We all have goals. Take a minute to think about what your goals are. Usually, they are likely to be centered around what kind of lifestyle you want to have for you and your family over a certain period of time: your lifetime, at least, and perhaps the lifetimes of your children and grandchildren.
In order to make many of those goals happen, we are going to need some sort of financial freedom, where we are no longer dependent on someone else to provide us with our livelihood (i.e. an employer).
The standard way of getting to that financial freedom point is to build wealth. Save, invest, minimize the taxes that you have to pay and grow your wealth. Sounds so simple, right? Perhaps not so much when you throw all the uncertainties into the mix.
It is the uncertainties that create risk.
What is at risk, in the end, is whether or not we will be able to achieve our goals.
If we save our money for our future needs (goals) and stick it in a GIC at 1% (before taxes and costs eat up anywhere from 1/4 to 1/2 of the interest) and the annual increase in our cost of living is 2-2.5%, then the value of our savings, over time, will be eroding at an annual rate of somewhere between 1-2%. Friends that is not what your local bank advisor might call “safe”: your future purchasing power eroding and your goals fading.
OK, point made, we need to find alternative ways to get growth in our money. So we turn to the world of investing to find assets that will help us get growth, better than that which is available in a “safe” bank GIC.
Just how do we do that? We either buy assets that have growth potential (for capital appreciation), we buy assets that will pay us income, or we put together a portfolio with a combination of both.
That brings another layer of risk: we are going to be now dependent on 1) prices for some of the assets that we have purchased going up 2) that the income that some produce to be continuous and as tax efficient as possible. Remember that interest income is taxable at your marginal rate. Dividend income is taxed more favourably (at close to half of your marginal rate) as are capital gains (at the moment). Want to know more about your marginal tax rate… go here: CRA(link)