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Terms Every Investor Should Understand

Executive Summary

Investing today, whether for the short-term, long-term or in-retirement, can be complicated. An Advisor can guide you but there are many terms that investors should know in order to best understand the direction, recommendations and outcomes of their investments.

The following is a glossary of terms to help you understand some of the jargon and technical terms you have heard, and will likely hear again.  Please use it as a reference tool.

Investment Terms

  1. Rate of Return: gain or loss of an investment expressed as a percentage of the invested capital and is calculated on an entire investment portfolio to determine performance. Planning your Rate of Return to match financial goals and your risk/reward profile is a necessary step to successful investment planning.
  2. Asset Allocation is an investment strategy that balances Risk and Return by placing investments inside an investment portfolio into different Asset Classes like equities/stocks, fixed income, and cash. Each class has its own characteristics and can contribute more to the total as proportions increase. Asset allocation helps manage risks and rewards to meet your financial needs.
  3. Equities is a broad term used to describe ‘stocks’ or shares of a company. Most owners of shares believe they own shares, but, in fact, they own the company. In the case of publicly traded companies people investing for retirement own a very small percentage of the company, but they are the owners.
  4. Fixed Income is a category of investments that generate interest at a predictable, stable amount. Fixed income instruments inside a portfolio are often meant to be the safest investments. In the case of GICs, the balance is guaranteed by insurance and the interest payments typically have a very strong track record of occurring.
  5. Cash and Cash-like instruments are highly liquid investments. These investments can take advantage of market opportunities, and accommodate short-term unexpected personal expenditures without forcing the sale of an investment at an inopportune time.
  6. Capital Gains: Increase (or loss) in the value of a security at the time it is sold versus its cost when purchased. Since capital gains are taxed in Canada at a lower rate than interest income, depending on the province or territory, the highest marginal tax rate for capital gains is approximately 25%.
  7. Interest Income: Payments made to the owner of capital for the use of that capital and is calculated by multiplying the capital amount by the interest rate being paid for a particular period of time. Example – a $10,000, one-year annual-pay GIC paying 1.5% generates $150 of interest income each year, and would be paid on the anniversary date.
  8. Dividends: Payments made monthly, quarterly, semi-annually or annually to the “owner of record” of a share of a company. The dividend yield is calculated by dividing the expected dividend for the next year by the current share price.
  9. Basis Points a single basis point is one-one hundredth (1/100th) of a percentage point (1%) or 0.0001. Mathematically, a basis point is equal to one ten-thousandth.  Basis Points are used to express very small changes in numbers like percentages or the value of the Canadian dollar compared to the US dollar, for example.
  10. Volatility: the reaction of an investment to changes in the overall market. In other words, if the market goes up by 10%, will the stock react more, less or the same. Volatility is called ‘Beta.’ An investment’s Beta expresses how it reacts relative to the market, meaning the stock market in total.
  11. Diversification is a way to mitigate risk by placing investments in different kinds of investments (see Asset Allocation above) and by placing investments within an asset class in different industries, sectors, countries, etc. Diversification is a method used to manage risk by not having all of your eggs in one basket. If a country or an industry or a single company has a bad day, month or year your entire portfolio will have a measure of protection by being spread around.

The Bottom Line

We are here to help guide and advise you through the sometimes complicated world of finances and investments. To best understand our recommendations and their implications it is important for you to understand investment terminology. Keep this filed away as a tool for your reference or contact us for assistance or clarification anytime.

“How One Advisor Doubled His Book in Six Years”

“How One Advisor Doubled His Book in Six Years”

An article featuring our very own, Corey Butler, CIO – Chief Investment Officer, Wealth Advisor, Ecivda Financial Planning Boutique.

by: BMO Mutual Funds HQ

Corey Butler began his career as a bricklayer, where he learned the value of building a solid foundation. Now a successful Wealth Advisor and Chief Investment Officer at Ecivda Financial Planning Boutique, Butler shares the secrets that have allowed his advisory practice to more than double its assets under management in only six years, and why he sees the BMO Strategic Equity Yield Fund as an important building block for client portfolios.

Click HERE to read the full article!

#ECIVDA #ThinkForward #planningrighttoleft #BMO #BMOglobalassetmanagement

What Does it Actually Mean to Diversify?

Executive Summary

Diversification is a concept that many investors understand on some level.  It makes sense to not put all your eggs in one basket, but diversification is more than just investing in more than one fund or stock.  Diversification is the basis of modern portfolio theory, and it is an essential risk management tactic that every investor should be utilizing. Here’s how it works:

Correlation

The measure of correlation indicates how closely two assets follow together when the markets go up and down. The scale of correlation goes from -1 to 1, with -1 being a perfect inverse correlation and 1 being a perfect correlation.   For example, Oil Company A and Oil Company B will both fall if oil prices fall, and they will both rise if oil prices rise.  Therefore, they have a perfect correlation.  Conversely, when Oil Company A rises, Automobile Company A will fall.  This indicates an inverse correlation.  If one company’s rise and fall does not affect another company, then they have a correlation of 0.

The key to diversification is having varying degrees of correlations so that your portfolio is getting the most out of the market, while offsetting losses. 

Asset Allocation

Picking a group of stocks that have varying degrees of correlation is a good place to start, but to truly diversify one must take on a variety of different assets.  This is where assets allocation comes into play. Determined by risk tolerance and time horizon, holding a variety of different asset classes is the best way to curb volatility in your portfolio.   Asset classes include stocks, bonds, commodities, mutual funds, real estate trusts… to name a few.  Each asset class brings different risks to the table, so it is important to make sure you are thoughtfully choosing investments that complement one another and work well together.

Overdiversification

Too much of a good thing isn’t a good thing at all, and that is especially true when it comes to diversification.   It is possible to hold too many different investments that correlate in too many different ways. This might diversify the risk out of your portfolio, and it may stop you from making any gains.   It is important to work with a wealth professional who can help you pick an appropriate amount of investment holdings while still utilizing an appropriate asset allocation so that you stay on track.

The Bottom Line

Understanding that you need to diversify your portfolio is not always enough as it can be a bit more intricate than it seems.  We can help you understand how your investments work together to optimize your portfolio.

Estate Planning Checklist

While uncomfortable to think about, effectively planning ahead for when you are no longer here can save your loved ones a great deal of time, money, and emotional hardship.  Estate planning can be complicated, but there are some basic “must-do’s” that should be regularly updated and reviewed. Below is a simple checklist for making sure your estate plan is up to date.

What You Need to Know

Wills

  • Have you created a will?
  • Is it updated and current?
  • Have you experienced any major life changes since the will was created? This could be a new marriage, divorce, child, death in the family, etc.

Wills should be created with the guidance of an estate lawyer to ensure that your final wishes are correctly documented and carried out. It is vital that a will be regularly updated as it acts as the foundation of your estate plan.

Beneficiaries

  • Do all your registered investments have a named beneficiary? This includes RRSP, RDSP, RESP, TFSA, Pension Plans, and Segregated Funds.
  • Do all your life insurance policies have a named beneficiary?
  • Have you recently reviewed your beneficiaries? Has there been a major life changes such as a marriage or divorce that could warrant a change to your beneficiary appointment?

Beneficiary designations allow for assets to bypass probate (in most cases) and be passed directly to your beneficiary. This is a great money and time saver.

Dependents

  • Do you have a family member that you wish to provide an income to after your death?
  • Do you have family members that you wish to fund an education for after your death?
  • Do you have any family members that have special psychological or physical needs that you would like to provide financial support for?
  • Do you have a parent or other relative that you wish to ensure is taken care of financially if you die prematurely?

There are a variety of different financial and legal tools available to Canadians that can help them provide income or support for their dependents when they are gone. Keeping your dependents updated in your will is important as they may change throughout your lifetime.

Executors

  • Have you named an Executor of your will?
  • Is the Executor up to date? Have you named an alternate Executor in the event your first choice is unable to fulfill the position?
  • Has your Executor been made aware of their appointment and been briefed on your final wishes?

An Executor is someone you appoint in your will that will be responsible for administering your estate. An Executor should be someone you trust and also someone who is capable of dealing with the potentially complex responsibilities involved with administering an estate.

Powers of Attorney

  • Have you appointed a Power of Attorney for Property? This person will be able to help you with your finances and personal property in the event you are unable to do so yourself.
  • Have you appointed a Power of Attorney for Personal Care (Health)?  This person will be responsible for making medical and personal care decisions for you if you become unable to act on your own.
  • Are you POA’s aware of their appointment and willing/capable to perform the tasks that will be required of them?

Power of Attorney is a legal document that allows you to appoint someone to help you with your finances and personal care in the event that you feel unable to do so or become mentally incapable.

Financial Planning

  • Have you spoken to your financial advisor about structuring your assets in the most tax efficient way to minimize estate taxes and probate fees?
  • Have you set aside enough money to cover final expenses, estate taxes, probate fees, and funeral arrangements?
  • If you own a business, have you worked with your professional team of advisors to develop a succession plan?
  • Have you recently taken the time to calculate your final expenses and potential estate taxes?
  • Have you addressed any permanent insurance needs you may have?
  • Have you spoken to your advisor about your wishes to make a charitable donation before/after your death?

Your financial advisor will play a significant role in helping you prepare your estate. The above questions are only some of the issues that you may want to bring up to your financial advisor so that they can help you make your estate as efficient as possible.

Your Personal Financial Inventory

Prepare an Inventory of Assets and Liabilities

  • Real Estate
  • Investments
  • Bank Accounts
  • Annuities/Life Insurance
  • Personal Property (Art, Jewelry etc.)
  • Pensions
  • Value of Any Businesses You Own and Their Structure
  • Digital Assets

Make Sure You Indicate the Location of the Following

  • Will and Power of Attorney
  • Birth and Marriage Certificates
  • Divorce/Separation Agreements
  • Insurance Policies
  • Deeds
  • Safety Deposit Box
  • Preplanned Funeral Arrangements
  • Trust Documents
  • Names and Contact of Personal Advisors (lawyers, accountants, financial planners)
  • Executors, liquidators, and trustees

Far too often family members are left scrambling to find important documents and information. Your financial advisor and lawyer can help you collect the above information and organize it for your beneficiaries and executors.

The Bottom Line

Estate planning has a reputation for being complicated, but for most people all it takes is some thoughtful pre-planning. Working with a lawyer and financial professional will ensure all of your bases are covered and your final wishes are carried out. Estate plans should be reviewed and updated regularly.

Book an appointment with us – Click Here

How To Create A Portfolio For The Long Run

The concept of investment is no longer alien and almost everyone now has one form of investment or the other tucked away somewhere. Even new babies now have investments. Just as there is no age limit to investing so is there no limit to the extent of time you can hold your investment. You can hold your investments for decades and reap multiple profits on them. It is not all about having a long-term investment portfolio; there is a science to it also. It is important to be strategic in your choice of investment portfolios. Everyone has a risk appetite, and it is important to choose an investment portfolio that conforms with your risk principles. Another key factor to having a healthy long-term investment portfolio is adapting your investment approach to the changing dynamics of the financial market.

Secrets To Creating a Long-term Investment Portfolio 

When it comes to having an investment portfolio, it is important that you make the right decisions. This is what will ensure a healthy investment portfolio. If you are looking to grow your wealth over a 20-to-25-year span, you should try the following tips:

  1. Select The Appropriate Asset Allocation: At this stage, you use your current financial situation to determine how you want to spread out your investment portfolio. To successfully do this, you must consider your age, the amount of capital you want to invest, and your risk appetite. Your risk appetite is important because when it comes to investment, you will make losses at one point or the other. So, depending on your risk appetite, you should choose an investment portfolio that is in line with your risk appetite. You should also consider your current expenses as you do not want to invest all your money and be left with nothing to settle your bills.
  2. Structuring Your Portfolio: After determining how you want to allocate your investment portfolios, the next thing to do is to determine how much goes into each portfolio. This is where you determine how much goes into bonds, stocks, and cryptocurrencies. You can also go further by further dividing your portfolio allocations. For example, if you have an equity portfolio, you may decide to spread it across different industries to minimize your risks. You can also spread your bond portfolio into short-term bonds and long-term bonds.
  3. Monitoring and Reviewing: After successfully structuring your investment portfolios, you need to keep an eye on them to make necessary adjustments where necessary. The fact that they are long-term investments does not mean you can abandon them and check them when you are ready to cash out. You analyze your positions from time to time and rebalance them where necessary. This is made necessary because of the constant price movements in the financial market which will make your initial trading positions change. Your current financial needs may also require you to change your position. If you have extra cash to invest, you may want to pump in more money and if you need cash, you may want to deduct from profits already accrued.
  4. Strategic Rebalancing: After reviewing your portfolio and there is a need to rebalance your positions to make your portfolios healthy, you need to go about it in a strategic way.  In other words, while you identify a performing portfolio, you should also determine the portfolio you can use the proceeds of the performing security to buy. These are strategic decisions that must be taken carefully to ensure an all-round healthy investment portfolio over a long period.

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