This week I thought we’d go through the full spectrum of what people can invest in, just so you have a sense of what’s out there and what it can offer you. Should you necessarily have a little money in each of the following asset classes? Probably not, but we’ll get into that. Allons y.
Shares of stock or equity are little pieces of businesses you can buy or sell in marketplaces technically referred to as exchanges. Usually these exchanges are public, meaning anyone can buy as many available shares in as many companies as they can afford. I’ll say a little something about private equity below. Everyday individual investors like you or me tend to buy their stocks in bunches grouped together in mutual funds or exchange-traded funds (ETFs), which hold stocks curated based on specific investment strategies.
Some of these strategies are active, meaning they believe that through research you can pick winning stocks and avoid the losers. The rest of the strategies can be called passive, meaning they support the idea that owning every stock in a given industry or geographical area will make you money more often than research-based methods.
While there are more granular differences between ETFs and mutual funds you can explore here, you should at least know that shares of the former are bought and sold between investors on the aforementioned public exchanges, while shares of the latter are bought and sold directly with the investment companies that operate them.
Bonds are contracts between lenders and borrowers of money. Usually the way it works is the lender forks over some cash, and the borrower agrees to 1) pay the lender a certain percentage of the borrowed total in interest, typically twice a year, and 2) return the full borrowed amount after an agreed-upon period. For example, you could by a 10-year bond worth $10,000 that pays you 2% or $200 per year in semi-annual $100 payments. Everyday investors also tend to access bonds through mutual funds and exchange-traded funds, as they do every asset class below except art and jewelry to the best of my knowledge.
Real Estate Investment Trusts (REITs) are funds that invest in different kinds of real estate with the purpose of returning most of the properties’ income to shareholders. They are beneficial because they allow you to sidestep the hassles of managing properties and tenants directly. All you have to do is buy shares while the staff behind the REIT takes care of all the dirty work.
There are arguments on both sides about whether or not investors need exposure to REITs. The yays will say they’re a way to further diversify your portfolio, especially if you don’t have 100k around to make a down payment on a property of your own. The nays will point out that, unlike the steady income that comes from owning and renting out your own property, REITs can move up and down violently just like stocks, putting a dent in the diversification argument.
Private Equity refers to shares of stock that are only privately available for sale. In other words, you’re only going to be allowed to buy if someone from the company thinks you’re the right partner and reaches out to you. While you may not be able to buy private equity directly, you can buy shares of public companies that specialize in buying and selling these private companies—such as ONEX Corporation and Clairvest Group—which would fall under the rubric of active as opposed to passive investing.
The benefit of owning private equity is that it isn’t priced millisecond to millisecond like public equity is; private companies may only value themselves and let you know the value of your investment once per year. A private equity investment also tends to have a holding period contractually tied to it, sometimes over a decade or more. These qualities are good news for the nerves, because they prevent investors from checking stock quotes 50 times a day, spooking themselves, and selling an investment when they should have just held on. This kind of overreaction is an everyday reality for public equity, which can be bought or sold whenever you deem it appropriate during regular market hours (M-F, 9:30am-4:00pm).
Precious Metals include gold, silver, and platinum for the most part. Investors like to hold them as a hedge against inflation. A hedge is insurance against an occurrence, such as inflation. Inflation is the sustained rise in the prices of goods and services; in Canada, that works out to about 3.3% per year including applicable taxes. Precious metals function as a hedge here because, as inflation makes each dollar worth less every year, metals will be worth more dollars as a result, meaning their prices will rise.
Then there are more alternative investments some opt for citing a variety of reasons like diversification, passion, or having an edge like superior knowledge/research compared to the average investor. These asset classes include Art, Jewelry, Cryptocurrency like Bitcoin and Ethereum, and arguably Private Equity, though it’s becoming more mainstream so I included it above. Do you, as a young Canadian investor, need to dedicate a sleeve of your portfolio to alternatives to succeed at making money long term? No. Not unless you’re interested in something and motivated to do the research and form your own opinions. Otherwise, stocks and bonds will do fine to meet your financial goals. Yes, the more asset classes you own, the more diversified and sheltered from loss you’ll be, but that doesn’t excuse you from knowing what you’re walking into by learning exactly how they work.
If you’re ready to learn about stocks and bonds and start investing in them for yourself, you should read my investing guide, Nine Steps to Successful Investing: A Guide for Young Canadians. To sum it up, it’s a matter-of-fact stroll through the investing process, from figuring out your financial goals, to opening your account, to purchasing shares of a diversified set of passive funds tailored to your financial situation.
Feel free to drop any questions in the comments.
I’m available to teach you 1-on-1 over Zoom if you prefer.
Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.