How to successfully approach your new year’s resolution to invest

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Now more than ever, investing has become top of mind for many, with new investors ready to jump in and start their investment journey in 2022. While investing can be a core component to growing your wealth, approaching it wisely will help you reach your goals and avoid costly mistakes and fraud. If your new year’s resolution is to start investing, consider the following steps to hit the ground running and invest wisely in 2022 and beyond.

1) Map out your financial goals first
While you may be raring to go with starting your investing journey and building out your investment portfolio, remember that success relies on planning your goals and utilizing the appropriate investments to get you there. By understanding the time horizon (the length of time you expect to hold an investment before needing the funds), you can assign suitable investments with varying levels of risk to drive the best returns over time. Before you consider any investment, first map out your short (6 months to 5 years), medium (5-10 years) and long-term goals (10 years or more).

2) Learn about the registered and unregistered accounts available to you
As a Canadian citizen, registered accounts are available to you with unique properties to help you reach your financial goals. A registered retirement savings plan (RRSP) is an account designed to reduce the income tax you pay on the money you contribute towards your retirement. A tax-free savings account (TFSA) is an account allowing you to save or invest a defined amount tax-free each year throughout your life. These are examples, and you have access to a variety of accounts that can help you achieve your goals. Learn more about the different accounts and how you can leverage them.

3) Understand your risk tolerance
Investments carry a level of risk in line with their potential for return. One of the most common mistakes investors make is exposing themselves to a level of risk far outside what’s appropriate for them. This is called investment risk tolerance, and ignoring or not knowing your ability and willingness to take risk can expose you to dramatic losses. If you are unsure what your risk tolerance is, you can take the Check your risk tolerance quiz. By answering these questions openly and honestly, you can get a better sense of the level of risk you are comfortable taking with your investments, before you start.

4) Improve your investment literacy
If you feel like you still need to learn more about investing before starting, that’s great. It’s important and worthwhile to enhance your knowledge and learn how to invest your hard-earned money wisely. The Alberta Securities Commission offers free, unbiased investment literacy programs with partners across Alberta, covering everything from starting your investing journey to recognizing and avoiding scams and investing in cryptocurrency. If you are interested in attending a virtual program, visit Investing 101 classes and events page to learn more.

Client-focused reforms: Addressing material conflicts of interest in adviser-client relationships

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Many Albertans work with a registered adviser to grow and maintain their wealth. To achieve the best results, clients must be open and transparent about their finances and goals and in turn, registered advisers must align investment portfolios and products to meet their client’s time horizons and risk tolerance.

To further enhance investor protection, improve the foundation of adviser-client relationships and standardize services of investment firms and advisers, the Canadian Securities Administrators, which includes the Alberta Securities Commission, published a comprehensive set of rules known as client-focused reforms on October 3, 2019. Under these reforms, conflict of interests provisions were partially implemented on June 30, 2021 with the remaining rules coming into effect on December 31, 2021.

What does client-focused reforms do?

Under client-focused reforms, registered firms and advisers are required to put the interest of the client first when recommending or choosing investments and resolve and avoid material conflicts of interests. Material conflicts of interests are factors that could influence the impartiality adviser’s should have when recommending investments. If there are any material conflicts, the adviser or firm must inform the client of the conflict in a timely fashion and detail how they are being resolved in their best interest.

What are the material conflicts that may occur with your registered adviser?

There are situations in which a registered adviser may have a material conflict of interest with clients. For example, there may be situations in which a registered adviser may be paid a higher commission for selling a certain type of investment, which may influence their decision on what to offer their client.
Alternatively, a firm or registered adviser could offer that client a similar product that is more cost-effective and suitable.

How to talk with your registered adviser about client-focused reforms and material conflicts of interest?

Talking with your registered adviser routinely is not only recommended for ensuring your investments are tracking towards your goals, but is an important step in taking an active role in understanding what you are investing in. Follow these key steps to strengthen your relationship with your registered adviser and address conflicts of interest as they arise:

  1. Ask questions and get satisfactory answers: If you are confused with what has been communicated, be sure to ask questions and only move forward when you have what you need to make an informed decision. Do not feel intimidated to ask questions, remember an adviser works for you after all.
  2. Discuss any conflicts of interests: Registered advisers should work on your behalf and in your best interest, so take the time when you meet or talk with them to understand if the investment products they are proposing, or you are already invested in, are right for you. If you feel there may be a product that is better suited for your goals, bring it to your registered adviser’s attention and request answers before you agree to move forward.
  3. Get information in writing: Getting all information in writing, especially information about any areas in which you are concerned, can help you better assess the investments offered to you and enable you to do it at your own pace, outside of the meeting.

By taking these steps to identify and address material conflicts of interest, you can better understand the investment products available to you and ensure that your registered adviser continues to offer you the investment products best aligned to your needs and suitability.

Sticking to your investing goals through the holidays

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As the holidays approach, many Albertans are overwhelmed by the costs associated with the season. According to PwC’s Canadian Holiday Outlook, Canadians expect to spend on average $1,402 on the holidays, an increase of 29 per cent over last year. From gifts to large dinners, saving and investing can take a backseat to stressful credit card bills.

To avoid this unwanted stress and falling off track with your investing goals, here are five steps you can take to enjoy the holidays and continue to grow your wealth into the new year.

Understand your budget: We all have costs associated with our day-to-day lives, with some falling under needs (housing, utilities, and food) and the rest under wants (gifts, trips, eating out etc.). Take the time to understand your monthly fixed costs and what you can realistically allocate towards gift shopping and entertainment. With this information, you can also see what steps you can take to stay within your regular monthly budget while showing those close to you that you care for them. This could be as easy as giving personalized handmade items instead of buying gifts, and coordinating a volunteering day or potluck instead of hosting a large dinner.

Automate your investments: One of the key components to every investing journey is contributing consistently to your investment portfolio to maximize the compounding effect (the interest on top of interest your invested money earns over time) on your returns. Before you start shopping, consider an achievable amount you can dedicate to your investments each paycheck and set up automatic withdrawals through your bank as soon as you get paid. By utilizing the “Pay yourself first” strategy, you can ensure consistent contributions to your investments, without even having to think about it or inadvertently spending that money.

Confront your debts: There is no better time to confront your debt than now. Review any consumer debt you may have, and focus on ways to minimize adding to it. If you cannot find a sensible approach that doesn’t add to your debt, set reasonable spending limits on gifts, entertainment, and food that you won’t struggle with paying off in the new year, and won’t limit your ability to continue contributing to your investments.

Save while you invest: While investing is an important tool to growing your wealth, dedicating some of your money towards a savings account can help you be prepared for significant expenses like the holidays. Ideally, it helps to have a savings account for near-term goals like gifts, trips, entertainment and an emergency fund that you can utilize for unexpected expenses that may come your way. By planning ahead and dedicating a small amount each month to both accounts, you will be well prepared.                                                                                                                                                                                                       
Avoid the temptation of get-rich-quick investment scams: You may be enticed to make extra money during the holidays with investment offers advertised as having high returns with little to no risk. Remember that fraudsters like to target those who are trying to make money quickly online and in person. Stick to your own financial goals and ignore those investment “opportunities” that could leave you in a worse position.

By staying mindful of your budget, maintaining your investment contributions, and minimizing the debt you take on, you can come out of the holidays without hitting speed bumps on your investing journey.

How to conduct fundamental analysis and invest wisely

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Relying on social media platforms, self-proclaimed investing gurus and online forums for investment recommendations can be disastrous. Whether you’re assessing the potential of a company or analyzing your existing portfolio, fundamental analysis is the best barometer for gauging the true value of any investment. Learn the five key steps of conducting fundamental analysis and making informed investment decisions about companies you are interested in.

1. Review public reports – When you have found a company that best fits your investment objectives, the first step is to research and understand how the company makes money and any business risks it faces. You can gain a better understanding of that by reviewing public reports on the company’s website or those available on SEDAR (i.e. the filing database for the Canadian Securities Administrators) or EDGAR website (i.e. U.S Securities and Exchange Commission’s SEC filing database).

2. Understand the company’s financials – Once you feel confident in the company’s business, the next move is to understand the company’s financials. This information can be found in the company’s publicly available annual reports. These reports will help you learn about the company’s debt and obligations as well as its net income at the end of the quarter or year. Additionally, you can learn about the company’s return on equity, which can help you determine if it’s using its investment money responsibly.

3. Explore the company’s industry – Next, you want to explore the company’s business landscape. At this stage, you can learn about the innovations, disruptions, and opportunities facing the company’s industry. This is also a great time to understand the company’s competitors and whether it has the right products and services to compete.

4. Examine the company’s leadership – You should examine the company’s leadership, including board members and executive team. The purpose of this step is to understand if the company’s leadership has the right experience and management style to make the critical decisions for the company’s success.

5. Finalize your research with trusted and experienced resources – Once you have conducted all of the preceding steps, you can round out your research with additional insights and perspectives on the company. Utilizing information provided by reputable sources like Bloomberg News, Morningstar.ca, TMX.COM and NASDAQ.com, you can uncover any risks you may have missed during your research or additional growth opportunities. Remember to avoid the temptation of confirmation bias and consider all expert opinions and not just the ones aligned to your own opinion.

The excitement around investing continues to grow, with speculation, social media hype, and ongoing news coverage stoking frenzied investor sentiment. While fundamental analysis will never guarantee investment returns, it will help you move past the online noise and provide you with the knowledge to make informed investment decisions.

Kicking off the school year with RESPs

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With the new school year kicking off and kids headed to classrooms, now is a great time to start thinking about how prepared you are for their future education. While it may seem far away, planning for your child or grandchild’s post-secondary education early on can pay off big over time.

Costs for post-secondary education – universities, trade schools, colleges – are rising every year. According to Statistics Canada’s 2020-2021 figures, the average national one-year cost of university for students in residence was $22,730 and $11,330 for those living at home, which is expected to rise to $32,942 and $16,165 for children born in 2021. For those wanting to help support their children with the costs of post-secondary education, an RESP account can be a critical savings and investment vehicle.

Why should you consider an RESP?

The registered education savings plan was created in 1974 by the Federal Government to encourage parents to save for their children’s post-secondary schooling. As a savings and investment vehicle geared towards students, there are numerous benefits RESPs have over other savings plans. These include:

  • Tax-deferred growth. You can contribute up to $50,000 per child to an RESP without any taxes payable on the money earned (i.e. accumulated income, Canada Education Savings Grants, Canada Learning Bond, Provincial Grants), until it is used. When the money is withdrawn, income earned is taxed at the student’s tax rate – which could be minimal as most students have little or no income.
  • Government grants. To complement existing funds saved or invested, the government will contribute 20% on every dollar up to a maximum grant of $500 a year. You can utilize this annual grant for a total grant contribution of $7,200. Low-income families can also benefit from additional grants provided through the Canadian Learning Bond.

The title “savings plan” is slightly misleading, as parents are also able to invest within their child’s RESP and rely on the power of compound interest to grow the plan significantly. For example, if you invested $210 a month for the first 15 years of your child’s life in a diversified investment fund at an average annual compound interest rate of 6%, at the 16 year mark, your child would have $58,655 in their account, excluding the additional government grants.

What if my child decides not to go to post-secondary?

If your child decides that they do not want to pursue post-secondary education, you are allowed to keep the account open for up to 36 years. If you know for sure that your child will not be attending a post-secondary institution, you can withdraw the contributions you have made to the account with the accumulated interest earned on these contributions, taxed at your marginal tax rate plus 20%. You can also transfer up to $50,000 of your contributions to your RRSP, if you have the room.

How do I create an RESP?

Start by contacting your financial advisor or financial institution. Most banks, credit unions, mutual fund companies, investment dealers and scholarship plan dealers offer RESP accounts. Additionally, financial advisors and robo-advisors can help you open an account and recommended a suitable portfolio of investments for your child. Always remember to check the registration of any individual or firm you plan to work with.

Just like when you held their hand on their first day of school, your investment in an RESP can provide invaluable support to your child as they complete their scholastic journey.

Changes in the Canadian SRO landscape and what it means for Alberta investors

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There are two self-regulatory organizations (SROs) in Canada that strive to promote investor protection and ethical conduct within the investment industry. These organizations are the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC).

On August 3, 2021, the Canadian Securities Administrators (CSA), the umbrella organization representing all of Canada’s securities regulators, announced its plan to oversee the creation of a new, single SRO to consolidate the functions of the MFDA and IIROC. The new SRO will provide an enhanced regulatory framework for the investment industry.

Similarly, the CSA will oversee the creation of a new investor protection fund which will consolidate the functions of the MFDA Investor Protection Corporation and Canadian Investor Protection Fund. These funds provide eligible customers of investment dealers and MFDA members protection for cash and securities within defined limits, in the event that a dealer or member they work with becomes insolvent.

Understanding SROs

An SRO is an organization created to regulate the operations, standards of practice, and business conduct of its members and their representatives and to promote the protection of investors and the public interest.

The MFDA, founded in 1998, provides oversight to dealers that distribute mutual funds and exempt fixed income products to investors. The MFDA is structured as a not-for-profit corporation with its members comprised of mutual fund dealers licensed with provincial securities commissions, outside of Quebec and Newfoundland.

IIROC, formed in 2008, sets and enforces rules regarding the proficiency, business and financial conduct of investment firms and registered securities dealers. With surveillance teams across Canada, IIROC oversees all Canadian marketplace activity, ensuring everyone trades fairly and follows trading rules.

What does the consolidation of the MFDA and IIROC mean for investors?

CSA Position Paper 25-404 New Self-Regulatory Organization Framework outlines the framework for the new SRO, which is based on extensive research, analysis and consultation with industry participants. It is designed to streamline the protection measures for Canadian investors while enhancing public confidence, innovation in the capital markets and fair and efficient market operations through continually evolving industry conditions.

The new, yet to be named, SRO will centralize the MFDA and IIROC complaint-reporting processes, allowing investors to easily file a complaint and have it directed to the new SRO or the relevant provincial securities regulator(s). Additionally, the new SRO will facilitate easier and more cost-effective public access to a broader range of investment products and services.

Until the consolidation of the MFDA and IIROC is complete, investors are reminded that the functions and services of both existing SROs still remain fully operational. If you have complaints regarding trading issues or with your registered or dealing representative, please visit www.iiroc.ca, www.mfda.ca or www.albertasecurities.com.

Active Investing: Understanding the basics

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Investing is a wealth-building tool that can be as involved or as hassle-free as you want. Active investing is a hands-on approach in which either you or a financial advisor acting on your behalf invests with the objective to outperform the market’s average returns. Passive investing involves investments in funds like exchange-traded funds and indexes that track and invest in the entire stock market and require little to no involvement from the investor to achieve average market returns.

For those interested in a more hands-on approach to investing, the active investing strategy may be more appropriate. Learn more about active investing and what you should consider before adopting this strategy.

Research is fundamental

Active investing comes in many forms, whether it is stock-picking on your own or through actively managed investment funds or portfolios created by financial advisors. The key to being successful at active investing is researching the fundamentals of any investment and ensuring that it meets your risk tolerance and aligns with your financial plan. Elements of this research include performing a comprehensive analysis of the company’s financial statements and other public reports to understand its business, revenue, cash flow, and debt etc.

It’s all about balance

When assessing the fit of an investment within a portfolio, investors or financial advisors are tasked with ensuring that it does not impact the overall balance. For example, if you invest in a company already held in an index fund you own, you are unknowingly increasing your investment in that company for better or worse. Suppose you buy too much stock in the technology sector, for instance. In that case, you may imbalance your portfolio towards that sector and see greater losses if that industry has a downturn, more so than a broadly diversified or balanced portfolio.

Know the risks

Generally speaking, active investing can yield higher returns but also carries with it higher risk. Even with comprehensive analysis, investors are not guaranteed high returns through picking individual stocks. In fact, more often than not, they underperform the market. The buying and selling of stocks can also expose you to cognitive or behavioural biases that can cause you to sell your investments at the worst of times or take on more risk than you are willing or comfortable to accept normally.

Active investing can be a great way to grow your wealth but is far more complex and involved than a passive approach. Fortunately, you are not restricted to any one strategy and can implement a blend of both passive and active strategies to create a portfolio that aligns with your unique financial plan, risk tolerance and goals.

 

 

Confronting the five cognitive biases of self-directed investing

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Money is a powerful tool in our day-to-day lives. There are various emotional connections and cognitive biases that impact how we spend, save, and invest our money. When it comes to investing, you perform the best when making informed decisions and approaching the market methodically and rationally.

Our investing behaviour is defined not just by the act of buying and selling investments, but also the psychological traps and misconceptions we have to contend with. Below, learn more about how you can recognize these negative biases and take a more calculated and successful approach with your investing.

Overconfidence effect: is a well-established bias in which your confidence in your judgment does not align with your actual accuracy and results. In investing, this can lead you to overestimate your understanding of the stock markets, ignore or disregard information and expert advice, take greater risks than is suitable for you, and ignore red flags of poor investments and fraud.

Herding behaviour (aka. FOMO effect): often linked to wild and irrational stock market bubbles, herding is the tendency for us to want to follow the crowd. The fear of missing out on the next big investment can influence you to make investment decisions in line with what you see and hear from others and less so on the fundamentals of the company you are considering. Fundamentals include profitability, revenue, assets, liabilities, and growth potential.

Confirmation bias: is when you have preconceived notions about a company or investment and seek out information that supports your beliefs rather than building a comprehensive understanding through objective research and data. This bias can make you invest in companies with a skewed sense of its business potential.

Loss Aversion: is the tendency for you to place more importance on losses rather than gains. This can lead you to hold on to a stock that continues to drop in value while all current rational analysis tells you to sell it. Inversely, this could also have you selling a stock that went up in value slightly to realize a gain, while ignoring analysis telling you that it should be held longer for a much greater profit.

Anchoring: is when you anchor your opinion and value of an investment to one piece of information or price and ignore the company’s fundamentals. Worse yet, anchoring can quickly lead to confirmation bias, having you look for additional information that aligns with your anchored belief in the stock.

Investing in the stock market on your own can quickly bring out these biases, impacting your investment portfolio. By recognizing when you are being influenced, you can better address the bias and ensure that your investment decisions are based on rational analysis. If investing on your own may sound too challenging, financial advisors and robo-advisers can lay out an investment strategy that will help you invest for the future and avoid these common psychological traps.

 

Diversification: A strategy to reduce your investment risk

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Investing has become more popular than ever, with news outlets, online forums, and maybe even your friends and family discussing the next big stock, sector or industry to invest in. Investing entirely in one thing can be tempting when all you hear about are high returns, but it also means the value of your entire portfolio can drop based on the movement of one stock or sector. Learn more below about how diversifying your investment portfolio can help you manage risks that could impact your returns.

Investing in the stock market always carries two inherent risks that comprise your total risk. The first, called systematic risk, is derived from broad market factors that impact the entire market and are something investors can’t control. These include interest rate changes, inflation increases, war, recessions, and even a pandemic like the world is currently facing. The second, called unsystematic or residual risk, is the risk inherent to the investment in a particular company, industry or market. This can include a new competitor in a company’s space or changing laws or regulations on an entire industry that impacts all the businesses within it. While investors cannot entirely remove unsystematic risk, they can take steps to reduce it and lower the total risk of their investment portfolio.

How do I diversify my investment portfolio?

Diversification is the act of spreading risk across your investments so that when some investments or sectors in your portfolio are performing poorly, you’ll have others performing well. Investors should look at their entire investment portfolio and evaluate the weighting of their investments across companies, industries, sectors and markets. Are most of your investments located in one country? You may want to explore investing in global stocks. Are you invested in too many technology companies? Consider broadening out into other sectors like financial services, energy or consumer staples. By creating what’s called a balanced portfolio, you can minimize the substantial losses you might experience if you were heavily invested in any one stock or market. If you’re having difficulty building a balanced portfolio, you may want to work with a registered financial planner or registered financial advisor to create a portfolio right for you.

Why diversify my investments if they are doing well?

It may be difficult to justify diversifying your investments if they are doing well, but remember that no security or market will altogether avoid downturns. Regardless of the investment, company, industry or market you choose to invest in, there are various unsystematic risks. These include business risk, financial risk, strategic risk and legal and regulatory risk. Each of these can impact your returns. Without diversification of your investments in different markets, industries and companies, your investment returns could feel the full effects of all this risk.

You can’t predict the future, but you can hedge against risk.

Even when you thoroughly research your investments, you still can’t foresee all the risks you may encounter. Diversifying your investment portfolio won’t protect you entirely from losses, however, it can help drive steadier returns in the long run and help you achieve your investment goals.

Robo-advisers: The best way to invest?

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First launched in the early 2000s, robo-advisers were used as an online interface to assist investment managers in handling their client’s assets efficiently. Since 2008, robo-advisers have become publicly available, providing beginner and experienced investors with a simple and relatively low-cost automated investing service. As with any investment product, it’s essential to understand how a robo-adviser works and if it aligns with your goals, risk tolerance and investing needs before diving right in.

How do robo-adviser’s automate investing?

At the core of any robo-adviser platform are complex mathematical rules and algorithms designed in collaboration with investment managers, financial advisers and data scientists. These algorithms’ common goal is to provide investors with a standardized investing portfolio aligned to their desired risk preference, time-horizon and expected return range. The portfolios can include any mix of securities, including exchange-traded funds, stocks and bonds, which are auto-rebalanced over time to maintain the right amount of risk and diversification. Investors can contribute to the portfolio whenever they like and can change their portfolio risk level as they see fit, but they can’t change the individual investments held within their standardized portfolio.

Robo-adviser fees

Considering robo-advisers do not require an investment manager or financial adviser’s assistance in managing the portfolio or meeting with the client, the fees are generally lower. The fee structure for most robo-advisers includes two main components, an account management fee for using the platform and an investment expense ratio for the securities held within the portfolio.

Is a robo-adviser right for you?

Robo-adviser’s may sound like the ideal investing service, but there are a few considerations to keep in mind before opening an investment account or changing your current investment strategy. When it comes to personalization and risk, robo-advisers are designed to provide a relevant portfolio by asking you a series of pre-determined questions when opening an account to help meet your preferred risk tolerance and investing goals. While this does help to suggest an optimal portfolio, robo-advisers do not compare to the comprehensive and personalized services a registered investment manager or financial adviser can offer. Registered investment professionals can develop a tailored investment strategy that helps you achieve your current financial goals and adjust your investments as your risk tolerance and priorities change in life. Human interaction with a registered investment professional can also grow your understanding of investment products, your investment portfolio and enable you to stay focused on your goals.

Robo-advisers have skyrocketed in popularity, providing many investors with a low-cost, diversified and hassle-free approach to wealth management. If you are interested in a robo-adviser, consider the level of investment guidance you need and whether a standardized portfolio is a right tool for your investing strategy.