Super basic Financial advice

September 4, 2012 3:42 PM

I'm hoping for some information more then advice on investing in Canada. Really really basic investment information.

I've inherited a large chunk on money and have no idea what to do with it! I don't need it in my day to day life so I figure I'll stick it somewhere to grow until I do need it. I've tried to do some research on my options but I a) have zero knowledge and b) there is a ton of information out there and it's exhausting trying to wade through it and figure out what I need. I've gone through some of the past posts on metafilter, but would appreciate it a bit dumbed down!

What is the difference between mutual funds, index funds, rrsps? Some basic "duh" explanations and pointers to some good extra reading would be greatly appreciated. I've tried to track down a book to help me out, but there are a million of them and I don't know how to separate the gold from the flotsom. Please very Canada specific, I'm not planning on moving any time soon.

Once I have more of a clue I will look into financial advisers/planners. Advice on how to find a good one would be great.

(I've tried asking the people around me, but from half baked explanations and the deer-in-headlights looks it appears I am not alone in my lack of any knowledge on this subject. Also it's embarrassing.)

posted by Dynex to Work & Money (3 answers total)

Best answer: It's geared to people who are saving as they earn money rather than people who already have a chunk, but a Canadian classic with a totally approachable, non conversational tone is The Wealthy Barber, and I bet there's an old copy for under $5 in the nearest second-hand book store (or, of course, get it from a library).

Here's a few sort of quick explanations:
It's important to make the distinction in your mind between what is an asset (a thing you own) and what is an account (a place you put assets). So you own some dollars, and they are in a bank account. If you buy an investment, you will keep it in an account of some sort. RRSPs (and TFSAs) are special kinds of account; without getting into gory details, they permit you to make a profit on your investment without having to pay tax right away.

There are two main kinds of investments people have; stocks (often called equity) and bonds (often called fixed income). If you buy a stock, you are buying part of a company. (In fact, they're sometimes called "shares" for that reason; it's a share of a company.) You make money in two ways: the company can make a profit and pass that on to you (called a dividend), or the price of the stock can go up and you can sell for a profit. The price of stocks can also go down, of course. If Apple announced tomorrow they had built a working holodeck, then the price of each small bit of the company would probably go up; selling holodecks would be incredibly profitable. If Microsoft announced it instead, the price of each share of Apple would go down; people will buy fewer iPads, when they can buy holodecks from Microsoft instead.

A bond (this includes things like the Canada Savings Bond, and Guaranteed Investment Certificates aka GICs) is like lending somebody money; they agree to pay you back over time, with interest. If it's a fine upstanding citizen, like the Government of Canada that is certain to pay you back, then they won't pay much interest (like 1%). If it's a deadbeat that is almost bankrupt, like Spain or Greece, then they will agree to pay a lot of interest (6.5% in Spain, 24% for Greece) -- but they may go broke and decide not to pay anyone, and you won't get anything. Excluding the Greeces and Spains of the world, a basic bond, like a Canada Savings Bond is as low-risk an investment as you can get. But it's also guaranteed to have a low return.

A mutual fund is a financial product where people pool their money and buy a bunch of stocks and/or bonds together. The idea is that it's hard to invest in a bunch of companies or whatever; you need to do a lot of research, and there are fees associated with buying each of the stocks, and unless you have a lot of money, you can only buy the stocks of a few companies. (If you buy shares in more companies, you get the benefit of diversification; one company having something bad happen to them won't lose all of your money. It's putting your eggs in several baskets, and is an important part of investing.) So what a mutual fund does is hire some people to do all the buying and selling of stocks/bonds/etc for a certain fund; it gives them guidelines like "buy shares of technology companies that you think will go up", and instead of having to figure out what technology companies in particular to buy, someone can buy a share of this mutual fund which may have bought shares in hundreds of individual companies.

An index is a measure of the price of a set of stocks in a particular market. If you want to know how a stock market has done; if the price of the stocks in general have gone up or down, that's really hard -- there are thousands of stocks. So instead, a selection of stocks that are large and representative are chosen. It's like if you wanted to know if the prices in the supermarket were going up -- that's hard to calculate and keep track of. So instead, you keep track of a few things that people buy a lot of and represent different aisles; maybe apples, Coke, milk, ground beef, toilet paper and Kraft Dinner. If the prices of those things go up, then probably the price of everything has gone up. Investors are interested in this, because they own these stocks and want to know if they might be able to sell them for more than they bought them.

The index you are most likely to hear about is the S&P/TSX 60, which tracks the stocks of 60 major Canadian companies, traded in Toronto. These represent the major parts of the economy; the major banks; big retail companies like Loblaw's, Shopper's Drug Mart and Tim Hortons; the three major phone companies; a bunch of oil companies like Husky and Imperial (Esso) and so on. The other most common ones are based on US companies that trade in New York; the Dow Jones (30 very large companies like Boeing and Microsoft and Disney and Wal-Mart); and the S&P 500 (500 of the largest companies in the US). Most countries have a well-known index of major companies based in that country. (There are also a lot of indices based on certain industries, or what have you. There is an index that tracks financial companies from Brazil, and another one that tracks consumer staples companies based in Belgium, etc.)

So mutual funds used to all be run by these slick traders, doing research and collecting data. But then, a while ago, somebody noticed that most of these mutual funds did worse than the underlying index. So many mutual funds that were supposed to buy the best stocks of major Canadian companies made less money than you would have if you invested in the S&P/TSX 60 directly. Eventually somebody had the bright idea to create the index fund. Rather than having smart folks buying and selling all the time, they just bought whatever was in the relative index. Not only would they not do worse than the index, but they could fire the slick guy in the $3000 suit and just have a computer do the buying and selling. Because they tend to reflect the overall performance of a stock market, but charge very little in terms of fees, (0.17% versus 2% or more) they have become incredibly popular and are the main investment vehicle for people who don't want to get fussy with their investments. (Another financial product, that is very similar, is the ETF or Exchange Traded Fund.)
posted by Homeboy Trouble at 7:53 PM on September 4, 2012 [5 favorites]

Another well known Canadian investment writer is Gordon Pape. He did (may not anymore) regularly updated books about RRSPs and mutual funds. You might find something like Sleep-Easy Investing: Your Stress-Free Guide to Financial Success to be useful, or at least cover the Canadian situation.

Any Chapters/Indigo will have a personal finance section that will have a variety of books aimed at people in your situation. Browse around and you'll find one or two that will cover all the basics. New editions will come out in the start of the year, probably, before taxes.
posted by wdenton at 8:03 PM on September 4, 2012

Dasein summed up RRSP's very well, your money grows tax-deferred. You don't pay taxes on the money you put into the RRSP (you get a deduction in your taxable income when you fill out your tax return), and only pay taxes on the money you put in plus the gains when you withdraw the money, at the tax rate you are at then. This is beneficial if you expect to be in a lower tax bracket at retirement - if you think you will be at a similar tax rate, then it doesn't really help you at all.

Tax Free Savings Accounts were introduced a few years ago, and allow money to grow tax-free. Despite the name "savings account", you can put most types of investments into your TFSA (similar to putting them into an RRSP). In this case you pay tax on the money you put in when you earn it (no tax deduction for contributing), however you pay no tax on the increase. The government of the day brought it in to encourage short-term savings, however to my mind it's more powerful over a lengthy period of time. The major limiting factor is that you can only contribute $5,000, per year, per person. The other risk is that if a different government comes into power, there is no guarantee that this plan will remain as-is (it could be seen as benefiting the wealthy at the expense of the poor, so an NDP (or perhaps Liberal) government might see it as an easy cut.

Make sure that any source you are looking at is reasonably current - an older copy of some books might not mention the TFSA, which could be something to look at in your situation. Another possible source is finding a good investment broker - you need to be careful that they are as interested in educating you as they are in selling you something, however a professional can give you specific info that is most applicable to you. If you're in Winnipeg, you can message me and I can give you the info for the person we use - we're very happy with her.
posted by PGWG at 5:52 AM on September 5, 2012 [1 favorite]