12

INTRODUCTION

Saving to build wealth is investing. When people have too much money to spend immediately—that is, a surplus of disposable income—they can choose to become savers or investors. As investors, they can transfer their surplus to individuals, companies, or governments that have a shortage or too little money to meet immediate needs with the intention to grow their surplus. Traditional resource management teaches us that our actions today affect the resources available to us in the future (BNC, 2015). The time-value-of-money concept teaches us that the money we have today, if invested well and managed effectively, can increase our resources in the future. Investing allows individuals to grow their resources by leveraging their surplus dollars not only for their own long-term benefit but also for benefit of their families and communities. From this perspective, investing is using a portion of your surplus to its maximum advantage so that when you retire or need to access that surplus, it has grown enough to support not only your own individual needs, but also can be utilized to help your families and communities.

Investing is almost always done through an intermediary—a bank or broker—who can match up the surpluses and the shortages. If the capital markets work well, those who need money can get it, and those who can defer their need can try to profit from that. When you invest, you are transferring capital to those who need it on the assumption that they will be able to return your capital when you need or want it and that they will also pay you for its use in the meantime.

Investing happens over your lifetime. In your early adult years, you typically have little surplus to invest. Your first investments are in your home (although primarily financed with the debt of your mortgage) and then perhaps in planning for children’s education or for your retirement.

After a period of just paying the bills, making the mortgage, and trying to put something away for retirement, you may have the chance to invest any surplus that you have been able to build. Your income increases as your career progresses. You have fewer dependents (as children leave home), so your expenses decrease. You begin to think about your investment options.

You may reach this stage earlier or later in your life, but at some point, you begin to think beyond your immediate situation and look to increase your real wealth to ensure your future financial health. Investing is about that future.

Investment also goes beyond simply contributing one’s own individual wealth and financial health. The investments we make can contribute to the growth of businesses, organizations, and communities. Throughout this chapter, we will explore how the investment choices we make can have a significant economic and social impact in the world.

Investing in Indigenous Nations and People in Canada

Economic growth is fueled by investment. Chief Michael LeBourdais of the Whispering Pine/Clinton Indian Band shares that, “investment can be generated from local residents through savings, through home equity or from outside sources” (Tulo Centre of Indigenous Economics, 2014, p. 6). However, according to the Tulo Centre, there is 30% less private sector investment on First Nation land than off-reserve due to the high transaction costs associated with on-reserve investments; they consider this a “generous estimate” due to the limited private sector investment observable on-reserve (2014, p. 184). The Tulo Centre of Indigenous Economics asserts that the Indian Act has hindered not only the development of First Nations institutions, but also an institutional framework to support investment on First Nations lands. Attracting private investment to Indigenous business and economic development projects is an important part of economic growth because “investment creates jobs and business opportunities. This, in turn, builds the fiscal capacity of governments to support social improvements and build infrastructure” (Tulo Centre of Indigenous Economics, 2014, p. 7). Creating more investment opportunities within Indigenous communities in Canada is a necessary and critical step not only to support economic growth and development, but also to support economic reconciliation.

Canada’s First Nations and the Government of Canada worked together to support the creation of the First Nations Fiscal Management Act (FNFMA) which came into effect on April 1, 2006. The FNFMA provides participating First Nation governments with support to assist First Nations to better access capital markets and more investment opportunities through the following First Nations institutions established under the FNFMA: the First Nations Financial Management Board (FNFMB), the First Nations Tax Commission (FNTC), First Nations Finance Authority (FNFA), and the First Nations Infrastructure Institute (FNII) (FNTC, 2024). The FNFMB helps First Nations to build stronger community management and accountability frameworks, including best practices, standard-setting, and capacity-building, that enhance First Nations’ ability to participate in raising capital through the FNFA (Cooper, 2016). First Nations that become FNFA borrowing members must be scheduled (added) to the First Nations Fiscal Management Act legislation and initially work with the FMB. Just as national and provincial governments have the capacity and institutions to manage public borrowing, such as issuing government bonds, First Nations that have become FNFA borrowing members participate in pooled debenture borrowing, secured by property taxes or other long-term revenue sources, and are able to access short-term and long-term loans at lower rates than traditional financing in order to finance infrastructure and economic development (FNFA, 2024). The FNTC, as mentioned in Chapter 6, helps First Nations to use their property tax revenue to secure long-term borrowing and oversee the bylaw approval process, which provides greater investor certainty. The FNII supports Indigenous communities and organizations to plan, procure, own, and manage their infrastructure assets on their lands. The FNTC, FMB, FNFA, and FNII all work together to provide a regulatory framework that provides assurances of good fiscal and capital planning that enhances private investment on-reserve which in turn supports the growth of First Nations businesses and economies.

Many Indigenous Nations and people are investing their surpluses wisely on behalf of their current members and planning seven generations ahead as well through their own unique short- and long-term investment strategies and policies. As noted by Podlasly, Von Der Porten, and Kelly (2023), many Indigenous systems have “a multi-generational perspective and a long-term sustainable viewpoint” that influences their decision making; this perspective is illustrated in the following example from in Aotearoa New Zealand, “An iwi (tribe) economy has a multigenerational time horizon…It must produce wealth over the long term and not just for the generation in which it finds itself” (p. 62).  Many Indigenous Nations are investing their money in trusts and other investment vehicles with their communities and those future generations in mind. The following two examples are meant to illustrate the investments being made by Indigenous Nations in Canada.

The Mohawk Council of Kahnawake (MCK) created Kahnawake Sovereign Wealth Fund (KSWF), a for-profit, diversified investment fund, “hit the market on June 27, 2024 with $26.7 million deployed in public market investments,” such as government bonds, corporate bonds, globally diversified, exchange-traded funds, and equity investments; there are two portfolio managers and 50% of the $26.7 million is invested in stocks and 50% is invested in income-producing assets, such as bonds and guaranteed investment certificates (GICs) (LaFontaine, 2024). There is another $6.6 million in the fund which will be managed by MCK’s investment and revenue committee and can include ‘direct investments into renewable power, real estate, infrastructure, private equity, etc….a portion of it has been earmarked for upcoming renewable power projects’ (LaFontaine, 2024). Dividends from the fund will not be touched for the first ten years in order to allow the fund to grow, and after 10 years, dividends will be reinvested back into the community (Cable, 2024). The MCK hopes that the fund will make Kahnawake completely financially independent from the federal government. Greater economic independence means greater self-determination. The goal is to reach a net asset value of $1 billion by 2074 (LaFontaine, 2024).

The Inuvialuit Investment Corporation (IIC) is one of four subsidiaries of the Inuvialuit Regional Corporation (IRC). The IRC was established after the Inuvialuit Final Agreement (IFA), a comprehensive land claim agreement, was signed by the Government of Canada and the Inuvialuit on June 5, 1984. The Inuvialuit is the name the Inuit of the Inuvialuit Settlement Region (ISR) call themselves. The ISR is located in Canada’s western Arctic, the northern part of the Northwest Territories, and represents the area covered under the IFA. The land claim that was signed provided the Inuvialuit the following “guaranteed rights” from the federal government: land, wildlife management, and money (IRC, 2024a). The money received after the IFA was signed was invested by the IIC. The mandate of the IIC is “to increase overall portfolio value using conservative strategies to preserve capital and benefit future generations of Inuvialuit” (IRC, 2024b). Currently, it works with Canadian institutional fund managers to manage its portfolio. The IIC’s revised Statement of Investment Policies and Goals that it adopted in 1977 resulted in investment targets of “60% equities and 35% fixed income securities, with permissible deviations of up to 5%” (IRC, 2024a). Today, the IRC has a diversified portfolio that has reached $695M in value (IRC, 2024c). Please visit the following site, IRC’s Mandate, Goals, and Philosophy, for more information on the IRC’s goals and objectives for both current and future generations.

NATOA is a charity organization that works with Indigenous Peoples throughout Canada to provide them with the resources and information “that will help them efficiently create, manage, and operate trusts as a means to ensure the seven generations yet unborn, can benefit from the goals and dreams of the present generation” (NATOA, 2024).  NATOA provides information on investing, trust structures, accounting, tax, management, administration and legal issues and utilizes “investing principles that are consistent with Indigenous cultural traditions and values” (NATOA, 2024). The First Nations Financial Management Board partnered with KPMG to conduct an Indigenous Investment Commission Scoping Study that was published in 2023. The study asserts the need for an Indigenous Investment Commission, “an investment fund management service designed and led by Indigenous people, for Indigenous people” that could offer Indigenous people in Canada more control and choice, lower fees, increased returns, and better alignment with Indigenous values. NATOA and the Indigenous Investment Commission Scoping Study demonstrate the growing investments being made by Indigenous Nations in Canada on behalf of their people. When Indigenous Nations do well,  both individuals and the community as a whole benefit through better infrastructure, more business supports, better services, and ideally, stronger economies. When the private sector is strong, “it generates economic activity to support the public sector’s fiscal requirements, and the public sector creates a competitive framework for private sector investment” (LeDressay, Reeves, and Lavallee, 2024).

How should you invest your money? This is a critical question that we must all ask ourselves as we reach that stage of our lives when we are ready to begin investing. Investing doesn’t have to be viewed as solely for individual wealth accumulation and profit–it can be viewed as a way for individuals and collectives to grow their surpluses with greater purposes and future generations in mind. Today, there are more and more options available to investors who wish to invest their money in socially and environmentally responsible ways. We will explore such options throughout this chapter. Understanding how investing works, how to grow your individual surplus, and how your investments can contribute to the greater good is the key focus of this chapter.

12.1 INVESTMENTS AND MARKETS: A BRIEF OVERVIEW

Before looking at investment planning and strategy, it is important to take a closer look at the galaxy of investments and markets where investing takes place. Understanding how markets work, how different investments work, and how different investors can use investments is critical to understanding how to plan your investment goals and strategies. As Steven Arnott (2021) notes,

While the rate of return is important for your financial well-being, so is the quality of your investments. It’s common knowledge that different types of snow are better or worse at keeping a snowman packed together. The first thing most people want to know before starting to build a snowman is whether the snow is “packing snow.” (p. 15)

You have looked at using the money markets to save surplus cash for the short term. By contrast, investing is primarily about using the capital markets to invest surplus cash for the longer term. As in the money markets, when you invest in the capital markets, you are selling liquidity.

The capital markets developed as a way for buyers to buy liquidity (i.e., raise capital). The two primary methods that have evolved into modern times are the bond and stock markets. Both are discussed in greater detail in Chapter 13 “Owning Stocks” and Chapter 14 “Owning Bonds and Investing in Mutual Funds,” but a brief introduction is provided here to give you a basic idea of what they are and how they can be used as investments.

Bonds and Bond Markets

Bonds are debt. The bond issuer borrows by selling a bond, promising the buyer regular interest payments and then repayment of the principal at maturity. If a company wants to borrow, it could just go to one lender and borrow. But if the company wants to borrow a lot, it may be difficult to find any one investor with the capital and the inclination to make that large a loan, taking a large risk on only one borrower. In this case, the company may need to find a lot of lenders who will each lend a little money, and this is done through selling bonds.

A bond is a formal contract to repay borrowed money with interest (often referred to as the coupon) at fixed intervals. Corporations and governments (e.g., federal, provincial, municipal, and foreign) borrow by issuing bonds. The interest rate on the bond may be a fixed interest rate or a floating interest rate that changes as underlying interest rates—rates on debt of comparable companies—change. Underlying interest rates include the prime rate: the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. The Bank of Canada sets the prime rate.

Bonds have many features other than the principal and interest; these include the issue price (the price you pay to buy the bond when it is first issued) and the maturity date (when the issuer of the bond has to repay you). Bonds may also be “callable”—that is, redeemable before maturity (paid off early). Bonds may also be issued with various covenants or conditions that the borrower must meet to protect the bondholders (the lenders). For example, the borrower (the bond issuer) may be required to keep a certain level of cash on hand, relative to his or her short-term debts, or may not be allowed to issue more debt until this bond is paid off.

Because of the diversity and flexibility of bond features, the bond markets are not as transparent as the stock markets—that is, the relationship between the bond and its price is harder to determine.

Stocks and Stock Markets

Stocks or equity securities are shares of ownership: when you buy a share of stock, you buy a share of the corporation. The size of your share of the corporation is proportional to the size of your stock holding. Since corporations exist to create profit for the owners, when you buy a share of the corporation, you buy a share of its future profits. You are literally sharing in the fortunes of the company.

Unlike bonds, however, shares do not promise you any returns at all. If the company does create a profit, some of that profit may be paid out to owners as a dividend, usually in cash but sometimes in additional shares of stock. The company may pay no dividend at all, however, in which case the value of your shares should rise as the company’s profits rise. But even if the company is profitable, the value of its shares may not rise, for a variety of reasons having to do more with the markets or the larger economy than with the company itself. Likewise, when you invest in stocks, you share the company’s losses, which may decrease the value of your shares.

Corporations issue shares to raise capital. When shares are issued and traded in a public market such as a stock exchange, the corporation is “publicly traded.” There are many stock exchanges in Canada and around the world. Internationally, the best-known Canadian stock exchange is the Toronto Stock Exchange.

Only members of an exchange may trade on the exchange, so to buy or sell stocks you must go through a broker who is a member of the exchange. Brokers also manage your account and offer varying levels of advice and access to research. Most brokers have web-based trading systems. Some discount brokers offer minimal advice and research along with minimal trading commissions and fees.

Commodities and Derivatives

Commodities are resources or raw materials, including the following:

• agricultural products (food and fibres) such as soybeans, pork bellies, and cotton;
• energy resources such as oil, coal, and natural gas;
• precious metals such as gold, silver, and copper; and
• currencies, such as the dollar, yen, and euro.

Commodity trading was formalized because of the risks inherent in producing commodities—raising and harvesting agricultural products or natural resources—and the resulting volatility of commodity prices. As farming and food production became mechanized and required a larger investment of capital, commodity producers and users wanted a way to reduce volatility by locking in prices over the longer term.

The answer was futures and forward contracts. Futures and forward contracts (or forwards) are a form of derivatives, the term for any financial instrument whose value is derived from the value of another security. For example, suppose it is now July 2025. If you know that you will want to have wheat in May of 2026, you could wait until May 2026 and buy the wheat at the market price, which is unknown in July 2025. Or you could buy it now, paying today’s price, and store the wheat until May 2026. Doing so would remove your future price uncertainty, but you would incur the cost of storing the wheat.

Alternatively, you could buy a futures contract for May 2026 wheat in July 2025. You would be buying May 2026 wheat at a price that is now known to you (as stated in the futures contract), but you will not take delivery of the wheat until May 2026. The value of the futures contract to you is that you are removing the future price uncertainty without incurring any storage costs. In July 2025, the value of a contract to buy May 2026 wheat depends on what the price of wheat actually turns out to be in May 2026.

Forward contracts are traded privately, as a direct deal made between the seller and the buyer, while futures contracts are traded publicly on an exchange such as the Chicago Mercantile Exchange or the New York Mercantile Exchange.

When you buy a forward contract for wheat, for example, you are literally buying future wheat, wheat that doesn’t yet exist. Buying it now, you avoid any uncertainty about the price, which may change. Likewise, by writing a contract to sell future wheat, you lock in a price for your crop or a return for your investment in seed and fertilizer.

Futures and forward contracts proved so successful in shielding against some risk that they are now written for many more types of commodities, such as interest rates and stock market indices. More kinds of derivatives have been created as well, such as options. Options are the right, but not the obligation, to buy or sell at a specific price at a specific time in the future. Options are commonly written on shares of stock as well as on stock indices, interest rates, and commodities.

Derivatives such as forwards, futures, and options are used to hedge or protect against an existing risk or to speculate on a future price. For a number of reasons, commodities and derivatives are more risky than investing in stocks and bonds and are not the best choice for most individual investors.

Mutual Funds, Index Funds, and Exchange-Traded Funds

A mutual fund is an investment portfolio consisting of securities that an individual investor can invest in all at once without having to buy each investment individually. The fund thus allows you to own the performance of many investments while actually buying—and paying the transaction cost for buying—only one investment.

Mutual funds have become popular because they can provide diverse investments with a minimum of transaction costs. In theory, they also provide good returns through the performance of professional portfolio managers. Chapter 14 section 4 “Mutual Funds” provides more information on portfolio management fees.

An index fund is a mutual fund designed to mimic the performance of an index, a particular collection of stocks or bonds whose performance is tracked as an indicator of the performance of an entire class or type of security. For example, the Standard & Poor’s (S&P) 500 is an index of the five hundred largest publicly traded corporations, and the famous Dow Jones Industrial Average is an index of thirty stocks of major industrial corporations. An index fund is invested in the same securities as the index and so requires minimal management and should have minimal management fees or costs.

Mutual funds are created and managed by mutual fund companies or by brokerages or even banks. To trade shares of a mutual fund you must have an account with the company, brokerage, or bank. Mutual funds are a large component of individual retirement accounts and of defined contribution plans.

Mutual fund shares are valued at the close of trading each day and orders placed the next day are executed at that price until it closes. An exchange-traded fund (ETF) is a mutual fund that tracks an index or a commodity or a basket of assets, but is traded like stocks on a stock exchange. An ETF trades like a share of stock in that it is valued continuously throughout the day, and trades are executed at the market price.

The ways that capital can be bought and sold is limited only by the imagination. When corporations or governments need financing, they invent ways to entice investors and promise them a return. The last thirty years have seen an explosion in financial engineering, the innovation of new financial instruments through mathematical pricing models. This explosion has coincided with the ever-expanding powers of the computer, allowing professional investors to run the millions of calculations involved in sophisticated pricing models. The Internet also gives amateurs instantaneous access to information and accounts.

Much of the modern portfolio theory that spawned these innovations (i.e., the idea of using the predictability of returns to manage portfolios of investments) is based on an infinite time horizon, looking at performance over very long periods of time. This has been very valuable for institutional investors (e.g., pension funds, insurance companies, endowments, foundations, and trusts) as it gives them the chance to magnify returns over their infinite horizons.

For most individual investors, however, most portfolio theory may present too much risk or just be impractical. Individual investors don’t have an infinite time horizon, but rather a comparatively small amount of time to create wealth and to enjoy it. For individual investors, investing is a process of balancing the demands and desires of returns with the costs of risk, before time runs out.

REFERENCES

Arnott, S. (2021). The Snowman’s Guide to Personal Finance: A simple approach to managing your money. Self-published by the author.

Cooper, T. (2016). “Finance and Banking.” In K. Brown, M. Doucette, and J. Tulk, eds., Indigenous Business in Canada, pp.161–176. Sydney, NS: Cape Breton University Press.

Cable. E. (2024). “Kahnawake Sovereign Wealth Fund closes Toronto Stock Exchange Fund.” Aboriginal Business Magazine. Retrieved from: https://aboriginalbusinessmagazine.com/?p=7514iev.

Inuvialuit Regional Corporation. (2024a). “Inuvialuit Final Agreement.” Retrieved from: https://irc.inuvialuit.com/about-irc/inuvialuit-final-agreement/.

Inuvialuit Regional Corporation. (2024b). “Inuvialuit Investment Corporation.” Retrieved from: https://irc.inuvialuit.com/business/inuvialuit-investment-corporation/.

Inuvialuit Regional Corporation. (2024c). “Message from the Chair.” Retrieved from: https://irc.inuvialuit.com/about-irc/message-from-the-chair/.

Lafontaine, M. (2024). “Kahnawake Sovereign Wealth Fund deploys investments.” Retrieved from: https://www.pentictonherald.ca/spare_news/article_ddb11cc4-849b-5f8c-be6a-4a178e6cfede.html.

LeDressay, A., Lavallee, N. and Reeves, J. (2024). Moving at the Speed of Business: A Possible Path to First Nation Prosperity Starts with Efficiency. Journal of Aboriginal Economic Development 14(2).

Podlasly, M., Von Der Porten, S., & Kelly, D.  (2023). What BC Can Learn from Aotearoa: New Zealand’s Two Wellbeing Framework. BC Assembly of First Nations. Retrieved from: https://www.bcafn.ca/sites/default/files/docs/reports-presentations/BCAFN%20NZ%20wellbeing%20Oct%2016%202023.pdf.

Tulo Centre of Indigenous Economics. (2014). Building a Competitive First Nation Investment Climate. Retrieved from: https://static1.squarespace.com/static/55565d7ae4b0447c46dd53e8 t/559c0405e4b0b280226825cc/1436288005495/tulotextbook.pdf.

12.2 INVESTMENT PLANNING

Allison has a few hours to kill while her flight home is delayed. She loves her job as an analyst for a management consulting firm, but the travel is getting old. As she gazes at the many investment magazines and paperbacks on display and the several screens all tuned to financial news networks and watches people hurriedly checking their stocks on their mobile phones, she begins to think about her own investments. She has been paying her bills, paying back student loans, and trying to save some money for a while. Her uncle just died and left her a bequest of $50,000. She is thinking of investing it since she is getting by on her salary and has no immediate plans for this windfall.

Allison is wondering how to get into some serious investing. There is no lack of information or advice about investing, but Allison isn’t sure how to get started.

Allison may not realize that there are as many different investment strategies as there are investors. The planning process is similar to planning a budget or savings plan. You determine where you are, where you want to be, and how to get there. One way to get started is to draw up an individual investment policy statement.

Investment policy statements are outlines of the investor’s goals and constraints, and they are popular with institutional investors such as pension plans, insurance companies, or non-profit endowments. Institutional investment decisions are typically made by professional managers operating on instructions from a higher authority, usually a board of directors or trustees. The directors or trustees may approve the investment policy statement and then leave the specific investment decisions up to the professional investment managers. The managers use the policy statement as their guide to the directors’ wishes and concerns. The Inuvialuit Regional Corporation’s investment policy statement is a good example. There are many other examples of such investment policy statements that can be found through Indigenous governments, trusts, and organizations.

This idea of a policy statement has been adapted for individual use, providing a helpful, structured framework for investment planning—and thinking. The advantages of drawing up an investment policy to use as a planning framework include the following:

• The process of creating the policy requires thinking through your goals and expectations and adjusting those to what is possible.
• The policy statement gives you an active role in your investment planning, even if the more specific details and implementation are left to a professional investment adviser.
• Your policy statement is portable, so even if you change advisers, your plan can go with you.
• Your policy statement is flexible; it can and should be updated at least once a year.

A policy statement is written in two parts. The first part lists your return objectives and risk preferences as an investor. The second part lists your constraints on investment. It is sometimes difficult to reconcile the two parts, so you may need to adjust your statement to improve your chances of achieving your return objectives within your risk preferences without violating your constraints.

Defining Return Objectives and Risk Tolerance

Defining return objectives is the process of quantifying the required annual return (e.g., 5 per cent, 10 per cent, etc.) necessary to meet your investment goals. If your investment goals are vague (e.g., to “increase wealth”), then any positive return will do. Usually, however, you have some specific goals—for example, to finance a child’s or grandchild’s education, to have a certain amount of wealth at retirement, to buy a sailboat on your fiftieth birthday, and so on.

Once you have defined goals, you must determine when they will happen and how much they will cost, or how much you will have to have invested to make your dreams come true. As explained in Chapter 4 “Evaluating Choices: Time, Risk, and Value,” the rate of return that your investments must achieve to reach your goals depends on how much you have to invest to start with, how long you have to invest it, and how much you need to fulfill your goals.

As in Allison’s case, your goals may not be so specific. Your thinking may be more along the lines of, “I want my money to grow and not lose value,” or, “I want the investment to provide a little extra spending money until my salary rises as my career advances.” In that case, your return objective can be calculated based on the role that these funds play in your life: safety net, emergency fund, extra spending money, or nest egg for the future.

However specific (or not) your goals may be, the quantified return objective defines the annual performance that you demand from your investments. Your portfolio can then be structured—you can choose your investments—such that it can be expected to provide that performance.

If your return objective is more than can be achieved given your investment and expected market conditions, then you know to scale down your goals, or perhaps find a different way to fund them. For example, if Allison wanted to stop working in ten years and start her own business, she probably would not be able to achieve this goal solely by investing her $50,000 inheritance, even in a bull (up) market earning higher rates of return.

As you saw in Chapter 10 “Personal Risk Management: Insurance” and Chapter 11 “Personal Risk Management: Retirement and Estate Planning,” in investing there is a direct relationship between risk and return, and risk is costly. The nature of these relationships has fascinated and frustrated investors since the origin of capital markets, and it remains a subject of investigation, exploration, and debate. To invest is to take risk. To invest is to separate yourself from your money through actual distance—you literally give it to someone else—or through time. There is always some risk that what you get back is worth less (or costs more) than what you invested (a loss), or is less than what you might have had if you had done something else with your money (opportunity cost). The more risk you are willing to take, the more potential return you can make, but the higher the risk, the more potential losses and opportunity costs you may incur.

Individuals have different risk tolerances. Your risk tolerance is your ability and willingness to assume risk. Your ability to assume risk is based on your asset base, your time horizon, and your liquidity needs. In other words, your ability to take investment risks is limited by how much you have to invest, how long you have to invest it, and your need for your portfolio to provide cash—for use rather than reinvestment—in the meantime.

Your willingness to take risk is shaped by your “personality,” your experiences, and your knowledge and education. Attitudes are shaped by life experiences, and attitudes toward risk are no different. Chart 12.2.1 shows how your level of risk tolerance develops.

Chart 12.2.1 Risk Tolerance

Investment advisers may try to gauge your attitude toward risk by having you answer a series of questions on a formal questionnaire or by just talking with you about your investment approach. For example, an investor who says, “It’s more important to me to preserve what I have than to make big gains in the markets,” is relatively risk averse. The investor who says, “I just want to make a quick profit,” is probably more of a risk seeker.

Once you have determined your return objective and risk tolerance (i.e., what it will take to reach your goals and what you are willing and able to risk to get there) you may have to reconcile the two. You may find that your goals are not realistic unless you are willing to take on more risk. If you are unwilling or unable to take on more risk, you may have to scale down your goals.

Defining Constraints

Defining constraints is a process of recognizing any limitation that may impede or slow or divert progress toward your goals. The more you can anticipate and include constraints in your planning, the less likely they will throw you off course. Constraints include the following:

• Liquidity needs,
• Time available,
• Tax obligations,
• Legal requirements, and
• Unique circumstances.

Liquidity needs, or the need to use cash, can slow your progress from investing because you have to divert cash from your investment portfolio in order to spend it. In addition, you will have ongoing expenses from investing. For example, you will have to use some liquidity to cover your transaction costs such as brokerage fees and management fees. You may also wish to use your portfolio as a source of regular income or to finance asset purchases, such as the down payment on a home or a new car or new appliances.

While these may be happy transactions for you, for your portfolio they are negative events, because they take away value from your investment portfolio. Since your portfolio’s ability to earn returns is based on its value, whenever you take away from that value, you are reducing its ability to earn.

Time is another determinant of your portfolio’s earning power. The more time you have to let your investments earn, the more earnings you can amass. Or, the more time you have to reach your goals, the more slowly you can afford to get there, earning less return each year but taking less risk as you do. Your time horizon will depend on your age and life stage and on your goals and their specific liquidity needs.

Tax obligations are another constraint, because paying taxes takes value away from your investments. Investment value may be taxed in many ways (as income tax, capital gains tax, property tax, estate tax, or gift tax) depending on how it is invested, how its returns are earned, and how ownership is transferred if it is bought or sold.

Investors typically want to avoid, defer, or minimize paying taxes, and some investment strategies will do that better than others. In any case, your individual tax liabilities may become a constraint in determining how the portfolio earns to best avoid, defer, or minimize taxes.

Legalities also can be a constraint if the portfolio is not owned by you as an individual investor but by a personal trust or a family foundation. Trusts and foundations have legal constraints defined by their structure.

“Unique circumstances” refer to your individual preferences, beliefs, and values as an investor. Some investors don’t want to finance companies that make objectionable products or by-products or have labour or trade practices reflecting objectionable political views. Divestment is the term for taking money out of investments. Grassroots political movements often include divestiture campaigns, such as student demands that their universities stop investing in companies that do business with nondemocratic or oppressive governments.

Some investors believe in Indigenous, Environmental, Social, and Governance (IESG) investing; they want their funds to be invested in companies that score well on IESG metrics and take into consideration Indigenous, environmental, social and governance factors and outcomes in their business decisions and initiatives. Many businesses are focusing their energies more and more on enhancing their corporate social responsibility (CSR) frameworks and initiatives so that social and environmental factors, such as IESG, are guiding business decisions and contributing to economic, social, and environmentally sustainable activities that benefit society—and not only because they know it is the right thing to do, but also because it is good business. More and more companies are sharing their CSR progress, initiatives, and reports, which makes it easier for investors to research and make informed decisions.

Socially responsible investment (SRI) is the term for investments based on ideas about products or businesses that are desirable or objectionable based on specific ethical criteria. These qualities exist in the eye of the beholder, however, and vary among investors. Your beliefs and values are unique to you and to your circumstances in investing, and they may change over time. For more information on socially responsible investing in Canada, please see the Responsible Investment Association (RIA) and SHARE (shareholder engagement, advisory services, research and education). SHARE works with investors such as foundations, asset managers, Indigenous trusts, universities, and religious investors to “steward their assets in ways that contribute to positive social and environmental outcomes” (SHARE, 2024). SRI and IESG investing are considered two approaches to impact investing.

Impact Investing aims to make investments that have beneficial social or environmental effects and outcomes but that also generate financial gains. Social Finance is often interchangeable with impact investing because it also seeks to “to achieve social, cultural, and environmental goals along with financial returns” (Purppl, 2024). Social impact investments or impact funds are managed by impact-investment firms or social finance intermediaries that invest in social enterprises or a variety of financial instruments (e.g. grants, donations, community loan funds, equity and social impact bonds) and investment products (e.g. bonds, equities, ETFs, GICs, mutual funds) that aim to have beneficial social or environmental effects and outcomes while generating financial returns. Social finance intermediaries are, for example, community loan funds, venture capital funds, housing funds, and credit unions, that raise money from investors to make social finance investments (Purppl, 2024). Impact investing is associated with the common slogan, “doing good while doing well” (Whittaker, 2024).

Raven Indigenous Capital Partners, an Indigenous led- and owned social finance intermediary, facilitates “the flow of capital through impact investing” by working with Indigenous entrepreneurs in Canada and the United States “to ensure that they are investment-ready” and by providing “investors the opportunity to invest in competitive returns and long-term social and environmental impact” by investing in early and growth stage Indigenous companies  (Raven Indigenous Capital Partners, 2024).  The “Social Finance Fund (SFF) is a $755 million Canadian government initiative aimed at growing the social finance market. It provides flexible financing to social purpose organizations (SPOs) like charities, non-profits, and social enterprises” (Purppl, 2024).

The Indigenous Growth Fund (IGF), managed by the National Aboriginal Capital Corporation (NACCA), is Canada’s largest Indigenous social impact fund. Its current investors are investors are the Government of Canada and Business Development Bank of Canada (BDC), Export Development Canada (EDC), Farm Credit Canada (FCC), and Block Inc., but it is structured to accept investments from the following Accredited Investors: Public and Private Foundations, Indigenous Trusts, Corporate Canada, and other Institutional Investors. The capital generated through the IGF will provide greater access to capital for Indigenous Financial Institutions and Indigenous small and medium-sized enterprises (SMEs) and “offers institutional and social impact investors a direct vehicle to contribute to economic reconciliation” (NACCA, 2024).

Having mapped out your goals and determined the risks you are willing to take, and having recognized the limitations you must work with, you and/or your investment advisers can now choose the best investments. Different advisers may have different suggestions based on your investment policy statement. The process of choosing involves knowing what returns and risks investments have produced in the past, what returns and risks they are likely to have in the future, and how the returns and risks are related—or not—to each other.