Where to find long-term investment ideas in Canada - MoneyTalk (2024)

Legendary investor Warren Buffett famously avoids companies he doesn’t understand. He took a ton of heat in the late 1990s for passing on the original dot-com frenzy, only to be proven right when it came crashing down in 2000. Where did he put his money instead? The soda can he’s so often photographed with is a decent clue. It is not unusual for Buffett to look to his own spending preferences when investing.

Long-term investors could consider heeding Buffett’s advice of investing in what they know, versus chasing big gains in companies with a business model that’s hard to quantify. For example, it can be natural for Canadians to feel more familiar with homegrown companies than foreign ones. While our economy may not be huge on a global stage, it is stable and increasingly made up of companies that do business internationally. If you’re seeking long-term investments, looking at Canada can be a natural place to start.

Investment ideas in Canada for long-term benefits

Canada offers investors access to a range of asset classes, including equities, fixed income, cash investments and alternative investments, such as real estate. Derivatives, private equity investments, commodities and cryptocurrencies are investment vehicles that are also available to Canadian investors.

When it comes to investing in Canada specifically, there are fewer stocks to choose from than there are in the U.S. In fact, our market is concentrated in three main sectors: financials (banks, insurance companies), energy (oil and gas operations) and materials (precious metals and chemicals). While there are businesses in other sectors to choose from, such as technology, health care and consumer staples, your options can be limited. If you want a truly diversified portfolio, you could consider owning companies from other countries in sectors that are underrepresented in Canada.

Here are some of the popular assets available in Canada:

Stocks:

Equities, as they’re also known, get you an ownership stake — or shares — in the company that issued them. That doesn’t mean you can march into a company’s building and claim a seat in the corner office, but you do get to benefit from profit and earnings growth. If the company does well and the share price increases, the value of your holdings in the business will rise. (The opposite is also true, however.) You can buy stocks through a brokerage account such as a TD Direct Investing account or TD Easy Trade account.

Mutual funds and ETFs:

There are other ways to add equity exposure to your portfolio. Besides buying company shares, you can invest in mutual funds mutual funds and Exchange-Traded Funds (ETFs), both of which pool your investments across multiple stocks.

You can invest actively or passively. Active management involves investing your money with funds run by professional money managers. In return for a fee (that the investor pays), the manager chooses which companies to invest in. Passive funds are typically less expensive, because building this type of investment vehicle does not require asset mix decisions. Instead, index funds or index ETFs aim to replicate the performance of a specific index such as the S&P/TSX Composite Index.

Fixed income:

This category includes bonds, treasury bills and guaranteed investment certificates (GICs). Fixed income investments are issued by both companies and governments. Basically, you’re loaning money to the company or government for a set period to, say, invest in a new project or build new roads. In exchange for your cash, you get interest payments. When the term of the loan is up, you’ll get back your principal too. Bonds can also be traded with other investors at a profit (or a loss).

GICs:

There are few sure things in investing, but Guaranteed Investment Certificates (GICs) are the exception. These investments are issued by banks. They’re a bit of a cross between a savings account and a bond. You give money to the financial institution in exchange for interest. Unlike a savings account, though, you must keep your money in the GIC for a set period. If you need the cash sooner, you may have to pay a penalty.

Cash:

Investors can also earn interest on cash holdings with money market accounts and certificates of deposit.

Commodities:

Canada is rich in natural resources, such as oil, natural gas, gold, silver, potash and lumber, among other commodities, many of which can be bought, sold and traded in various ways.

Real estate:

With Real Estate Investment Trusts (REITs) you can invest in properties like office buildings or warehouses. REITs have long been a popular investment in Canada because they give regular investors a way into the commercial and industrial space. They’re like mutual funds for real estate investments, chosen by professional investors. You buy units in the REIT, which spreads your investment across multiple properties. Unlike selling an actual building, REITs are easy to buy and sell because they trade on regular stock exchanges.

Pros and cons of long-term investment in Canada

Pros

• Invest in what you know: Here’s where Buffett’s invest-in-what-you-know mantra comes in handy. People in Canada have the opportunity to understand the operation of Canadian companies best. We shop at publicly traded grocery stores and bank with publicly traded financial institutions. Whether we’re attuned to earnings reports or not, if the coffee from a publicly traded coffee shop starts tasting like water, we can tell right away that something may be amiss. While you’ll need to do more research into whether a company has good growth prospects or not, having an opportunity to interact with the business itself could help you make better investment decisions.
• Take advantage of compound growth: While not specific to Canada, long-term investing lets you experience the power of compound growth. Say you buy 100 shares of a stock, each priced at $100. After a year, the stock value rises by 3%, to $103. If that happens again the next year, then your stock is worth $106.09 ($103 x 3%). After just two years of 3% growth, a single share would be worth $106.09.

Cons

• Canada is small on the global stage: Canada represents less than 2% of the global economy. For all the benefits of long-term Canadian investing, remember that there’s a great big world out there full of investment opportunities. Geographic diversification can be just as valuable as asset class diversification, for example. Investment professionals refer to something called home-country bias, which is the tendency among investors to feel more comfortable investing close to home. You’ll likely want to hold more than 2% of your assets in domestic operations and securities, but like anything else, it can be important to strike a balance.

• A concentrated market: A lot of Canadian companies are in commodity sectors like oil and gas. These industries can be volatile and rise and fall in value based on global demand for their products. As a result, mutual fund and ETF investors focused in these sectors may find themselves exposed to fluctuations.

What to consider when looking for long-term gains

• Can you sleep at night? If your investments cause you anxiety, you could consider adjusting your risk tolerance levels and buying more conservative investments.
• Are you properly diversified? Having exposure to multiple asset classes and geographies so that you’re not placing too big a bet on one or two investment categories is one way to manage volatility. You can also build a diversified portfolio yourself by buying a variety of funds or ETFs in different areas of the market or stocks in different industries and locales.
• Do you know what you’ve bought? No matter the type of investment, do your research.

Some things to keep in mind

Don’t forget about saving

While you want your money to grow, you also need to set aside some funds in a savings account for an emergency or other short-term needs. Ideally, you don’t want to have to sell investments when you need extra cash to, say, repair a roof or support yourself for a few months if you lose a job.

Creating a budget and doing your best to stick to it is one way to highlight when you may be spending too much or not earning enough to support your lifestyle.

Beware of inflation

While Canada has gone through periods of nearly no inflation and conversely years of high inflation, the price of goods and services tends to rise by 1% to 3% every year. You’ll want to make sure your investment returns exceed that figure over the long term, otherwise your money won’t go nearly as far as you might think.

Here’s an example: Say you earmarked $10,000 for travel in your retirement every year. In today’s dollars, that might seem like a nice vacation, but add 2.2% inflation every year for the next 25 years and those same trips will cost $17,297. If you put money in the market to pay for that vacation, the cash would have to grow at the rate of inflation. In other words, whatever you’re earning on your money, make sure it’s more than what prices are rising by.

Don’t forget about your risk tolerance

People often associate risk with danger, and that awareness can provide a good guardrail when it comes to investing. At the same time, the greater the risk, the greater the potential return. The trick is figuring out how much of a return you desire versus how much risk you can comfortably accept. In that sense, risk tolerance is a kind of balancing act.

In many cases, younger people who are years away from retirement can take on more risk, since they’ll have more time to recover if the market falls. Once you get closer to retirement, you may feel the need to protect your assets, which means owning more conservative investments. Risk tolerance varies —some people just hate losing any money, while others are willing to risk it all if there’s a big payoff at the end. Many of us are somewhere in the middle.

Save on tax with investment accounts

Long-term investors in Canada typically make use of registered investment accounts, all of which provide tax incentives to help encourage investing.

The Registered Retirement Savings Plan (RRSP) is the most well-known investment account. Contributions to this account can be claimed as a tax deduction to lower your taxable income — potentially earning you a tax refund ­— while investments made within the account can grow tax free until you start withdrawing those funds in retirement.

The Tax-Free Savings Account (TFSA) is another popular account. Here, contributions don’t lower your taxable income, but you can withdraw money without ever having to pay tax on anything you take out.

Non-registered accounts receive no special tax treatment themselves, but investments inside of the account are taxed at different rates when you withdraw. For instance, capital gains (the growth of an investment) and dividends both receive preferential tax treatment, and are taxed at a lower rate than the income spun off by bonds. The benefit of a non-registered account is that you can invest in any asset class you like (which is not the case with registered accounts, although the list of eligible investments remains broad), and there are no limits on the amount you can invest each year. See registered vs. non-registered accounts to learn more about these two account structures.