Building passive income can be a great way to increase your household income. Learning how to build passive income as you go through life can set up your family for a more prosperous future. The practices in this article will help you learn more about passive income along with some of the best ways to do so while making the most of your time and resources. 

Why Passive Income is Valuable

Did you know passive income can help you change your financial future? It’s great if you’re trying to save for a down payment on a house, a new car, or to pay off student loans. You can also use this extra money to invest further and build more wealth. For example, if you’re investing in a rental property, you can put the money you make towards a second property. 

Building passive income can also come in handy in an emergency. For example, if you or someone in your household needs medical attention, having money set aside can make this expense much less detrimental.

How You Can Build Passive Income

#1. Purchase an Investment Property

Investing your money into another home can be one of the most profitable ways to make passive income. Although the initial investment can be high, purchasing an old house to renovate and flip or purchasing a home to rent out on sites such as Airbnb and VRBO can be great investments. 

Investing in real estate can be tricky and costly, but there are many benefits. Learning how to get preapproved for a mortgage can help you narrow down your search in terms of location, square footage, and amenities in the home so you can save your money for upgrades you want to make. The more upgrades you make in the home, the more money you can charge for people to rent out, increasing the passive income you build. 

House flipping is another one of the many ways you can invest in real estate. Whether you purchase a home to flip and sell or rent out the home to a long-term tenant, the money you make can become a savings account for future investments. Often, you can purchase these homes for a great price if they require a lot of work. Putting in the time and resources to upgrade the property can turn a quick profit. But keep in mind not every renovation will turn the profit you invest.

#2. Rent Out a Vehicle on a Car-Sharing App

If you own multiple vehicles, this can be an excellent way to make some easy extra money. Apps like Turo are easy to use and have a large consumer base. On Turo, you can list your car similar to how you list a home on Airbnb. People can then reserve your car and rent it out for a length of time. 

This can be tricky to get into if you don’t have experience, but Turo makes it relatively easy to sign up and has many resources for hosts. In addition, they offer insurance for those renting and different protection plans hosts can choose from. The great thing about this is that if you need your car, you can pause it on the app and relist it whenever you want. 

A pro tip to set you up for success: invest in cars specifically to list online. Then, you can see in the app what kinds of vehicles are prevalent in your area and choose a car that’s more likely to be rented out frequently. 

With every investment, there are risks, and this is no exception. For example, there is always a chance of your car breaking down or not being in demand as a rental, so it’s essential to research and learn about renting on Turo before investing in it.

#3. Invest in the Stock Market

Putting some of your extra money into the stock market is one of the most common ways to build passive income. If you set aside a portion of your paycheck each month to invest, you’ll be able to track the progress of your money in the stock market and see where you should invest next. Investing in the stock market is easy once you do the proper research, even if you’re investing as a beginner.

Using the stock market to make more money is great because you can put in money and take it out whenever you see fit. If you have some extra money lying around one month, you can add it to your portfolio. The same goes if you have a month where you incurred some additional expenses, it’s entirely up to you if you want to decrease your investment that month.

One advantage to investing this way is that the money will accumulate over time, and you don’t have to do any work other than your planned investments. In addition, this method is one of the best if you’re planning to use your passive income for retirement, as the money you put in the stock market is separate from your other savings and isn’t as accessible for you to spend elsewhere.

#4. Turn Your Favorite Hobby Into a Side Hustle

This option is a great choice for creative hobbies, like art, sewing, or DIY projects. There are many ways to make a quick profit from upcycling something you no longer use. Upcycling is when you take something previously damaged and give it some TLC to make it new again. People often do this with clothing and furniture.

If you enjoy sewing, you can buy old leather goods that have been damaged, purchase them for a low price, fix them up, and sell them on social media. You need to have specific skills for this, but you can do so many other things to make some extra money.

Another thing you can try is a DIY furniture flip. Facebook Marketplace is full of old furniture that people give away for free or sell very cheaply. Often, these items only need a fresh coat of paint and some new hardware to look brand new. Items with just a few minor updates can sell for upwards of $200 depending on the piece itself, which is an excellent turnaround after getting it for free.

If you have a lot of old furniture or clothes, you can sell them at a garage sale. Although a lot of planning and time can go into this, it can make you a great deal of extra money and help you reorganize and declutter your home. Coordinating this with neighbours and having a community-wide sale can also bring traffic.

Final Thoughts

Building passive income can set you and your family up for success in the future, and it’s crucial to begin doing this as early as possible. Whether you purchase an investment property or vehicle, invest in the stock market, or just do some small DIYs for extra cash, every bit helps.

As you begin to build your passive income, you’ll better understand how to invest. From there, you can grow even more and use the money you make to invest even further, especially if you want the extra money for when you decide to retire. 

The post 4 Ways to Build Passive Income appeared first on Mixed Up Money.

It’s no secret that one of the oldest ways to invest in real estate is through buying actual property. But what if you don’t want to sell your kidney to compete in a bidding war in today’s market? 

Aside from this, maybe you aren’t interested in owning, don’t want to become a landlord, or you’re looking for a new way to invest in real estate entirely. 

In today’s post, we’ll look at alternatives to the typical real estate investing methods. We’ll cover everything from crowdfunding & REITs to executing a live and flip. 

What is the traditional way to invest in real estate?

Real estate can be an excellent opportunity for investors. Many people buy property to rent it out and renovate and resell the property in the future for a profit. 

Another traditional way to invest in real estate would be to buy a plot of land and either:

• Develop the land into something that generates income (property, business, etc.)

• Hold it with hopes that it would increase in value over time

There are many benefits of investing in real estate as well. For one, it’s tangible, which many people find reassuring — especially these days with so many digital assets being at the forefront of our lives.

Its value is usually stable, so you may be less likely to see your investment decline dramatically than other investments in times of economic turmoil.

How much money do you need to start to invest in real estate — or how little?

You might believe that you need a large sum of money to start investing in real estate. However, that doesn’t necessarily have to be the case, given many opportunities to invest. 

For example: depending on your brokerage account, it could be less than $20 — no matter your current financial situation.

A few types of non-traditional investing

REITs

A real estate investment trust (REIT) is a portfolio of real estate investments cooped into one fund. Most REITs trade like stocks on the stock exchange and make it possible for individual investors to earn dividends.  

REITs specialize in a specific real estate sector. However, diversified and specialty REIT portfolios may hold different types of properties. Example: a REIT that consists of both retail and office properties.

Dollar-cost averaging by regularly contributing extra cash or setting up an auto-deposit or buy to an investment account is a great way to build up an amount that could lead to significant passive income over time. 

Crowdfunding

Crowdfunding is a method of pooling investment funds with a group of other investors. Advantages of this strategy are: minimized risk because total investment spreads across multiple investors, and there is low cost to entry (ex: some platforms have tiers starting as low as $10.)

Fundrise (a US-based platform) was one of the pioneers of real estate investing via crowdfunding, and there will surely be more crowdfunding opportunities popping up in the future. One Canadian alternative to Fundrise is Fundscraper (minimum $5000 investment).

With crowdfunding, there are some genuine risks, like losing your entire investment or not having access to the funds in the event of an emergency because they are illiquid. 

If you are looking for more information on crowdfunding, check out Maple Money’s article from last month, where he shared a Beginner’s Guide to Crowdfunding in Real Estate.  

Live & Flip

This method includes purchasing a property with a plan to live in it while renovating/rehabbing that property to sell it for a profit eventually. 

Although, a word of caution. Remember when you heard about that friend who just got a great place? And how it ‘just needs a little work.’ Well, most people underestimate how much work home renovations can be, how much they cost, and how long they can take. 

Many new home buyers with good intentions start down this path end up way over their heads with the cost or scope of the projects.

Taxes

You can own real property in various ways, whether through outright ownership, joint tenancy with rights of survivorship, tenant in common, or as part of a corporation. But, of course, each has its tax implications. 

If you’re unfamiliar with the different types of ownership and the associated tax obligations, please consult with a professional before making real estate investments so you can be sure to avoid any unpleasant surprises.

When is the best time to invest in real estate, and how much should you invest?

The answers to those questions depend entirely on your financial situation. However, investing in real estate can be a great way to build your wealth and achieve a lot of independence. 

If you are looking for an investment that can produce dependable income without too much time commitment, this is the perfect opportunity for you. However, you may find that it does take some time to get started. This time will be well worth the investment, though, because you will have all the time in the world to work on other things.

Many people think that investing in real estate must require vast sums of cash, but this doesn’t have to be true. If you are looking for a smart way to invest in real estate, this is the best option for many people.

If you want to protect your assets, build equity, and gain some passive income without dealing with tenants, repairs, noise, and long hours — try investing in real estate in non-traditional ways.

The post How to Invest in Real Estate the Non-Traditional Way appeared first on Mixed Up Money.

The bear and the bull. An unlikely pair that has very little meaning in the real world but hold a heavyweight in the world of finance. The terms “bull market” and “bear market” are popular financial jargon. I came across this type of jargon when I first entered the industry, and if you’re reading this, then chances are you’ve come across them too.

So you’re probably wondering, what do two very different animals have in common? Also, what the heck do they have to do with finance? Below I will be explaining what these terms mean and where they came from.

What do bear and bull market mean?

A boom, a slowdown, peaks, troughs, bears, bulls. They may sound confusing, but these terms are all used to describe the same thing — market movement. They refer to how the market is behaving. Is it performing well or not? Lots of downward movement means the market is doing poorly, and lots of upward movement implies the market is doing well.

Each day the market will move one way or another — but it’s the long-term trends over several weeks or months that are of more significant concern. While there have been points in history where the market has trended downward for many months, it has always rebounded and has continued to climb upward.

A bear market

A bear market refers to consistent downward movement in the stock market, specifically a market that has fallen at least 20% from its previous high. Bear markets have lasted as little as three months and as long as 20 months in recent history. In the last half-century, the largest bear market was the 2008 economic crisis, where the stock market fell by 51.93% off previous highs and didn’t rebound for over a year.

A bull market

A bull market refers to consistent upward movement in the stock market, specifically a market that has risen by at least 20% from its previous low. Bull markets have lasted as little as 31 months and as long as 147 months or over 12 years in recent history. In the last half-century, the largest bull market was a run between the late 80s and late 90s that gained 582% from previous lows.

A history of the markets

Below you can see a chart showing the length and time of current US bull and bear markets, although the Canadian markets closely mirror these. The average bull market outperforms and outlasts the average bear market, which has always recovered in the end.

The only issue with investing is managing the volatility, as short-term bear markets have happened and are likely to occur in the future. To do this, make sure you’re investing based on your risk tolerance and considering the time horizon of when you need your money, as you don’t want to be in a position where you have to sell when the markets are down.

Being “bullish” or “bearish”

While we often use the terms bull and bear to refer to the market as a whole and how the markets are performing in real-time, sometimes these terms can be used by investors to speculate, in other words, make predictions.

If an investor is “bullish” on the market as a whole or a specific stock or sector, that means they feel favourably towards it and feel it will outperform in the near term. Conversely, if an investor is “bearish” on the market as a whole or a specific stock or sector, they don’t feel favourably towards it and feel it will underperform in the near term.

Analysts often use these terms to make predictions about the industries or stocks they cover in their marketing materials or research reports. You may also hear them in casual conversations between investors.

The origins of these terms

You may be wondering, so why a bull and a bear? Why not a cat and dog? Tortoise and hare? The exact origins of this famous financial metaphor are unclear; however, two popular explanations are often used.

The first is based on how the bull and bear attack their opponent. The bull attacks by shooting its horns up into the air, while a bear attacks by swiping down. The other explanation is the history of selling bearskins and how they would sell the skins ahead of time. There may also be an explanation from the historical bull-and-bear fights.

Although the exact origins are unknown, the metaphor has undoubtedly held its popularity in the industry over time.

Financial jargon isn’t as confusing as it seems

When I got my first job in the industry, the financial jargon felt like a new language. It can certainly be confusing at the start. A great way to feel more confident with your financial vocabulary is by reading more and often. I hope that my blog posts can help decode some of that language for you, but otherwise, books and financial news sites are a great place to start. I was lucky that my first job involved reading a lot of news and analyst research reports daily. Decoding those helped me tremendously, and with the online access available today, anyone can do the same. So don’t feel discouraged to ask questions or speak up too. Chances are you’re not the only one!

The post Bear and Bull Markets: What Do They Really Mean? appeared first on Mixed Up Money.

The idea of saving for retirement can be confusing and overwhelming, as you’re saving for a future event, years in advance, and with so many unknown variables. People are also living longer, and some Canadians even spend the same number of years in retirement as they did at work). 

With the nature of pension plans changing and the possibility of CPP payments fluctuating, you may wonder whether your retirement is secured.

With various ways Canadians can save, such as through an employer-sponsored plan or a Registered Retirement Savings Plan (RRSP), you may wonder: Is one better than the other? Or, if I already have one, is that good enough? Let’s break down everything you need to know about retirement and pension savings.

How can Canadians save for retirement?

Canadians can save for retirement in three ways: through Government pension plans, employer-sponsored pension plans, and individual retirement savings plans.

1. Government pension plans

In Canada, we have a federally regulated pension program (excluding Quebec who has its own) called the Canada Pension Plan (CPP), funded through contributions from Canadians and their employers over their working careers. The program is mandatory as a way to make sure that Canadians are saving for retirement.

At retirement, the amount you receive depends on how many years you’ve worked in Canada and how much you earned while working. It’s very uncommon to obtain the total amount of CPP each month, with the average Canadian receiving $613, around half of the maximum of $1,204.

In addition to CPP, Canadians can also receive Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). These programs do not rely on your past work history; however, they are subject to various eligibility rules and may be reduced based on your income. In other words, they exist to help low-to-middle income Canadians.

Unfortunately, these programs were not meant to replace your income and do not provide for a safe retirement, even though many Canadian seniors in poverty currently live off these programs. On average, a Canadian will receive $8,500 per year from CPP and $7,400 from OAS, while average annual household expenditures total $62,183. Given these only support 25% of the average yearly expenses, Canadians must save in other ways.

2. Employer-sponsored pension plans (or Registered Pension Plans)

Historically, saving for retirement was primarily out of our hands here in Canada. Most Canadians had pension plans through their employers and would use the CPP and OAS as a supplement. But, as of the 1980s, employers started to reduce their pension programs or cut them all together because of inflation.

In 1977, the number of Canadian workers with Registered Pension Plans (RPP) was around 46.1% or nearly half, with the number now sitting at 37.1% of paid workers. This is in part due to the changing nature of work – with more people working contract jobs, working several part-time jobs at once, or being self-employed. As such, you’re one of the lucky ones if you currently have an employer-sponsored pension plan here in Canada.

Another ongoing change in the pension plan landscape has been the shift from Defined Benefit (DB) plans to Defined Contribution (DC) plans and how saving for retirement is even more unpredictable.

With both plans, you and your employer make contributions at varying rates, depending on the company. Contributions get pooled and invested within the plan. The difference lies with who takes on the market risk and who is responsible for managing the money.

With a DB plan, your retirement benefit is guaranteed, no matter how the market performs. If the money doesn’t grow as projected, your employer absorbs the loss as the manager of these funds. With a DC plan, your retirement benefit is not guaranteed and is subject to market risk. You are in charge of managing your money and may suffer from volatility in the markets before your retirement date. While employer-sponsored plans (DB or DC) are incredibly valuable and can produce three times the income than if you had invested the same amount in an individual plan, it may not be enough.

Why an employer-sponsored plan is not enough

Have you heard the saying, “don’t put all your eggs in one basket?” While your benefits aren’t subject to market risk with a DB plan compared to a DC plan, there is still business risk involved with both. What if your company goes bankrupt and can no longer meet its pension obligations? 

It’s not likely, but it can happen. Retired Sears employees are still trying to recuperate the $730 million in pension funds owed to them.

Other risks include changes to pension policies. For example, during COVID-19, there was a discussion of employers being legally able to halt contributions to pension plans. Other things that may pressure company pension plans include many baby boomers entering retirement and historically low interest rates.

Essentially, nothing is guaranteed, even with a DB plan. And again, people are living longer, spending less time in the workforce than years in retirement, and have more debt, LOTS of it. With all of these factors taken into account, Canadians need to take on greater personal responsibility when it comes to saving for their retirement, outside of just their pension plan.

3. Individual retirement savings plans

Individual retirement savings plans can help you save for retirement on your own. Unlike employer-sponsored plans, all Canadians have access. These include the Registered Retirement Savings Plan (RRSP), and the Tax-Free Savings Account (TFSA), which you may not have realized could be used to save for retirement.

Since the government wants to give citizens equal access to tax-deferred retirement savings, your RRSP room will be reduced if you have an RPP with your employer. Your annual RRSP room will be reduced by your Pension Adjustment (PA), which reflects the value of the benefits

you earned under your pension plan. If you have an RPP, it’s worth checking if you have any RRSP room left through the CRA website.

The TFSA is another excellent way to save for retirement, as it’s more flexible, your contribution room isn’t diminished if you already have a pension plan, and you’ll owe no tax at all when you withdraw in retirement.

Remember, the difference between investing individually for retirement compared to a pension plan is that the responsibility of growing the money is in your hands. Make sure you do your research or speak to a professional about an investment strategy that fits your risk tolerance and retirement time horizon.

You got this.

Maybe you don’t have a pension plan, or maybe you do. Maybe you’ve opened up an RRSP, or maybe you haven’t. I know all this talk about saving for retirement can be overwhelming, but don’t get discouraged. 

You’re doing yourself an amazing favour simply by educating yourself and learning more. But, remember, there is no one path to retirement. Find what works for you and your budget.

The post Should You Invest For Retirement Outside of a Pension? appeared first on Mixed Up Money.

“Have you ever heard of a SPAC?” This was the question that I asked my online community, and not surprisingly, a large majority had never heard the term before. For me, the word SPAC or Special Purpose Acquisition Company first came up in 2017 and had fallen off my radar until coming up again last year.

In 2017, I was working at a co-op job in downtown Toronto at a financial company. The company had many moving parts, and I worked exclusively with one side of the business. I didn’t know what my other colleagues were doing until near the end of term when I finally got a peek inside after being ushered into a board room. 

I grasped that one side of the business was a SPAC and had just finalized a deal, which was cause for major celebration. I didn’t understand much, only that this was big news and an excellent step for the company. I left the board room thinking that this was some private deal for a few big-name investors, utterly unaware that public investors, those like you and me, would be benefiting from this news as well. 

Fast forward three years later, and it was my boyfriend who brought them up again. They were on Reddit, his favourite financial news platform. This is unsurprising as 2020 was the most significant year for SPACs in history. His excitement was a big inspiration for why I wanted to learn more.

A SPAC is not an investment 

The first thing to know is that a SPAC is not an investment. It’s a legal structure. It’s one of three ways that companies can go public, or in other words, get listed on a stock exchange. Some benefits to going public for companies is that their company gets valued, as shown through the stock price, they have easier access to capital or outside investment to grow their business, and there is increased liquidity for investors. There is also credibility that comes with going public – it’s a milestone that the world’s largest, and arguably most successful, businesses have all taken. 

Why a traditional IPO can be problematic

So, once companies decide that they are at the stage in their business life cycle to consider going public, they have to choose how. Like I mentioned, there are currently three ways to do so – a traditional IPO, a direct listing (a less popular option that I won’t go into here), and a SPAC. 

The typical route is through a traditional Initial Public Offering (or IPO). 

SPACs have taken off due to the challenges that arise for both companies and everyday investors with the traditional process. The company will work with an investment bank, otherwise known as the underwriter, that comes up with a price. 

As a company, you receive the deal price determined by the underwriters, and they technically own the stock on that first day of trading and receive the price sold to the public. This is a challenge for companies because IPOs have historically been underpriced by banks that want to create demand for the stock. It creates a conflict of interest because companies benefit from a higher price, and underwriters benefit from a lower price. 

In addition to this, it’s nearly impossible to get stock of an IPO as an everyday investor. This is normally reserved for institutions and the bank’s most profitable clients.

What is a Special Purpose Acquisition Company (SPAC)?

SPACs have been around for a few decades but have only gained popularity recently. Using a SPAC provides advantages for companies because it eliminates that conflict of interest with the underwriters and costs much less.

In 2020, 200 SPACs went public. That’s six more than traditional IPOs and raised only $3 million less, at $64 billion. SPACs have become famous for tech and innovation companies – from industries such as electric vehicles, space exploration, e-sports, and online gambling. You may know some of the more popular companies that went public using a SPAC recently, including Virgin Galactic, DraftKings, Opendoor and Nikola Motor co. 

A SPAC is a company that has gone public on its own, with a unique exchange-traded ticker symbol. For example, SBUX is Starbucks’ ticker symbol and trades on the NASDAQ exchange. A SPAC has no business operations, and its sole purpose of existence is to find an operating company hoping to go public to merge with. This can be called a “reverse merger.” 

The company they acquire eventually takes over their spot on the stock exchange, and those that initially created the SPAC essentially bow out after the deal. 

They benefit by keeping a portion of the shares, usually around 20%. The companies benefit because they didn’t have to go through the lengthy process of going public, avoided underwriter fees, and potentially underpricing their stock. 

What is the life cycle of a SPAC?

1) SPAC creation

Once created, a SPAC promoter has up to two years to find a company to merge with. Around 20% of the SPAC shares are held with the promotors, but the remaining 80% can be sold to the public. When someone invests, their money is placed in an interest-earning trust until a deal can be made or the SPAC is wound up. 

SPACs begin trading at $10 a unit, their starting Net Asset Value (NAV) – which consists of one share and any number of warrants that can convert into shares at a later date. Warrants give investors the right to buy stock in the future at a fixed price (typically $11.50) – making them highly valuable if the stock goes up. 

For example, if the stock is now trading at $20 and you have the option of buying them at $11.50, you’ve instantly made an $8.50 gain per share. 

The shares have a money-back guarantee of their NAV, which may decrease over the two years as the company spends money trying to find a target. This money-back option is the reason why some investors claim that buying SPACs is “risk-free.” I would disagree with this statement, but it’s a compelling feature and does lower your risk. 

2) Deal negotiations 

Once a SPAC has found a “target,” negotiations will begin to reach an agreement. Only members of the original SPAC creation and the company are a part of these negotiations. Both sides must see a good fit. Typically, the SPAC members will focus on companies in their specialties. If they cannot agree, the SPAC can go back to searching if the time frame is not up yet. 

Sometimes during this negotiation stage, news of a potential announcement can trigger major price moves if there is a lot of press and excitement about the potential target company.

If you agree, the SPAC heads to an investor meeting where all shareholders have the opportunity to vote. A majority need to decide, and shareholders that don’t agree have the chance to sell out. If everything passes, the “de-SPAC” process starts. 

3a) Merging with a company (The de-SPAC)

At this point, there was a successful agreement, and both companies begin transitioning. The company becomes the SPAC and starts trading in its place on the stock exchange. The share price will now reflect the value of the new company, depending on their performance numbers and estimates for the future. If both look positive, the stock has the potential to rise significantly above the original $10. This appreciation potential is the main reason why investors choose SPACs. 

At this point, investors can decide to stay for the long-term if they believe in the new company or sell out and take their gains. Remember, they also can exercise their warrants, which is a significant advantage if the stock price has risen. 

3b) Wind-up

If the SPAC fails to acquire a company during the two years, they will have to wind up. In this case, they will return the money to investors at the current NAV. 

What are the benefits of SPACs for investors?

Some significant benefits make SPACs unique and appealing to investors. The first being the exposure to new companies. It’s nearly impossible to receive traditional IPO shares on the first day of trading and participate in the “IPO pop,” the standard rise in price on their first day. With a SPAC, every day investors can take part. 

There is also the benefit of the warrant received when you purchase units. This is not something you get as a traditional shareholder. It has lucrative potential and can also be sold separately from your shares. 

Finally, the money-back guarantee doesn’t eliminate risk, but it does reduce it and provides a cushion that doesn’t exist anywhere else. 

Potential problems or risks of SPACs

There are some potential problems with SPACs being on the rise. With a historical amount being created, it becomes increasingly more challenging to find a suitable target company. 

With a smaller ratio of potential companies to SPACs, these companies have all the bargaining power, with four or five teams’ options to choose from. There is also the potential for worse deals as SPACs become more desperate to close a deal. 

What do we think of SPACs?

SPACs have provided a new option for companies wishing to go public. They avoid some of the issues with the traditional process and give companies the opportunity they may not have had before. These are companies with little cash flow but significant growth potential. That’s why you see recent newsworthy SPACs in innovative industries like space exploration and e-sports. 

It’s important to note that these are speculative investments that are typically not for long-term use. They should not make up the bulk of your portfolio by any means. They require constant active management. Monitoring the news allows you to know of any deal announcements. 

Otherwise, you are left in a position where a majority of shareholders already sold their positions, leaving you behind.

I find that with many buzzworthy finance topics, it often means that a lot of the gains have been realized. In other words, the train has left the station. I’m not sure if that is the case for SPACs, but I’ll indeed be watching them closely over this next year. 

TL;DR? We’ve got you!

• SPACs are not an investment. They are a legal structure

• SPACs offer companies a new way to go public and list on a stock exchange

• SPACs had their largest year ever in 2020, passing the filed number of traditional IPOs

• Some popular companies that used a SPAC to go public include Virgin Galactic, DraftKings, Opendoor and Nikola Motor co.

• A SPAC is a shell company that lists on a stock exchange purely to find a legitimate business to merge with within a two-year time-frame

• Investors buy a SPAC in anticipation of a deal and can get a portion of their money back if no agreement is made

• Investors receive a unit – a share and any number of warrants when they invest

• If a deal is made, the company takes over the SPAC, and the stock price reflects the value of the new company

• If no deal is made, the SPAC is wound up, and money is distributed to investors

• SPACs tend to be companies in innovative industries with little cash flow but high-growth potential

• They are speculative investments that require detailed active management and should not make up the bulk of your portfolio

• SPACs are having a moment right now, but there is no way of knowing what will happen in the future

The post What is a Special Purpose Acquisition Company (SPAC)? appeared first on Mixed Up Money.

Whether or not you wish to help fund your children’s education is a very personal decision. I was fortunate enough to have my post-secondary education financed by my parents, and I am forever grateful for their support. However, I also saw the benefit of what financial independence did for my fellow students at a young age. 

Understanding the process of taking out student loans, budgeting your money, and working hard are essential life lessons that they received from a young age by having to pay for their education. 

There is no one-size-fits-all to money decisions across families. Feeling pressure and shame to fund your children’s education is authentic in today’s society, but other people’s expectations should never come between making the decision that’s right for you. If you decide that you wish to help fund your children’s education in any way, it’s essential to know what tools are available to you. The best way to save money for education in Canada is with an individual or family Registered Education Savings Plan (RESP). 

That said, not all RESPs are created equal. 

How does a traditional RESP work?

The RESP is available to Canadian parents to help save and invest for their children’s education, similar to how a Registered Retirement Savings Plan (RRSP) is used to save for retirement. 

Now, you may be thinking: Doesn’t the TFSA offer me better tax treatment? Why not just use that? 

Although the TFSA is a great way to grow your money and minimize taxes, what makes the RESP so unique is the government grant money you receive, called the Canada Education Savings Grant (CESG), and in some cases, the Canada Learning Bond (CLB).

What should you know about an RESP?

Similar to the RRSP, the RESP has contribution limits, although they are calculated much differently. Unlike the RRSP, there is no annual maximum or minimum. There is only a lifetime maximum of $50,000 per child (otherwise known as the beneficiary). You can set up an RESP for a single child or a family plan with multiple children. 

With the CESG, the government matches 20% of your first $2,500 each year, up to a lifetime maximum of $7,200 per child. Think of it like getting an automatic 14% return on your investment. Pretty sweet gig, right? Not to mention the CLB, which is available to lower-income families for up to $2,000 per child. 

Both your contributions and the government grant money get invested and grow within the RESP tax-deferred. If and when your child attends post-secondary, the funds withdrawn will be taxable to them. You paid your contributions in after-tax dollars, so only the investment income and grant money will be taxed. The benefit is that college students are generally in a lower tax bracket. 

If your child decides not to attend post-secondary, there are other options. With a family plan, you can quickly transfer the money to another child. If no children participate in post-secondary, or if it’s an individual plan, your original contributions can be returned to you tax-free. You will have to sacrifice the grant money, but up to $50,000 of investment income can be rolled over into your RRSP if you have the room. In other words, if plans change, there is little risk to you.

So, what the heck is a Group RESP?

While I briefly touched on two types of RESPs above: an individual plan and a family plan, there is a third type of RESP you should be aware of, called a Group RESP, also known as a group scholarship trust. 

Group RESPs are controversial due to their restrictive rules and lacking transparency. If you’ve ever heard a horror story where Canadians lost their education savings, likely it was with a group RESP. 

I hadn’t heard of group RESPs until a few months ago. The topic came up at my former workplace when we thought that a new client held one. I learned that my colleagues did not recommend these types of plans, and the companies who sold them were highly frowned upon. Our team suggested that the client pay to get out, no matter the cost. I thought that this was an extreme response. Could a government-regulated product be so bad? I would soon find out. 

How group RESPs work is that money from multiple families is pooled together in one “trust” with contributions and grants. With high front-end loads, most of the money being contributed in the first few years will go strictly to fees. This can cut into future returns as you want your money in the market to compound interest as long as possible. Sure, you supposedly get those fees back at the end, but what if you withdraw early or can’t contribute each month? 

When I said that group RESPs have restrictive rules, I meant with their contribution schedules and withdrawals. Compared to traditional RESPs with no annual minimum, group RESPs have a strict contribution schedule that is agreed upon when you sign up, leaving very little room for unexpected changes over the decades in between. What if, say, a pandemic hit, and you can’t make your payments? This could violate the terms of the contract and sever your savings. 

In 2016, a single mom from Timmins, ON, lost her $8,300 worth of savings. She unknowingly violated her contract contribution terms, only to find out when submitting a withdrawal request, putting her daughter’s upcoming education in jeopardy. 

The same goes for early withdrawals. In 2017, the CBC spoke with a mother of two who requested her money to another institution, only to be told she would lose two-thirds of it. She was unaware of these costs and blamed their lack of transparency when she signed up as a new mom in a vulnerable position.

If you contribute on time each month and your child attends a qualifying institution, then a group RESP will payout in the end. Investment returns aren’t great, but members who stay profit from the earnings forfeited from withdrawn members. I’ll take returns where I can get, but potentially profiting off others’ misfortune doesn’t sit well with me. In my eyes, there is no benefit to a group RESP when flexible, higher-return RESPs exist at the bank. 

Who sells Group RESPs?

Now, you may be wondering if you have a group RESP. An easy way to know is where you hold your RESP. If you save your RESP at the bank, you’re fine. Specialized companies sell group RESPs. Popular companies include Knowledge First Financial, Children’s Education Fund, and Heritage Education Funds.  

According to the Toronto Star, the most prominent provider, Knowledge First, holds over 500,000 RESPs with over $6 billion in assets under management. These certainly aren’t small companies. These are large, for-profit businesses (supposedly) regulated by the government, and their “advisors” are commissioned sales reps who profit off the number of people they can sign up and how much they contribute. 

Their sales tactics are known to be unprofessional and unethical – positioning at mommy-and-me group classes, doctor’s offices, and malls, preying off sleep-deprived parents. Sound shady? It gets worse. In 2015, a lawsuit ensued after a hospital clerk sold 12,000 confidential maternity patient records to Knowledge First Financial in Toronto. 

Things need to change

These companies are profiting off of new parents who want the best for their children. They are vulnerable due to the overwhelming nature of new parenthood, the potential lack of financial education, and in some cases, even language barriers. There have been countless lawsuits of similar nature to the ones mentioned above involving these companies.

Hopefully, the various financial regulatory bodies in Canada can make a change. Canadian financial professionals have tried to speak out. In 2011, a group of Chartered Financial Analysts reached out to the Ontario and Quebec securities commission about their disapproval of Group RESPs. It stated that “the time has come to phase them out.”

While things hopefully move behind the scenes, it’s essential to educate your friends that are new parents about the risks of this product. If they still wish to sign up, then that is their call to make. The important thing is that they are provided with the full disclosure and transparency that they deserve because being a new parent is shocking enough. 

The post The Dangers of the Group RESP appeared first on Mixed Up Money.

The number one question I get from readers is where to start when it comes to investing. If you’re a beginner and are curious what the first step you can take to take control of your financial future, the first thing you need to know is that it’s never too early (or too late) to start.  

What is investing?

Investing is the process of putting your money into a resource in the hopes of seeing it grow in value. You can generate a profit or income by investing in businesses, assets, or real estate. Typically, we invest a small amount of money in the hopes that it will become of value to our future selves. 

Unlike saving money, investing money is a long-term commitment to help you achieve specific financial goals. Everyone who plans to retire or build wealth should invest their money as early and as often as possible.

When you save your money in a bank account or hidden somewhere in your household, your return on that money will be nothing or a tiny percentage of interest. If you keep your savings in a high-interest savings account, you can earn around 1% on the money you hold on your account. Investing, on the other hand, will return you about 10% each year. 

What types of investments exist?

One thing that you’ll learn as a beginner to investing is that there are many different types of investments that exist. Here are four common types of investments and what each of them means.

Stocks

A stock is a security (or a negotiable financial instrument) representing a small percentage of ownership in a corporation. If you own a stock, you have fractional ownership in that companies assets and profits — depending on how much stock you own. 

Each stock unit is called a share. Stocks are listed on exchanges, such as the S&P 500. If you’re already feeling lost, don’t worry. The S&P is like that place you see in the movies with tons of traders standing in the middle of a room shouting at their phones and looking at signs with big numbers. You can trade stocks throughout the day, with regular trading hours for the New York Stock Exchange (NYSE) and the Nasdaq as 9:30 am to 4:00 pm EST, Monday through Friday.

Exchange-Traded Funds (ETFs)

An ETF is a security that includes a collection of other securities, like stocks. ETFs are cheaper to buy than individual stocks because they hold fewer management fees. Because an ETF has multiple assets, unlike one stock, they are a popular choice for investors looking to diversify their portfolio. 

Bonds

A bond is a fixed income instrument. It is a tradable asset in which companies issue units of corporate debt. Bonds are also correlated with interest rates, which means that if interest rates go up, bonds go down, and when interest rates go down, bonds go up. You can sell most bonds to other investors after purchasing them and before their maturity date. 

Mutual funds

A mutual fund is a collection of securities managed by a financial professional, and typically, you buy mutual funds through a financial institution. Mutual funds are made up of a pool of money from investors, and they consist of stocks, money market funds, bonds, and other types of assets. Although diverse, mutual funds can come with high fees, which will ultimately affect your earning potential.

What type of investment account should you open?

Now that we know what investing is and some common types of investments, it’s useful for a beginner investor to know what types of investment accounts exist. Typically, what we think is our only option for investing is to call our bank and speak with a financial advisor. However, that’s not the only option, and it can be risky to open an account without understanding all that comes with that investment.

If you open an investment account with a financial institution, it’s essential to know that most of the time, the people who will advise you where to invest your money are salespeople. Because of this, they may only be licensed to sell you certain types of mutual funds that belong to their bank, and these mutual funds will come with high management expense ratio (MER) fees.

To learn more about Canada’s investing fees, visit our post about how investment fees affect our money and precisely what most popular investment accounts charge.

Another option for investors is roboadvisors. Roboadvisors are online investment brokerages that offer low-cost portfolios that do not require any self-directed investments. They have low-cost management fees and also rebalance your investments depends on the market and as you add new contributions to your portfolio.

Lastly, if you are a more experienced investor or are confident in your abilities as an investor, you can open a self-directed portfolio using a financial institution or roboadvisor. This eliminates management fees and allows you to choose exactly where you invest your money. Self-directed portfolios are not recommended for beginner investors.

If you are new, it is never a bad idea to speak to a financial professional or fee-based financial planner to see what account option is best for you and to better understand your options as an educated consumer.

How much money do you need to start investing?

If you already feel like you’ve faced information overload at this point, it might be a good idea to start to learn how you can begin to invest. Sometimes, seeing how simple it can be will make the process feel a lot less overwhelming. 

Depending on where you invest your money, you don’t need necessarily need very much to start. Many people assume that investing isn’t accessible for regular people or low-income earners. Thanks to some newer platforms that have made investing more approachable and affordable, that’s no longer the case. 

If you choose to invest by using a roboadvisor, such as Wealthsimple, you can start with as little as $20. For Questrade, as soon as you’ve deposited $1,000, you can begin to invest your money. If you’d prefer to invest through a financial institution or with a financial advisor, your cost to start around $500. Ultimately, whichever platform or company makes the most sense for you is best. Just be sure to do your research, ask about management fees and annual fees, and seek a transparent option.

What is a good investment strategy?

Once you know what type of investment account you’d like to open, it’s a good idea to educate yourself on which account you can park your investments within. Your Registered Retirement Savings Plan (RRSP) and your Tax Free Savings Account (TFSA) are two common options. Both options are great, but there are differences between the two accounts – which you can read about here. 

The RRSP and TFSA are both tools you can use to purchase long-term investments like ETFs, individual stocks and mutual funds. If you set up an automatic and passive plan through Wealthsimple or Questrade (like myself), the only requirement is to set up weekly, bi-weekly or monthly contributions that are then invested on your behalf. Merely opening an RRSP or TFSA and putting money inside them does not mean that it is invested. You need to open an account through a brokerage or actively invest money inside of these accounts through your financial institution. Otherwise, the money will just sit there interest-free. 

As for investment strategies, an excellent place to start is by learning what your risk tolerance is. If you’ve done any investing through your workplace, you may remember taking a quiz to help you understand how comfortable you are with losing or gaining money for your future. If you are a more aggressive person and are okay with the idea of losing money, you may be comfortable with an aggressive portfolio. This means that when the market dips, your investments will also drop at a similar rate. If you are a more conservative investor, you may not want to take as much risk with your investments and portfolio. 

There is no right or wrong way to invest, but the important thing to remember is that you need to feel comfortable with whatever happens with your money and remember that it is invested for the long run. The money will dip, but it will also grow. Do your best not to touch your investments until retirement. The longer your money is invested, the more earning power you will have, and the more time your money has to grow. 

Whether you are nearing the end of this post feeling anxious or confused, if there are a few takeaways you should remember, let them be this:

1. You do not need to know everything to start investing. Find a roboadvisor you love, and put as much as you feel comfortable with into your account for your future. 

2. It’s never too late to start investing. If you think it’s too late, so why bother? You will miss out on a ton of earning potential and growth for your future self. Don’t wait any longer.

3. A little is better than nothing. Even if you can only afford to put $20/month towards your investments, continue to do it! It still counts. It still earns. 

4. What are you waiting for?! Time outside of the market is a missed opportunity. Many people think that they can not invest their money while they pay off their debt. If that’s your mindset and you are comfortable with that, it’s okay. But it’s also okay to do both. Regardless of your debt load, you will always need to retire. 

5. You cannot time the market. Trying to ‘keep up’ or ‘speculate’ is not a good idea. It is gambling. Investing is not meant to be for big wins, but instead, consistent returns. It should be boring. Please sit back, and let compound interest do its job.

If you are just starting with investing, remember that it’s okay to feel confused. Often, financial institutions prefer that we don’t know it all because then we are more comfortable consumers. Don’t be afraid to ask tough questions, do more research, and be suspicious. 

You work hard for your money, and it’s normal to want to protect your cash. One of the best things you can do for yourself and your financial future is to have that money that you work hard for go to work for you! 

The post A Guide to Investing for Beginners appeared first on Mixed Up Money.

Investing can be an intimidating task. For some, it may even feel like a gamble. Will this work out in my favour? Or, am I better off putting my money to safer use? In reality, this “gambling” reputation is far from the truth. When done right, long-term investing is a safe strategy and can be tailored to meet your unique needs, even if that’s a low-risk portfolio. Yes, low-risk portfolios exist, and you may be wanting in on them. The thing to understand with investing, however, is the risk-return relationship. 

The general rule is that the higher the risk, the higher the return. This rule stands for any single investment; however, you can tilt the formula in your favour through something called diversification. Diversification is the process of holding investments of different asset classes, geographies, and industries. Diversification within a portfolio can decrease your risk while maintaining your potential returns and is the perfect example of the saying, “don’t put all of your eggs in one basket.”

Although you can reduce your risk, it can be challenging to grow your money without some level of risk. After all, investment values are always changing, and markets may go through periods of increased volatility – and 2020 is a perfect example of this. The key to managing this volatility and ensuring you’re not gambling the stock market is by measuring your risk tolerance.

What is risk tolerance?

Like any part of the economy, investments go through periods of volatility. Volatility is not necessarily bad, as it can also lead to years of high returns. Financial planning doesn’t seek to eliminate volatility. Instead, it aims to increase your exposure during periods where you can handle it and decrease exposure during periods where you can’t — the higher your risk tolerance, the higher your resiliency to changes in returns. Your risk tolerance is continually changing, and different aspects make it up. Those aspects include financial resilience, emotional resilience, and resiliency due to the time horizon. 

When you have a high-risk tolerance, you want to invest in riskier investments such as stocks and exchange-traded funds (ETFs). These are meant to be your high-return years, and without that increased risk, you won’t have enough to withstand the periods where you need to pull-back and potentially earn less. When you have a low-risk tolerance, you want to invest in low-risk options such as bonds and money market funds. 

Generally, your investments won’t transition entirely from one to the other, but each will change your hold ratios. This is called your asset mix, or the percentage of each asset class that you own. Generally, there are three asset classes: cash & cash equivalents, fixed income, and equities. Cash & cash equivalents are nearly risk-free investments, fixed income is generally low-risk investments, and equities are medium-to-high-risk investments. When you have a low-risk tolerance, your asset mix will hold a higher percentage in cash & fixed income, and when you have a high-risk tolerance, your asset mix will maintain a higher percentage of equities. To benefit from diversification, it’s a good idea to own different asset classes at all times, even if only 10-20%. 

How do you determine your risk tolerance? 

After learning what risk tolerance is, you may be wondering about the elements that make it up. How do someone’s unique financial situation, time horizon, and emotional tendencies come into play when choosing their investments? What factor is most important, and what happens when two elements have opposite conclusions? 

#1. Your financial situation 

Your financial situation is one of the most important things to consider when looking at risk tolerance. If you don’t have an emergency fund or have very little saved with inconsistent income streams, your risk tolerance will automatically be low. Investing in stocks, mutual funds, or ETFs is only beneficial when you can park your money without touching it. Using investments as a form of a checking account is NEVER a good idea. 

#2. Your time horizon

The second thing to consider is your time horizon. Time = resilience to volatility. One year of negative returns likely won’t matter by the time you need to cash your investments. Short-term, negative market volatility has always returned and provided more for investors in subsequent years, as you can see from the historical performance of the S&P 500.  

The longest downward trending market was in the 1970s, and even then, the return for investors was -48.20%. The trend merely lasted less than two years (20.7 months to be exact). Although that may seem like a scary number if you compare that with the longest upward trending market between the 1980s and 2000, its duration was over twelve years and returned 582.15% for investors. All downward trending markets have eventually evened out. The key is having your money invested long enough to withstand them. 

Those near retirement or those saving for an upcoming big purchase will often decrease their risk as they plan on using their money within a shorter period. When looking at both components and their collective impact, in my opinion, very few situations deviate from this general formula. A good financial situation + long time horizon = high risk tolerance. 

#3. Your emotional tolerance

Emotions can play a huge role in investing, whether you realize it or not. It’s important to understand that changing your risk tolerance due to positive or negative emotions often happens, but it won’t benefit your portfolio. 

You may not know, but the emotional side of investing is a well-researched topic of psychology. It’s known as behavioural finance and looks at why individuals make the investment decisions they do, even if they may be seen as irrational. It analyzes how outside influences such as past experiences, gender, religion, socio-economic class, or education can change decision making. 

For example, men tend to be overconfident in their investing abilities *gasp*. A study by Money Crashers found that men tend to believe they can outperform the market and are less likely to seek investment advice and trade more. This overconfidence and resulting strategy caused men to underperform women by 0.4% annually, who were more likely to seek professional advice and hold their investments longer. 

That’s right, ladies, our natural tendencies to overthink and make calculated decisions actually pays off. However, our worrywart tendencies tend to hinder that calculated decision-making, leading to overly conservative investments. Without bearing that additional risk when we can handle it, we will have a more challenging time growing our money enough to meet our financial goals. 

Understanding these behavioural tendencies is essential in figuring out if they hold true in our financial lives. The more you know about them, the more you can analyze whether you’re taking the best course of financial action or potentially taking the one that plays into these irrational behaviours. Just remember that when looking at risk tolerance, your financial situation and time horizon are the main components, and you should try not to be steered in either direction by other influences potentially at play. 

There are so many other common biases within behavioural finance, but some popular ones to look out for are the self-serving bias, herd mentality, and loss aversion. When related to finance, self-serving bias believes that all positive movements in a portfolio are due to skill, and all negative activities are due to bad luck. This could lead to repeated mistakes, a willingness to take on too much risk, and an inability to listen to financial advice. 

Herd mentality tends to follow what other people are saying or doing to a damaging extent – whether through friends, family, or the news. Herd mentality is worse when you have limited information on a subject. For example, if you don’t know much about investing, but Uncle Tony is going on about how outstanding Apple stock is, and everyone at the dinner table is nodding their heads, you may be more tempted to buy Apple stock yourself. Loss aversion is an investor’s tendency to avoid losses at all costs, even if that means losing gains. Like I mentioned before, women are often victims of this, and it can be harmful to their long-term savings. 

How to calculate your risk tolerance 

You can calculate your risk tolerance through detailed answers to questions analyzing all three components that I mentioned. If you’re working with a financial advisor, risk tolerance is one of the first things discussed. If you’ve ever opened up an online brokerage account, likely you’ve had to answer similar questions. 

Although I highly recommend speaking with a professional or doing extensive research before making any conclusions, there are many online risk profile questionnaires that you can fill out to get a sense of what to expect. Here’s a questionnaire for Canadians from Vanguard. You can mentally determine each question by analyzing your financial situation, time horizon, or emotional tolerance. 

For example: 

Q. My current or future income sources are stable or unstable? (Financial situation)

Q. I plan to begin withdrawing from my investments in how many years? (Time horizon)

Q. I would invest in a mutual fund based only on a brief conversation with a friend, coworker or relative? (Emotional tolerance, and more explicitly analyzing your herd mentality bias)

Investing is not gambling. With the uneasiness that’s currently taking place in the markets, maybe it can feel that way. Understanding your risk tolerance is an invaluable tool that can turn market volatility into opportunity. Sometimes it may seem like investing is a game of emotions, getting in one day when you’re feeling adventurous and getting out when your nerves are high. I hope that I was able to highlight how that shouldn’t be the case. Investing should be long-term, carefully analyzed, and sans emotions. Your risk tolerance is your guide, and you can tune out any outside noise with a good pair of headphones. 

The post What is Your Risk Tolerance as an Investor? appeared first on Mixed Up Money.

More and more research and statistics are coming out in favour of index-investing. You may have heard the term or its similar terminologies such as Exchange-Traded Funds (ETFs), or passive investing. 

If you haven’t, index-investing is a no-frill, cut-to-the-chase form of investing. It’s a strategy that seeks to replicate market returns, not beat them. This idea may confuse you and likely goes against your previous intuitions about investing. Even though you aren’t beating the market with index-investing, you aren’t trailing the market either. If you didn’t know, beating the market is challenging (and not recommended). 

Wall St. and Bay St. money managers spend hours and thousands of dollars on research attempting to beat the market, and often still come up short. This is something you wouldn’t realize from watching popular finance movies and television such as The Big Short, The Wolf of Wall Street, or Billions. In these shows, the money managers anticipate market movements and move their money accordingly. Either by anticipating a market crash and exiting the market or investing in worthless stocks hoping to quadruple their money in a short amount of time. This anticipation is what we call an ‘active’ strategy and is the complete opposite of index-investing or a passive approach.

With index-investing, there is no anticipation whatsoever. When you have money to invest, you enter the market, earn the return of the market, and exit when you need to use said money. Straightforward and clear-cut. In addition to the ease and lack of emotional attachment involved, index-investing is also cheap. Crazy cheap when compared to other strategies. 

How do you start index-investing?

You can achieve index-investing through purchasing ETFs on a stock exchange. When I mentioned that passive strategies replicate ‘market returns,’ they imitate or copy the investments of a particular index such as the S&P 500 in the United States. This index includes 500 of the U.S’s largest companies and a relatively comprehensive picture of the market. The index that each ETF attempts to replicate is called their ‘benchmark’. In addition to the S&P 500, there are hundreds of other indices that include companies and countries from all over the world. 

If you wanted to achieve the same returns as the U.S. market, you could purchase an ETF that has the S&P 500 as its benchmark. Three ETFs with these characteristics that are available to purchase on the Toronto Stock Exchange (TSX) are the SPDR® S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the Vanguard S&P 500 ETF (VOO). The cost to purchase and hold these investments is called the ‘Management Expense Ratio (MER)’ and represents a percentage of the amount of money you have invested. The MER on these three ETFs is 0.09%, 0.04% and 0.04%. In comparison, actively managed funds may have expense ratios upward of 2.0%.

Where can you find good resources?

It’s essential to understand the basic terminology and analysis to make a confident decision when investing. Online resources will make your research much more manageable. Since ETFs trade on a stock exchange, most stock tracking websites such as Yahoo Finance, Morningstar, or The Motley Fool will also include ETF information. The company that holds your brokerage account, such as TD Bank or Questrade, will also have information on ETFs for you to use. 

When analyzing an ETF, you can find important information on an up-to-date fact sheet. A fact sheet is a concise, four-page summary of the fund. In Canada, new buyers must receive fact sheets within two days of purchase; however, you can also find fact sheets on the issuer’s website before purchase. You can find a sample fact sheet here. While I was trying to learn more about ETFs, these fact sheets were confusing and made the experience more intimidating. What did all of these numbers, abbreviations and graphs mean? And I’ve been reading financial documents for a while.

After doing the decoding for myself, I felt that these terms were a lot less scary than they initially seemed. I felt that other potential investors would feel the same if someone broke it down in plain English. From my research as a new ETF investor, below are the things that I think are most important and least important when doing your analysis. 

What are the most factors to consider in an index-fund?

1. The Underlying Index or Benchmark

Like I previously mentioned, all ETFs have an underlying index. This is a critical factor in choosing an ETF. Often, a single index will have multiple ETFs, and in that case, you can differentiate them to some extent (minor fee differences, additional liquidity, etc.). However, you will likely achieve similar results. Comparing ETFs based on cost doesn’t mean anything if one ETF follows small companies in Brazil, and the other follows the largest companies in the U.S. 

2. Liquidity

Liquidity means your ability to buy and sell an investment quickly and without a significant change to the price. Another way of thinking about liquidity is the number of buyers and sellers in the market. When there is a high amount of liquidity, there are many buyers and sellers, and trading happens smoothly. On the other hand, when there is low liquidity, you’ll either have to settle on timeliness or price. Generally, the higher the liquidity, the less risky the investment.

With any investment, including ETFs, you’ll want to analyze liquidity. An easy way to do this is by looking at the ‘spread.’ The spread is the difference between the bid and ask prices of an investment. The bid is the highest price a buyer is willing to buy, and the ask is the lowest price that a seller is willing to sell. The bid and ask prices can be found on any stock tracking site such as Yahoo Finance. The smaller the spread, the higher the liquidity. The dollar value may not appear significant, but it is. A small spread could be a few cents, versus a large spread that could be tens of cents.

3. Tracking Error

Tracking error refers to the difference between the return of the fund’s benchmark and that of its own. Since you invest in ETFs to earn the market return, you want to make sure that that’s what you’re getting. The process of replicating the market return has to do with the management team and the specific index. A large tracking error could indicate poorly executed trades on the management team’s part, or it could result from following a very obscure index. 

If you have chosen an index to follow, comparing the various ETF options based on tracking error is an excellent way to narrow down your search. You can see the tracking error on a fund fact sheet. They will often disclose performance numbers for both your ETF and the benchmark it follows over various periods. 

4. Management Expense Ratio (MER)

The price of an ETF is disclosed in the ‘Management Expense Ratio’ or MER on the fact sheet. This is the annual fee, much like a subscription fee, to hold the ETF. Most passive ETFs have MERs under 1%, and some can be just a few basis points (one-hundredth of a percent). Fees are important, but they are not the most important thing to consider. In my opinion, analyzing ETFs based on fees comes after all other things have been taken into consideration. When all else is equal, choose the ETF based on the lowest cost.

What are the least important index-fund considerations?

1. Market Price 

The market price is the price that investors can buy or sell an ETF on an exchange. With most investments, you can’t compare them based on price. If stock X is $50 and stock Y is $100, that doesn’t mean that stock X is a good deal and stock Y is not. That number has nothing to do with future performance and should be disregarded. 

2. Past Performance

With any investment, you should never expect past performance to lead to future performance. I realize that analyzing past performance seems intuitive, but a passive strategy is about following the market, not attempting to beat it. Research on future performance based on past performance is also dismal. The few active managers that beat the market each period never continue to do so. Don’t look too heavily into the performance chart on any fund fact sheet.

3. Fund Launch Date

The fund fact sheet will disclose when an ETF was launched. It’s worth noting that age doesn’t equal increased experience, nor does a recent launch date mean increased flexibility or innovation. I would be wary of a brand-new ETF only because there is less data to analyze; however, once a fund has been in existence for a few years, there isn’t a significant difference based on the date it launched. 

New financial technology is making it easier than ever for individuals to invest, and ETFs are one of the easiest ways to do so. This doesn’t, however, diminish the due diligence required to make any form of investment. Investing for yourself may not be right for you, so I highly recommend doing your research and potentially speaking with a licensed professional. This article is simply for information sake and to further your understanding of a topic that I feel is getting some serious spotlight right now. 

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The year I started investing my money, I chose to go the route of a Robo-advisor through the Canadian-founded company, Wealthsimple. It seemed like the least overwhelming option, and it meant I could focus on growing my net worth and retirement fund without actively managing any trades. Talk about the least intimidating way to jump in with both feet. 

It was going great. My money was growing, and I didn’t have to check in to feel confident that things were working out. It wasn’t until a few years into investing that I started to get more curious about where my money was going. 

After all, if there are pros to investing using a Robo-advisor, there have to be cons — right? It was something I had never thought about before. As I started to read about Robo-advisors’ unknowns, I found some information on Socially Responsible Investing (SRI). As a hands-off investor, I hadn’t heard too much about SRI. So, I began to read.

What is Socially Responsible Investing (SRI)?

Similar to any investment, SRI is an investment you make into mutual funds or exchange-traded funds (ETF). The difference, though, is that SRI hosts a theme of socially conscious investments. In other words, the investment may mimic our current political and social climate. 

There are multiple types of SRI funds. The most common are traditional SRI funds. Instead of investing in tobacco companies or corporate giants that don’t always do the right thing, your investments instead favour companies that support sustainability, clean energy or social justice. 

Another is called Environment, Social, and Governance Funds (ERG) that focuses on the exclusion of companies that do not have ethical practices on top of having unethical products. Lastly, you can also invest in Impact Funds. Impact Funds focus on both ethics and monetary gain equally. 

How can you take advantage of SRI?

The idea of SRI has recently begun to grow, and companies like Wealthsimple and Questrade took notice. In March 2016, Wealthsimple launched its SRI option, and Questrade followed suit in November 2018. Now, there are many investment vehicles or products to help investors gain exposure to multiple sectors. 

But, how can you get involved or make the change? If you have a financial advisor, you can ask them to change to see more SRI in your portfolio. If you use a Robo-advisor, you can easily make the transition into your account. But, if you are self-directed with your investments, you will likely have to do more research and spend more time reviewing the companies you select for your portfolio. 

A great way to do this is to consider your values and determine whether or not a company abides by the same guidelines you would set if you owned the company. Look at their leadership board. If diversity matters and they don’t emulate this value, it likely isn’t a good fit for you. It might take some digging, but if it means something to you, it’s always worth the look.

What are the pros and cons of SRI?

There are two goals when it comes to SRI. Ideally, you’d like to create a positive social impact on our society. And of course, because we are talking about investing, it’s evident that you’d want to see some financial gain from this investment. Unfortunately, these two goals don’t always blend well together. 

Therefore, you have to assess the outlook versus the fund’s value and consider whether or not this company is worth the investment. It’s similar to many assets, but the difficulty comes with realizing that there are far fewer SRI options than the latter. Overall, it’s essential to review SRI’s pros and cons to see whether this decision is right for you and your portfolio.

It’s frustrating to exist in a system we cannot change by ourselves. Instead, we have to do what we can to make a positive impact, while still using that same system to finance our futures. For me, investing isn’t a game or a way to make more fun money. Instead, it’s about making enough cash for the future, so that I can choose how I spend my time. 

Freedom is an amazing feeling – and a solid investment account can help solidify that goal. The question is, what kind of investments are the right fit for you? Truthfully, the only way to determine the answer to whether SRI works for you is to consider your personal values.

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