investing. The amount can also make a significant difference in the method you choose, not just because some investment forms have minimum investment amounts.
Investing $1,000
If you are just starting to invest and have $1,000 to invest, one of the best ways to do so is in an RRSP or a mutual fund. You can get a return on the money when you file your taxes, since it’s tax-free, as well as start to save for your retirement.
Another great way to save $1,000 is to put the money into a high-interest savings account or a Tax-Free Savings Account (TFSA). While you don’t earn as much interest with either of these accounts as you may with riskier types of investing, there are no restrictions as to when you can take the money out. Interest on either of these accounts is associated with riskier types of investing; there are no restrictions on when you can withdraw the money.
Investing $10,000
With $10,000, there are quite a few ways you can invest your money. It really just depends on what you are comfortable with. You can invest in low-risk options like ETFs, index funds, mutual funds, or high-interest savings accounts. That said, though, there really is no best way to invest it. You have to do what’s best for you.
It’s important to keep in mind that some of the lowest-risk investments are also locked in, so there is a penalty if you need to take the money out. That’s why many investors diversify their investments. This means they don’t invest their own money into just one thing.
For example, with $10,000, you could invest some money in a variety of places. Say you put $2,000 in a high-interest savings account, then lock the rest into mutual funds, index funds, and ETFs.
Investing $20,000
Investing $20,000 can be scary. $20,000 is a lot of money. You can do a lot of things with that. Maybe you are looking to purchase a home or save for the future. These types of decisions make a difference in where you wanna invest your money.
You can put this amount of money into a high-interest savings account. Another option is to put it into an RRSP, such as a mutual fund or other similar investments. While these types of investments are usually long-term for retirement, there are some circumstances where you can take out the funds without penalty.
The most popular is the Home Buyers’ Plan. This allows you to withdraw money from your RRSP without penalty to purchase your first home. You also have more time to return the money.
That said, with RRSPs, you can also write off anything you put into your RRSP meaning that that amount of money is considered to be tax free, as long as you don’t go over your yearly limit. So, on top of saving for your future, you can also get a return on the money you invested.
Investing $500,000
With a lump sum of money like $500,000, you actually have a lot of options when it comes to investing. Some people may choose to invest in real estate. That said, it may not be the best time to invest in the market or the best option for you in general. If that’s the case, another option is to invest in index funds.
Index funds are low-risk investments that are often recommended for high-return, low-risk investments. If you want to do this, it’s best to work with a financial advisor or an investment broker.
Best and Safest Overall Investment Option
The least risky form of investing is a high-interest savings account. This is because you aren’t actually gambling any money. As long as the financial institution you are using is still active, then your money is safe. Even then, it’s insured by the CDIC for up to $100,000. At the same time, you earn interest on that money. It’s a great way to put a little money aside while letting your money earn for you.
High Risk Investments in Canada
For risk-averse investors, low-volatility funds are usually the first choice for their investment portfolio. However, for those investing in retirement savings, market volatility poses less risk to their financial goals. In these cases, high-risk investments are usually recommended. With these registered investment accounts with the Canadian Government, even with more risk and management fees, you’ll still find a stable but modest return as a minimum.
When it comes to investment accounts, there’s no credit risk, and the down payment can be as low as $50, no matter what your risk tolerance is. You can also change it at any time. If you’re investing online, the default risk is often very low, but you don’t have to stick with a low-volatility fund. However, if you’re investing in non-registered accounts and using this money for emergency funds, high risk may not be your best option. You have to consider the risk-return tradeoff.
CDIC Vs CIPF: What Each Protects in Canada?
Depending on what you invest in in Canada, your funds are likely protected by either the Canada Deposit Insurance Corporation (CDIC) or the Canadian Investor Protection Fund (CIPF). Here’s a look at the difference between the two.
| Feature | CDIC | CIPF |
| Protected Investments | Chequing Accounts, Savings Accounts, High Interest Savings Accounts (HISA), GICs, Term Deposits | Stocks, Bonds, Mutual Funds, Money Market Funds, EFTs, Cash |
| Coverage Limit | $100,000, both principal and Interest | Up to $1,000,000 in a general account |
| What it Protects Against | Banks and trust company failures | Insolvency of investment and brokerage firms |
| Who Backs the Protection | Federal Government | Investment Industry |
HISA ETFs and If They’re Safer Than Savings Accounts
The main reason that HISA ETFs aren’t safer than traditional savings accounts is that these funds aren’t covered by CDIC insurance. That said, they are still considered low-risk, highly liquid investments. You can earn a lot with these, along with other diversified ETFs, but you can also lose your initial investment due to market volatility or if the bank fails.
Safest Investment Options for Retirees
When it comes to retirement and financial independence, there are specific investments that are better for the vast majority. These include:
- Guaranteed Income Certificates
- High Interest Savings Accounts
- High-quality dividend-paying stocks or ETFs
Depending on whether you want quick access to the funds, you can invest them in either a TFSA or an RRIF. With a TFSA, you can choose to access the funds for whatever you like, including a vehicle purchase, a child’s education, or just in case of an emergency. With an RRIF, you can only take out a specific dollar amount at a time without incurring a penalty.
How Inflation Erodes Safe Investment Returns
Many different safe investment returns are affected by inflation, including:
- Cash
- Savings accounts
- Fixed-rate bonds
The first way this happens is through reduced purchasing power. Say your savings account pays at 3%, but inflation is currently 5%, then the value of your money declines by 2% annually. This is the same effect you see with fixed-income investments and bond prices.
The Limits of Provincial Deposit Insurance Beyond the CDIC
While many bank funds are protected by the CDIC, credit union funds are protected by provincial deposit insurance. While they often exceed $100,000, there are strict limitations that must be followed. However, when a credit union undergoes a merger, it may be required to comply with federal regulations.
Tax-Efficient Placement of Safe Investments by Account Types
No matter which account you choose to invest your funds, there will always be trade-offs. However, if you’re looking for a tax-efficient account for safe investments, these are some of your best options:
- RRSP/RRIF: These are good for interest-earning investments used to save up for retirement. The interest earned would be taxed at a marginal rate if it weren’t in a tax-deferred account. By the time you retire, your marginal tax rate is usually lower, so the tax you pay is much lower.
- TFSA: These are best suited to grow your funds with high interest. It’s the best choice for higher volatility assets, and all of your income and withdrawals are tax-free.
- Non-Registered Accounts: These are best suited for broad-market ETFs, dividend-paying stocks, and other investments with significant capital gains.
Are EQ Bank and Wealthsimple Cash Safe?
Yes, both of these banks are cash safe. All of your funds with them are protected by the CDIC, and high-end security safeguards your financial information. Just like other online banks, both of these options take your financial information very seriously, and your funds are just as safe as they are with a traditional bank. f GICs that are market-linked. That said, because it is a major purchase, there are still some low management fees.
