Table of Contents
- 1.1 Investment and saving principles
- 1.2 Investment objectives
- 1.3 Types of investments
- 1.4 Risks of investing
1.1 Investment and saving principles
There are timeless principles that form the foundation of investing and saving. Before diving into specific products, it’s essential to understand how money grows, how risk works, and how disciplined habits create wealth over time.
1.1.1 Concept of investing
💡 Investing starts with saving.
You cannot invest unless you first set aside money.
🔑 Key saving strategies
- 💰 Pay yourself first
Treat savings like a fixed expense. Automate it using PAC/PAD. - 📊 Save 10% of income
Adjust based on personal circumstances. - 🎁 Save unexpected income
Bonuses, tax refunds, etc. - 🪣 Savings buckets
Allocate funds for:- Retirement
- Vacations
- Major purchases
- 🧾 Budgeting
Controls spending and ensures consistent saving.
📈 What is investing?
Investing is using saved money (principal/capital) to generate profit (return).
- Goal: Grow money over time
- Return: Profit earned on investment
🔐 Types of investments
- ✅ Guaranteed investments
- GICs
- Some bonds
- ⚠️ Non-guaranteed investments
- Stocks
- Mutual funds
- Real estate
1.1.2 Investment basics
Understanding these core concepts helps investors make informed decisions and manage risk effectively.
1.1.2.1 Compounding (compound interest)
📈 Compounding = earning interest on interest
- Interest is added to the principal
- Future interest is calculated on the new total
- Leads to accelerated growth over time
💡 Key insight:
- Time greatly enhances compounding
- Early investing = bigger results
⚠️ Important:
- Withdrawals reduce compounding
- Debt also compounds (negative impact)
1.1.2.2 Investment returns
📊 Types of returns:
- ✅ Positive → Profit
- ⚖️ Neutral → Break-even
- ❌ Negative → Loss
📉 Rate of return:
- Expressed as a % (e.g., +10%, -10%)
⚖️ Risk vs Return
- 🟢 Low risk → Lower returns, more certainty
- 🔴 High risk (aggressive) → Higher potential returns, higher loss risk
- 🟡 Moderate risk → Balanced approach
💡 Core principle:
Higher risk = potential for higher reward
💵 Nominal vs Real return
- Nominal return: Stated return (e.g., 5%)
- Real return: Nominal − inflation
1.1.2.3 Asset classes
📦 Investments are grouped into categories:
- 📈 Stocks (Equities)
- 📊 Bonds (Fixed income)
- 💵 Cash (Money market)
- 🏠 Real estate
- 🛢️ Commodities
Each has different risk and return characteristics.
1.1.2.4 Diversification
🥚 “Don’t put all your eggs in one basket.”
- Mix different asset classes
- Spread investments across industries & countries
- Reduces overall risk
💡 Important:
- Funds (mutual funds, ETFs, segregated funds) provide built-in diversification
- Individual investors often struggle to diversify fully on their own
1.1.2.5 Liquidity
💧 Liquidity = how quickly you can access your money
- 🟢 Liquid investments
- Savings accounts
- Easily accessible
- 🔴 Illiquid investments
- Real estate
- Takes time to convert to cash
💡 Why it matters:
- Essential for emergency funds
- Ensures quick access when needed
1.1.3 Time value of money
⏳ Money today is worth more than money in the future due to its earning potential.
1.1.3.1 Present value (PV)
💡 Question answered:
How much do I need today to reach a future goal?
- Future money requires less investment today
- Depends on:
- Interest rate
- Time period
1.1.3.2 Future value (FV)
💡 Question answered:
How much will my investment grow in the future?
- Based on:
- Current amount (PV)
- Interest rate
- Time
🧠 Key Takeaways
- 💰 Saving is the foundation of investing
- 📈 Compounding is the most powerful growth tool
- ⚖️ Risk and return are directly related
- 📦 Diversification reduces risk
- 💧 Liquidity ensures flexibility
- ⏳ Time greatly impacts investment outcomes
1.2 Investment objectives
Investors save and invest for different reasons—these are called investment objectives. Clearly defining these objectives is essential because they guide every investment decision, including risk level, time horizon, and product selection.
🎯 Types of investment objectives
⏳ Objectives are categorized based on time:
- ⚡ Short-term (≤ 3 years)
Example: Vacation, emergency fund - 🚗 Medium-term (3–10 years)
Example: Car purchase, home down payment - 🏖️ Long-term (10+ years)
Example: Retirement
💡 Key insight:
Longer time horizons allow for more growth and risk-taking.
👥 Individual vs Group objectives
- 🧍 Individual investors → Focus on personal financial goals
- 🏢 Group plans (e.g., pension plans) → Focus on employer objectives like:
- Attracting employees
- Providing retirement benefits
👉 Understanding the client is essential to determining the right investment approach.
1.2.1 Purpose of investment
📌 Different investment plans are designed for specific goals.
📦 Common investment plans & purposes
- 💼 RRSP (Registered Retirement Savings Plan) → Retirement
- 🔄 RRIF (Registered Retirement Income Fund) → Retirement income
- 🎓 RESP (Registered Education Savings Plan) → Education funding
- ♿ RDSP (Registered Disability Savings Plan) → Support for disabled dependants
- 🧾 TFSA (Tax-Free Savings Account) → Tax-free growth
- 🏦 RPP (Registered Pension Plan) → Employer-sponsored retirement
- 🏠 FHSA (First Home Savings Account) → Buying first home
🧺 Registered vs Non-registered plans
- ✅ Registered plans
- Registered with CRA
- Provide tax advantages
- ⚖️ Non-registered plans
- More flexibility
- Investment income is taxable
💡 Important concept:
The plan is just a container (shell)—actual performance depends on the investments inside (e.g., GICs, mutual funds, ETFs).
1.2.2 Financial goals
🎯 A financial goal = a specific dollar target tied to an objective
Example:
- Objective → Retire at age 60
- Goal → Save $800,000
💡 Why goals matter:
- Motivate saving
- Track progress
- Guide investment strategy
1.2.3 Need for guaranteed investments
🛡️ Guaranteed investments provide certainty
✅ Key features
- Guarantee of principal (full or partial)
- Sometimes guaranteed returns
- Lower risk, lower return
👤 Who prefers them?
- Risk-averse investors
- Individuals nearing or in retirement
- Those with fixed future obligations (e.g., tuition payments)
💡 Main benefit:
Peace of mind and predictable outcomes
1.2.4 Time horizon
⏳ Time horizon = when the money will be needed
- Each goal can have a different time horizon
- Examples:
- 🚗 Car purchase → Short/medium
- 🎓 Education → Medium
- 🏖️ Retirement → Long
📈 Impact on investment decisions
- 🟢 Long time horizon
- Can take more risk
- More time to recover from losses
- 🔴 Short time horizon
- Lower risk preferred
- Focus on capital preservation
💡 Closely linked to time value of money concepts (present & future value).
1.2.5 Tax-advantaged investing
💰 Investment returns are taxed differently depending on type:
📊 Types of returns
- 💵 Interest income
- Taxed at highest rate (like regular income)
- 🏢 Dividends
- Eligible for dividend tax credit
- Lower tax than interest
- 📈 Capital gains
- Only 50% taxable
- Lowest tax burden
🔻 Capital losses
- Can offset capital gains
- Applied:
- Same year
- Past 3 years (carry-back)
- Future years (carry-forward)
⚖️ Key relationship
- 🔐 Low-risk investments → Interest → Higher tax
- 📈 High-risk investments → Capital gains → Lower tax
💡 Investors may benefit from both higher returns and tax advantages with riskier investments.
🧠 Key Takeaways
- 🎯 Investment objectives drive all decisions
- ⏳ Time horizon determines risk level
- 🧺 Investment plans are containers—not investments themselves
- 🛡️ Guaranteed investments provide stability
- 💰 Tax treatment impacts real returns
- 📊 Clear financial goals improve discipline and success
1.3 Types of investments
Understanding different types of investments is essential to selecting the right strategy based on risk, return, liquidity, and financial goals.
1.3.1 Segregated funds
A segregated fund contract is a type of deferred annuity offered by insurance companies. It combines investment growth with insurance guarantees.
🔑 Key features
- 📜 Issued by life insurance companies
- 💼 Investments are pooled and professionally managed
- 🔐 Assets are kept separate from insurer’s general assets
- 👤 Client does not legally own fund units (insurer does)
🛡️ Guarantees
- Maturity guarantee → Minimum ~75% of investment
- Death benefit guarantee → Paid to beneficiary
- Optional: Guaranteed income features
👥 Unique benefits
- 👨👩👧 Beneficiary designation (bypasses estate & probate)
- 🛡️ Potential creditor protection
- 📉 Protection against some losses
⚖️ Advantages
- Guarantees of capital
- Professional management
- Diversification
- Liquidity and flexibility
❌ Disadvantages
- Higher fees (MER)
- Complex structure
- Long maturity periods
- Guarantees may not always be useful
1.3.2 Annuities
💰 Annuity = steady income stream over time
- Funded by a lump sum
- Payments include principal + interest
- Often used for retirement income
📊 Types of annuities
- ⏳ Term annuity → Fixed period
- ❤️ Life annuity → Lifetime payments
- 👥 Joint annuity → Continues for surviving spouse
✅ Advantages
- Reliable income
- No investment management needed
- Protection against outliving money
❌ Disadvantages
- Low flexibility
- Inflation risk
- Locked-in funds
- Interest rate risk
1.3.3 Stocks
📈 Stocks = ownership in a company
🔑 Key features
- Ownership stake in a company
- Value rises/falls based on performance
- Two types:
- Preferred shares
- Common shares
💵 Returns
- 📈 Capital gains
- 💰 Dividends
⚖️ Advantages
- High growth potential
- Dividend income
- Liquidity
❌ Disadvantages
- High risk (possible total loss)
- Requires monitoring
- No guaranteed returns
1.3.4 Bonds
📊 Bonds = lending money to issuer (debt investment)
🔑 Key features
- Issued by governments or corporations
- Fixed maturity date
- Regular interest payments (coupon)
💵 Returns
- Interest income
- Possible capital gains/losses
⚖️ Advantages
- Predictable income
- Lower risk than stocks
- Capital preservation
❌ Disadvantages
- Interest rate risk
- Inflation risk
- Credit/default risk
1.3.5 Savings accounts
💧 Most basic and liquid investment
🔑 Features
- Easy access to funds
- Very low interest rates
- Highly liquid
⚖️ Pros
- Safe and simple
- Immediate access
- No minimum investment
❌ Cons
- Low returns
- Inflation reduces value
- Interest taxed at highest rate
1.3.6 Guaranteed Investment Certificates (GICs)
🔐 Low-risk, guaranteed investments
🔑 Features
- Fixed term investment
- Guaranteed principal + interest
- No fees
⚖️ Advantages
- Safe and predictable
- Easy to understand
- Accessible for beginners
❌ Disadvantages
- Low returns
- Limited liquidity
- Inflation risk
1.3.7 Mutual funds
📦 Pooled investment managed by professionals
🔑 Features
- Pool investor money
- Professionally managed
- Wide variety of options
💰 Fees
- MER (management expense ratio)
- TER (trading costs)
- Sales charges
⚖️ Advantages
- Diversification
- Professional management
- Liquidity
❌ Disadvantages
- Fees reduce returns
- No guarantees
- Tax complexity
1.3.8 Exchange-Traded Funds (ETFs)
📊 Funds traded like stocks
🔑 Features
- Trade on stock exchanges
- Lower fees than mutual funds
- Can be indexed or actively managed
⚖️ Advantages
- Low cost
- Diversification
- Transparency
❌ Disadvantages
- Trading commissions
- Requires brokerage account
- Complexity
1.3.9 Real estate
🏠 Physical property investment
💵 Returns
- Rental income
- Capital gains
⚖️ Advantages
- Income + appreciation
- Tangible asset
- Diversification
❌ Disadvantages
- Illiquid
- High upfront cost
- Ongoing expenses
1.3.10 Canada Premium Bonds (CPBs) and Canada Savings Bonds (CSBs)
💵 These were government-issued savings products designed for safe investing.
🔑 Key features
- Issued by the Government of Canada
- Guaranteed principal and interest
- Very low risk
⚠️ Important note
- These products are no longer sold today, but may still appear in older materials
⚖️ Advantages
- Extremely safe
- Government-backed guarantee
- Simple to understand
❌ Disadvantages
- Low returns
- Limited flexibility
- Not available for new purchase
1.3.11 Cryptocurrency
💻 Digital assets used as alternative investments
🔑 Key features
- Decentralized digital currency
- Based on blockchain technology
- Not issued by governments
⚖️ Advantages
- High growth potential
- Increasing adoption
- Accessible globally
❌ Disadvantages
- Extremely volatile
- Regulatory uncertainty
- High risk of loss
- Security risks (hacking, fraud)
💡 Key insight:
Cryptocurrency is considered a high-risk, speculative investment.
1.3.12 Group plans
👥 Investment plans offered to a group (usually employees)
1.3.12.1 Advantages and disadvantages of group plans
✅ Advantages
- Employer contributions (free money 💰)
- Convenient payroll deductions
- Lower fees due to group pricing
- Encourages disciplined saving
❌ Disadvantages
- Limited investment choices
- Less flexibility
- Dependence on employer plan structure
1.3.12.2 Where and how to buy a group plan
- Offered through employers
- Managed by insurance companies or financial institutions
- Employees enroll through workplace programs
1.3.12.3 Types of group plans
- 🏦 Group RRSP
- 🧾 Registered Pension Plans (RPPs)
- 📊 Deferred profit-sharing plans (DPSPs)
1.3.12.4 Returns and guarantees of group plans
- Returns depend on underlying investments
- May include:
- Fixed options (guaranteed)
- Market-linked options (no guarantees)
1.3.12.5 Risks in offering a group plan
- Employer bears:
- Administrative responsibility
- Cost management challenges
1.3.12.6 Risks in participating in a group plan
- Investment risk (market fluctuations)
- Limited control over investment options
1.3.12.7 Plan member protection
- Protection depends on:
- Plan type
- Provider (insurer or financial institution)
🧠 Key Takeaways
- 📊 Investments vary by risk, return, and liquidity
- 🔐 Guaranteed products = safer but lower returns
- 📈 Market-based products = higher growth potential
- 🧺 Diversification across types reduces risk
- 🎯 Investment choice must align with objectives and time horizon
- 📜 Some older products (CPBs/CSBs) are historical but testable concepts 💻 Cryptocurrency = high risk, emerging asset class 👥 Group plans = important workplace savings tool 🎯 Always match investment type with:
- Risk tolerance
- Time horizon
- Financial goals
1.4 Risks of investing
All investments involve risk. Understanding these risks helps investors make better decisions and align investments with their goals, time horizon, and risk tolerance.
1.4.1 Economy as a whole
🌍 Economic risk (macro risk)
- Caused by large-scale factors:
- Government policy changes
- Political instability
- Global events (e.g., pandemics)
💡 Key insight:
- Cannot be controlled by individual investors
- Difficult to predict
- Impacts all investments
1.4.2 Equity risk
📉 Risk of stock price decline
- Affects:
- Stocks
- Equity mutual funds
- ETFs
- Prices fluctuate due to:
- Supply and demand
- Market sentiment
⚠️ Investors may lose money if stock prices fall.
1.4.3 Inflation risk
💸 Loss of purchasing power
- Inflation = rising cost of goods/services
- Measured by Consumer Price Index (CPI)
🔥 Why it matters
- Reduces real returns
- Impacts:
- Long-term investors
- Retirees on fixed income
⚠️ High impact on
- Savings accounts
- GICs
- Bonds
- Fixed annuities
💡 Important:
Inflation compounds over time → biggest threat to long-term wealth
1.4.4 Interest rate risk
📊 Risk from changing interest rates
- Occurs when:
- Investments are locked at low rates
- Rates increase afterward
📉 Key effects
- Bond prices ↓ when interest rates ↑
- Fixed-income investments become less attractive
⚠️ Affects
- Bonds
- GICs
- Annuities
- Savings accounts
1.4.5 Market risk
📉 Risk of overall market decline
- Caused by major events:
- Recession
- Natural disasters
- Pandemics
- Global crises
💡 Key insight:
Diversification cannot fully protect against market-wide downturns
1.4.6 Liquidity risk
💧 Difficulty converting investment into cash
- Cannot sell quickly
- May need to sell at lower price
⚠️ Common examples
- Real estate
- Certain annuities
💡 Important for emergency planning
1.4.7 Foreign exchange risk
💱 Currency risk
- Occurs when investing internationally
- Caused by currency value changes
💡 Example:
If foreign currency drops → investment value decreases
1.4.8 Credit risk
🏦 Risk of borrower default
- Borrower may fail to repay debt
📊 Risk vs return
- Low risk → Lower returns
- High risk → Higher potential returns
📌 Examples
- Government bonds → Low risk
- Corporate/junk bonds → Higher risk
1.4.9 Industry risk
🏭 Risk affecting specific sectors
- Impacts specific industries:
- Technology
- Energy
- Retail
💡 Example:
Supply chain issues or declining demand can affect an entire sector
1.4.10 Other investing risks
⚠️ Additional risks to consider
- Each investment has unique risks
- Must match:
- Risk tolerance
- Risk capacity
💡 Key principle:
Understanding risk is essential before investing
🧠 Key Takeaways
- 📉 Risk is unavoidable in investing
- 🌍 Economic & market risks affect all investments
- 💸 Inflation is a major long-term threat
- 📊 Interest rates strongly impact fixed investments
- 💧 Liquidity matters for flexibility
- 💱 Global investing adds currency risk
- 🏦 Credit quality determines safety of debt investments
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