Making money grow
An investment is money put into an asset (stocks, bonds, real estate, a business) hoping it grows. The gain or loss is the return.
Common investments
| Type | What it is | Typical risk and return |
|---|---|---|
| Savings account, GIC | deposit at a bank | low risk, low return |
| Bonds | lending to a government or company | low to moderate |
| Stocks (shares) | owning part of a company | higher risk, higher long-term return |
| Mutual funds, ETFs | baskets of many stocks or bonds | depends on contents; built-in diversification |
| Real estate | property | moderate to high |
Risk and return
Higher potential return usually comes with higher risk (more ups and downs and possible loss). No investment offers high return with no risk; be wary of anything that promises it.
Calculating return
Return (%) = (ending value − starting value + income) ÷ starting value × 100
Example: Buy 50 shares at $40 ($2,000). A year later they’re worth $46 each ($2,300), plus $60 in dividends.
Return = (2,300 − 2,000 + 60)/2,000 = 18%
Annual rate of return and compounding
If an investment grows at an annual rate of return r:
A = P(1 + r)ᵗ
Example: $10,000 at an average 7% per year:
- 10 years: ≈ $19,672
- 30 years: ≈ $76,123
Real returns vary year to year; long-term averages smooth out short-term swings.
Average annual return
If an investment grows from $5,000 to $8,000 over 6 years:
(8,000/5,000)^(1/6) − 1 ≈ 8.1% per year
Diversification
Diversification means spreading money across many investments so one failure doesn’t sink you. "Don’t put all your eggs in one basket." Index funds hold hundreds of companies in one purchase.
Fees matter
A fund charging a 2% fee vs 0.2% can cost tens of thousands of dollars over decades. Always check the management expense ratio (MER).
Time horizon
- Money needed soon → safer investments.
- Money for decades away (retirement) → can usually handle more ups and downs.
Worked examples
Example 1: $1,000 grows to $1,150 in a year. Return? 15%.
Example 2: A stock drops from $80 to $60. Return? −25%.
Example 3: Which is more diversified: one company’s shares or an index fund? The index fund.
Common mistakes
- Chasing high returns without understanding risk.
- Ignoring fees.
- Selling in a panic during short-term drops.
Try it yourself
- Bought for $500, sold for $560 with $10 dividends. Return?
- $2,000 at 5% per year for 8 years?
- $4,000 becomes $3,400. Return?
- Why does diversification reduce risk?
Answers: 1) 14% 2) ≈ $2,954.91 3) −15% 4) Losses in one investment can be offset by others.
Quick recap
- An investment aims for a return, but carries risk.
- Stocks and bonds differ in risk and return.
- Diversification, low fees and time help investments grow.