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There are 22 types of squirrels in Canada
In fact, there are about 285 species of squirrels around the world. This makes squirrels one of the most diverse mammals found in the modern era. And when you’re investing, you want to be a squirrel collector: you want to have diversity.
Suppose you have a habitat that has a large collection of only grey squirrels, but there’s a specific grey squirrel flu going around. This will make your habitat suffer because a lot of your squirrels will get sick.
But suppose you have a habitat with lots of different squirrels: you have grey squirrels, red squirrels, fox squirrels, and even fiery squirrels. Now if that grey squirrel flu comes around, only a small portion of your habitat is affected. This is what diversification does: it reduces the risk of your entire portfolio (or squirrel habitat) by making sure that one company with a poor year doesn’t ruin the entire portfolio.
Some people choose to invest in mutual funds or an Exchange-Traded Funds (ETFs) to help more easily diversify their investment portfolio. Mutual funds and ETFs are collections of hundreds or thousands of stocks and bonds that you can purchase through that one fund. In other words, by investing in a mutual fund or ETF, it’s like you’re investing in a wide variety of different companies.
Squirrels procreate…a lot
Back in 1887, after the official completion of Central Park in New York City, menagerie officials released a handful of squirrels into the park, and another 30 pairs a year later. After just six years, there were so many squirrels in Central Park that the menagerie’s director considered trying to remove squirrels from the park to reduce the population.
This can show the power of compound interest, one of the greatest powers of investing. At the beginning, the squirrel population is pretty small. But with no predators in Central Park, this small group of squirrels starts to procreate to increase the population. Then that larger group of squirrels starts to procreate, then that larger group of squirrels procreate. On and on the cycle goes until the squirrel population grows exponentially.
Now replace squirrels with money. By investing your money into the stock market, your money can start to grow (or receive an average annual rate of return, if you want to speak financial). Then that larger balance of money can grow again, then that larger balance of money can grow again, and so on. And while there may be some ups and downs with money, over the long term that money can grow exponentially.
Compound interest is the idea that your money is building on your money year over year. So when investing in the stock market, try to think long term.
It might be better illustrated by showing you an image. Look at this graph:
I tried making this investment graph as non-scary as possible. This demonstrates what can happen with a 6% average annual rate of return. The green bar is the total amount of money that you have. You’ll notice that at the beginning it grows relatively slowly, but the longer you invest the faster your money builds. That’s the power of compound interest.
(You can use this investment calculator if you’d like to try it yourself.)
Squirrels need to hide their nuts from other squirrels
Did you know that squirrels can lose up to 25% of their buried nuts to other squirrels? That’s a significant amount of their food supply that can be lost over the winter.
Think of nut stealing squirrels like investment fees. If you invest in mutual funds or ETFs, then there are fees associated with managing the fund. What’s important to know is that just like how your money can compound, so can your fees. When looking at mutual funds or ETFs to invest in, look for the MER (Management Expense Ratio). This will show you the fees that the fund charges you for investing in it. Some people suggest to keep your MER under 1%, because then you can keep more of your money as it grows.
And if you ever see a fund that is charging more than 1% MER, feel free to use the following line:
Squirrels can be categorized into three major groups
Squirrels can be categorized into three major groups: ground squirrels, tree squirrels, and flying squirrels. And while each one is slightly different, they’re all part of the same species.
If you’re investing in mutual funds or ETFs, there are also three categories that you can choose from based on how risky the fund is. These three categories (from least risky to most risky) are conservative, moderate, and growth. Choosing one will depend on your goals, your investment timeline, and your risk tolerance (how much risk you’re willing to take on). When beginning your investment journey, you may be asked a series of questions to determine which of these categories will be right for you.
And there’s no right or wrong category to be in. Every person has a unique situation, and investing is completely personal. If you have questions, you can always ask an advisor at your financial institution.