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Planning Your Retirement


Investment Vehicles

 

An Investment Vehicle you choose for your retirement plan can play a very important role in your retirement plan. A few things you should consider before choosing an investment vehicle are safety, capital preservation, growth, and taxes.


If I want 100% safety what are my options?
If you want a completly safe investment vehicle then GIC (Guaranteed investment certificate) is the only option. In this low interest rate environment, the growth potential is very low, and your capital can lose the purchase power over a long term as returns do not even beat inflation.


What is the most important thing to consider when I am choosing an investment vehicle?
In the investment world the most important parameter is when your money will be doubled. The rule of 72 is a very widely used formula to guage the performance of investment. If you divide the number 72 by rate of return will give you the number of years investment will be doubled.


How many years will it take to double my money in GIC?
If your GIC is offering 1% rate of return it will take 72 years for your money to double. If your GIC is offering 2% it will take 36 years to double your money.


How much time normally will take to double my money in bonds?
In this low interest rate environment bond yields have been very low. The rate of return on bonds have been around 4% in the last 10-15 years. Therefore, it will take around 18 years to double your money in bonds.


Should I consider real estate as an investment vehicle for my retirement?
Real estate has been giving excellent returns for the last 20 years in Canada. The other two advantages in real estate are
1) It is a leveraged investment, so you magnify your return.
2) It generates rental income and therefore it can generate around 4% yield.


What are the disadvantages of investing in real estate?
Real estate is a sector, and every sector has a risk associated with it. Sector investing is very risky in the investment world. It becomes more riskier as it is a leveraged investment. Any downward movement in real estate prices can wipe out the capital significantly. Also, from tax stand point real estate is not a good option. You must realise the gains in one single tax year.


Should I consider investing in stocks?
Investing in stocks requires a lot of expertise and research. As a retail investor you have very limited resources to do that. You might lose your capital overnight if you made a bad choice in equity selection.

 

Should I consider investing in mutual funds?
Mutual funds are very common investment vehicles for Canadians. Canadians like mutual funds because the possibility of doubling the money is higher in a relatively shorter period. Historically, good mutual funds have performed around 8% rate of return which has given the clients the opportunity to double the money in 9 years. Which is far shorter period than GIC’s and bonds.


Are the returns in mutual funds guaranteed?
No, the return is not guaranteed in mutual funds. The only investment vehicle that can guarantee a return is GIC that too for a specific period. After that period GIC return will depend on the interest rate at that time.

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