There are thousands of financial products for Canadian investors to choose from.

From stocks, bonds and mutual funds, to cryptocurrencies and socially responsible investments designed to help make the world a better place, understanding which are right for you can take years of study and a lot of emotional highs and lows.

All investment products come with some form of risk. Understanding the trade off between risk and reward and your own risk tolerance is the key to ensuring your investment portfolio meets your long-term financial objectives, while still allowing you to sleep at night.

About Risk

Contrary to how most people think about risk (i.e. “will this investment lose money?”), when financial professionals speak about risk, they are primarily referring to volatility in returns. For example, if an investment goes up slow and steady every year, it is considered low risk. However, if an investment goes up significantly one year and then drops the next, it is considered high risk. Even if it makes more money overall than the less risky investment.

As a general rule of thumb, the more risk, the greater the reward. Depending on the product however, this rule can take years to play out, sometimes over 20+ years or more. Over the short and medium term (1-10+ years), investors can be left questioning whether they made the right decision and seconding guess themselves, potentially leading to bad financial decisions.

To get an idea of how you would feel about different investment products, check out the image below and see if you could stomach these types of returns in any given year.

With this in mind, let’s review an compare the most common investments available to Canadian investors.

Types of Investment Products

GICs (guaranteed investment certificates) are Canadian investments that offer a guaranteed rate of return over a fixed rate of time and commonly issued by banks and trust companies. They typically offer low rates of return, but your initial principal back is returned back to you at the end of the term. Many other money market instruments work in a similar fashion. GICs can also be offered with returns tied to “market growth” with the returns tied to an underlying stock market, but with principal guaranteed.

• The Good: Very safe, conservative and readily available at nearby bank branches.
• The Bad: Low rates of return, and non-cashable GICs don’t allow you to access the principal in an emergency.
• Risk Level: Low – generally considered the safest investments you can buy. The biggest risk to GICs is that inflation may eat into your return.

Mutual funds are portfolios of aggregated investments. Mutual funds come in many forms and can be comprised of stocks, bonds, domestic, foreign equities, and/or focused on a particular investment theme (eg. socially responsible funds ) as well as a myriad of alternative investments as well.

They are extremely popular with financial advisors as they are professionally managed and provide access to markets outside of North America. Because they contain a collection of financial securities, such as numerous stocks and bonds, they provide more diversification than holding a specific security, which can potentially reduce volatility.

Many have built-in sales and “trailer” fees, which compensate advisors for buying them and servicing the clients which hold them.

Most are “actively” managed, meaning a fund manager selects which companies to buy and sell within the portfolio, although passively managed index funds are also available.

Mutual funds charge fees referred to as MERs (Management Expense Ratios), which compensate the manager for managing the fund, the advisor for servicing and selling the fund, cover operating expenses, as well as taxes. Equity funds also incur a Trading Expense Ratio (TER) charged to the fund as well.

• The Good: Easy to access with low minimums and convenient contribution plans. There are thousands of mutual funds, covering a spectrum of market categories across domestic and global markets.
• The Bad: Fees (MERs) on some mutual funds are higher than some alternative investments. This is partly due to built in advisor compensation and the active management. There is an ongoing debate on whether active can outperform passive (index) management over the long term.
• Risk Level: Range from mid-low to high depending on the fund

Exchange-traded funds (ETFs) are baskets of securities that track an underlying index, sector, commodity, or other asset, and can be bought and sold on a stock exchange. Unlike mutual funds, most are passive and not actively managed by portfolio managers, although there are some semi-active and active ETFs. They can be purchased and sold on a stock exchange like a stock, which means they can only be purchased through a full service broker on online brokerage.

• The Good: Low cost with broad diversification, covering a spectrum of market categories across domestic and global markets. There are strong arguments that passive management outperforms active management over the long term.
• The Bad: Only accessible through through full service brokerage and discount.
• Risk Level: Range from mid-low to high depending on the category

Stocks (also known as equities) are securities that represent the ownership of a fraction of a corporation. Predominately sold on exchanges all over the world, prices of individual stocks can be volatile, depending on the company and the current trends within the market.

Stocks can range from speculative, such as over the counter and less established growth companies, to established dividend paying firms. There are various industries/sectors in which stocks are categorized and these can fall in and out of favour, depending on where we are in the economic cycle.

Historically over time, many stock indexes (collections of popular stocks organized by segments) have outperformed other asset classes making them the preferred asset class over the long term. Over the short term however, stocks (and indexes) can be volatile and under-perform and lose money.

The Good: Individual stocks are easily accessible through discount advisors or full-service brokers, stocks are available in all sectors across the economy, in both domestic and global markets. Buying the right stock and holding for the long term can make you rich.

The Bad: Only accessible through through full service brokerage and discount. Buying the wrong stock can potentially lose all of your money.

Risk Level: Range from mid to very high depending on the firm.

Bonds are fixed income instruments that represents a loan made by an investor to a borrower. Owners of bonds are debtholders, or creditors, of the issuer. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations and carry an interest rate which gets paid to the investor, with the principal being repaid at the end of term. Bonds are priced relative to the current interest rate, rate on the bond and the remaining term, as well as the security of the issuer. There are numerous types of bonds, with difference types of terms , some tied to inflation or current rates of return.

Bonds prices are correlated to interest rates. As interest rates fall, bond prices will rise and vice-versa. Bonds are safer than stocks, but they offer a lower return. As a result, when stocks go up in value, bonds generally go down.

The Good: A variety of low to higher risk options from government to small companies, with rates reflected accordingly. Low cost with broad diversification, covering a spectrum of market categories across domestic and global markets. Used for diversification purposes within portfolios.

The Bad: Individual bonds are generally only accessible generally through through full service brokerage.

Risk Level: Range from mid-low to high depending on the category.

Managed solutions (or “Wrap” products) are pre-built portfolios, comprised of various mixes of stocks, bonds and other asset class mutual funds, although more and more ETFs are now being added to the mix. Most of these solutions offer four to five portfolio options along the risk spectrum (eg. conservative, balanced, growth, etc), with an ever-increasing allocation to equities and other alternative asset classes. These turn-key solutions are typically sold to investors once they have completed a risk assessment which determines which portfolio is the most appropriate.

They are extremely popular as they provide diversification across asset classes and geography, as well as oversight over the overarching asset allocation mix. The funds/ETFs that comprise them can be built using all proprietary (“prop”) product from the firm, or may be comprised of some outside investment management. Also popular with firms as they provide a one ticket solution that helps them capture a bigger share of client’s wallets. They also they don’t require advisors to spend time performing market research, which should mean more time dedicated to client servicing.

Separately Managed Accounts (SMA’s) may also fall into this category, but offer a slightly more sophisticated offering with access to Institutional style investing, some customization, additional pricing options for HNW investors, and more in-depth reporting.

• The Good: Simple solutions that are appropriate for a large part of the population, providing diversification and access to a broad range of markets and asset classes domestically and abroad.
• The Bad: Not customizable – accessing specific stocks, other asset classes has to be done outside of these products. Fees typically include a trailer for client servicing, so ensure this is being done. There are cheaper ETF/passive portfolio alternatives, available through discount.
• Risk Level: Typically, managed solutions offer a suite of portfolios that cross the risk spectrum. Investing in the market always carries some risk, however these type of solutions provide an effective way to mitigate it.

From an investment perspective gold is often thought of a safe haven, when markets are volatile or when risks of inflation are high. In reality, gold prices are more likely to move with positive “real” inflation (when inflation minus the interest rate is positive). Not typically contained in most portfolios, investors can purchase gold bullion (the actual yellow metal, in coin or bar form), from a precious metals dealer or, in some cases, from a bank or brokerage.

Investors interested in a more liquid and low-cost entry into the gold market might instead consider mutual funds and or ETFs that replicate the movements of the commodity. Many gold funds are actually comprised of gold mining firms and don’t always move in step with the price of gold.

• The Good: Gold can be used to help diversify a portfolio and protect investors from real inflation
• The Bad: Gold prices sometimes take years to move and over the long term gold has under-performed other assets classes such as stocks and bonds
• The Risks: Gold can under-perform, and stay in a certain price band for years.

Crypto-currencies such as Bitcoin or Ethereum are digital currencies in which transactions are verified and records maintained by a decentralized system of growing lists, called blocks (blockchain) using cryptography (the science of hiding information), rather than by a centralized authority.

As they are not issued by central banks, their value is difficult to influence, however they are prone to speculation. While initially difficult to purchase use to transact (aside from online), there is an increased interest in crypto-currencies and new ETFs have been launched to provide more investors with greater access.

• The Good: Trendy and digitally advanced, there is continued discussion about how these types of currencies can be applied in the traditional marketplace. Wild price swings provides opportunity for large gains as well as large losses.
• The Bad: Trickier to acquire than traditional investments and long term prospects for any one currency are uncertain.
• The Risks: As they are primarily driven by supply and demand, price volatility is extremely high as is the potential for large losses.