Introduction
In our first guide, we explored essential personal finance concepts for Canadians. Now it’s time to take the next step into the world of investing. Whether you’re building a retirement portfolio, saving for a home, or simply aiming to grow your wealth, understanding these terms will help you make smarter, more informed investment decisions.
1. Exchange-Traded Fund (ETF)
An ETF is a type of investment fund that holds a basket of securities, such as stocks or bonds, and trades on a stock exchange like a regular stock.
Why it matters:
- Often lower cost than mutual funds.
- Easy diversification in a single purchase.
- Ideal for both beginner and experienced investors.
Example: Vanguard FTSE Canada All Cap Index ETF (VCN) gives exposure to hundreds of Canadian companies in one trade.
2. Index Fund
An index fund is a fund (ETF or mutual fund) designed to track the performance of a specific market index, such as the S&P/TSX Composite or S&P 500.
Why it matters:
- Passively managed, meaning lower fees.
- Historically outperforms most actively managed funds over the long term.
Example: An index fund tracking the S&P 500 invests in the 500 largest U.S. companies in proportion to their market value.
3. Management Expense Ratio (MER)
The MER represents the annual cost of managing a fund, expressed as a percentage of your investment.
Why it matters:
- A 0.25% MER vs. a 2% MER can mean tens of thousands of dollars difference in returns over decades.
- Lower MER = more money stays invested and compounds.
- Example: If you invest $10,000 in a fund with a 0.20% MER, you pay $20 a year in fees, whether the fund goes up or down. Compare that to a 2% MER, which would cost $200 a year.
4. Low-Cost Investing
Low-cost investing focuses on minimizing fees like MERs, trading commissions, and account costs to maximize net returns.
Why it matters:
- Fees compound negatively over time just like returns compound positively.
- Often achieved through ETFs, discount brokerages, and avoiding high-fee mutual funds.
5. Asset Allocation
Asset allocation is the mix of different asset classes such as stocks, bonds, and cash in your portfolio.
Why it matters:
- It’s one of the biggest drivers of long-term returns and risk level.
- A younger investor might hold 100% or 80% stocks / 20% bonds, while a retiree might reverse that for stability.
6. Diversification
Diversification spreads your investments across different asset classes, sectors, and geographies to reduce risk.
Why it matters:
- Reduces the impact of a single investment’s poor performance.
- Example: Holding Canadian, U.S., and international ETFs instead of just Canadian stocks.
7. Rebalancing
Rebalancing is the process of adjusting your portfolio back to your target asset allocation after market movements cause drift.
Why it matters:
- Maintains your intended risk level.
- Example: If stocks outperform and rise from 60% to 70% of your portfolio, you sell some stocks and buy bonds to return to 60/40.
8. Dollar-Cost Averaging (DCA)
DCA means investing a fixed amount of money at regular intervals regardless of market conditions.
Why it matters:
- Smooths out the impact of market volatility.
- Reduces the risk of investing a lump sum at a market peak.
Pro Tip: Always invest when you have money available rather than waiting for the “perfect” moment. Trying to time the market often results in missing the best days, which can significantly reduce long-term returns.
Example: You invest $500 on the first of every month. Sometimes you buy at a high, sometimes at a low, over time, you smooth out your purchase price. When you receive extra money like a work bonus or a tax refund, you invest the full amount right away instead of spreading it out, so it starts compounding sooner.
9. Risk Tolerance
Risk tolerance is your ability and willingness to endure declines in your portfolio’s value.
Why it matters:
- Guides your asset allocation and investment choices.
- Determined by factors like investment goals, time horizon, and emotional comfort with volatility.
This questionnaire can help you learn more about your investor profile: https://www.ciro.ca/office-investor/understanding-risk/investor-questionnaire
10. Tax-Efficient Investing
Placing the right investments in the right accounts to keep more after-tax money.
Example:
- Canadian dividend ETFs in a taxable account = lower tax thanks to the dividend tax credit.
- U.S. ETFs in an RRSP = no U.S. withholding tax on dividends.
- Foreign stocks in a non-registered account = can claim the foreign tax credit.
- Same foreign stocks in a TFSA = you lose the foreign tax credit and can’t recover withholding taxes.
Note: For a passive investor using an all-in-one ETF (like a balanced or growth ETF), you generally don’t need to worry about these tax placement rules, just invest in the same ETF across all your accounts and focus on consistency.
Conclusion
Understanding these 10 investing-focused terms will help you move from simply “saving” to actively “building wealth.” With tools like ETFs, proper asset allocation, and a focus on low costs, you can create a portfolio that works harder for you, and stays resilient in the face of market ups and downs.
FAQs
What’s better for Canadians: ETFs or mutual funds?
ETFs often have lower MERs and more flexibility, but mutual funds can be simpler for automatic contributions. With modern brokerages like Wealthsimple, you can set up automated ETF purchases, even fractional shares, for all-in-one ETFs like XEQT or VGRO, making them just as convenient as mutual funds.
Is rebalancing really necessary?
Yes. Without rebalancing, your portfolio’s risk level can drift significantly over time as certain investments grow faster than others. However, if you use an all-in-one ETF, rebalancing is handled for you automatically inside the fund. If your goals or risk tolerance change, you simply sell your current all-in-one ETF and buy the one that better matches your new target risk profile.
Can I start investing with $100?
Yes, with commission-free ETFs or index mutual funds, small amounts can still grow significantly over decades.
How often should I check my asset allocation?
Once or twice a year is enough for most investors.
