Fabulously Broke’s Retirement + Investing Primer – Pt. 1: Terminology Basics

DISCLAIMER: This is totally from my own personal experience and point of view. I am not a professional financial advisor, nor do I claim to be one. I’m just a girl trying to make it through the world and pass on what I’ve learned so far from reading, talking to others, and by trial and error. I’m also purposely keeping it simple.

PART ONE: BASIC TERMINOLOGY

If you’re just starting out in investing these are a few key things to look for to plunk your retirement money down in.

RRSP means: “Registered Retirement Savings PLAN“. It’s a plan, not an actual stock, bond, or piece of paper you buy saying that you have money in the bank that will grow at a certain percentage until you retire. When I first starting thinking about retirement and investments, I was so confused, and kept on wondering: Why do people keep buying these RRSPs? I can’t seem to find them anywhere to buy, all I see are stocks, bonds and mutual funds. Well, now you know. Best way to think about it – a deferred tax retirement (savings) account, or a portfolio that will hold all of your other investments in stocks, bonds and mutual funds. It’s what they call a “vehicle” for retirement, which is another fancy word for “a way to save”. So instead of stuffing $200 under your mattress every month, you stuff it into your RRSP account, and use that cash to buy different types of stocks, bonds and mutual funds to get your money to grow.

Mutual Fund: A collection of stocks that have been picked, where you can buy a little part of each stock via your one stock purchase. It’s like an organic co-op or in another example, a lot like if you live with roommates, and you decide you all want the same cable internet service for $60 a month, and each of you chip in a percentage to cover the $60. You don’t pay the full $60 for the cable internet per se, but you still get the benefits of using it, but you only pay 20% of the cost of that cable. Mutual funds work the same way.

The most common may be the index mutual funds (which I am a big fan of, because in the long run they – the stock index that is – outperforms most of the investors’ ‘handpicked’ mutual funds that they try and sell you on. More on that later) These mutual funds are dead easy, all these financial advisors do, is pick a couple of the stocks in every industry, and in different areas so that the collection of stocks will represent the stock market as a whole – this is called “diversification“. Then they group them all together into a big bucket as a collection and from that big bucket, you can purchase a small percentage (maybe a couple of shares, or $100 worth) of this mutual fund bucket, and you instantly get a small, small piece in every one of industries available in the mutual fund bucket. This is great, because you don’t have to buy a single stock in every single industry and area (some stocks run up to $100 each, so you can imagine how expensive this can get), so your $100 goes a lot further.

I will teach more about what bonds are, and other financial terms like “hedging” in my later posts. Don’t you worry! I think everyone needs to digest this information slowly, because I can tell you, a year ago if you had come to me and told me to read what I just typed in this post, and understand it, my brain would’ve exploded all over my laptop.