The key to successful investing is having a well-diversified portfolio because a variety of investments will help you manage volatility.
A portfolio is often made up of three main investment categories: cash, stocks, and bonds. The percentage you allocate to each depends on your risk tolerance. If you’re looking for growth, then you’ll want to own more stocks. But if you’re afraid of taking a lot of risk, then you’re probably better off taking a conservative approach to investing by allocating more of your portfolio towards cash and bonds.
Here are some options that can make your portfolio more diversified.
High-interest savings accounts
A high-interest savings account will provide you with a guaranteed rate of return. In the current low-interest rate environment, you could earn anywhere between about 1% and 1.8%, depending upon which financial institution you choose. This is considered a cash investment.
Like a high-interest savings account, GICs provide you with a guaranteed rate of return. The minimum investment is often $500. The rate of return will be slightly bigger than a high-interest savings account because your money is locked in for a certain period of time—usually between one and five years. This is also considered a cash investment.
Stocks (also called equities) are an investment in which you buy a piece of a company. When the company does well, the price of the stock usually also rises. Stocks are a high-growth investment and produce very good returns when the economy is strong. But when the economy is weak, stocks tend to underperform cash and bonds. They’re also not for the faint of heart because they’re much more volatile than other types of investments and prices fluctuate on a daily basis. There’s no minimum investment and you can buy or sell stocks at any time but you need to pay a commission each time you make a transaction.
Bonds (also called fixed income) are an investment in which you buy debt belonging to a company or government. Bonds are issued in different term lengths (such as five, 10, and 30 years). A bond will usually pay you interest twice a year and you’ll receive your initial investment when the bond matures. Like stocks, bonds can be sold at any time. But unlike stocks, prices don’t fluctuate as much and investors often buy bonds when they want a more stable investment. Bonds usually a minimum investment of $5,000.
A mutual fund will invest in cash, stocks, or bonds. The good thing about mutual funds is you will often only need to buy a few to get access to different types of investments. Mutual funds usually require a minimum investment of $500.
There’s a new investment opportunity for Canadian called peer-to-peer lending. Investors can currently get a return of anywhere between 6% to 15% annually over a period of between six months and five years. Unlike a bond, both the interest payments and principal are paid back on a monthly basis. You can choose what type of business you want to invest in and also help small businesses get off the ground. While you can’t sell your loan at any time, some businesses may pay back the loan early. The minimum investment is just $50.
If you want to be a successful investor, you should have a variety of investments. Having a combination of the investments described above will help you diversify your portfolio.