Last Updated April 30th 2023
What is investing?
From a technical standpoint investing is the act of buying assets in the hopes of getting a return from them. The return can come in the form of capital appreciation, dividends, or interest and any combination of the three. Investing can also come in the form of resources such as time. An example that requires both a time and financial commitment is going to post-secondary school. You spend a lot of money on books, courses, materials, administration fees to name few and years of your life in the hopes that your degree will help you get a higher paying job when you graduate.
Investing is different than saving from two perspectives. The first is that saving is geared toward a shorter time frame, one to three years for the most part. Investing is meant for three years to a lifetime. The second is that there is inherent risk when putting your money to work. Financially, the asset purchased could depreciate in value. In terms of your time, you could go to school all those years and not get the job you were hoping for.
As for a return on your funds, there is a tight relationship between risk and reward in the investment world. Low risk generally comes with low reward, and you guessed it, high risk can come with high reward. We will talk a little more about risk and why it’s important to understand later in this guide.
The boring Financial Advisor’s answer would be “to build your wealth”. That’s true but money is the foundation for something much more emotional. Your purpose should be to achieve a specific goal because ultimately investing is a means to an end. Prudent investing should give you the ability to accomplish something and the best part is, you get to choose what that “something” is.
Investing in yourself through education or through markets can assist you in attaining financial freedom, whatever definition that is for you. Growing your money is also important so you can maintain purchasing power. The sad reality is savings accounts and Guaranteed Investment Certificates never beat inflation long term. Parking your funds strictly in cash is a surefire way to erode away your ability to buy goods in the future. Another appealing attribute of investing is that it can be used to reduce your taxes. Certain accounts and strategies provide taxable benefits to those that qualify.
With that being said let’s take a look at what you’ll need on your investing journey.
First and foremost, you’ll need some capital to invest. The good news about this part is there is no wrong amount to begin with because everybody starts somewhere. Funds can come from saved income, loans (although leveraged investing creates additional risks so be very careful), inheritances, or sale of other assets.
If you are starting with a smaller amount you should be mindful of trading commissions as they will have an effect on the relative cost to trade. For example, if you start with $1,000 and the commission to buy the stock is $10 then that’s 1% of your invested value, plus another $10 to sell. If you’re investing $10,000 with a $10 commission obviously the relative cost is now only 0.1%. That’s why it’s important to be aware of trading commissions charged by the self-directed platform or your broker.
It’s important to understand how much capital you have to invest. It’s not advisable to put 100% of your cash into the market because you should have some set aside for “emergency purposes”. What is advisable is to contribute to your investments on a regular basis, say monthly or bi-weekly. Again its based on your budget so there is no right or wrong answer, every little bit counts.
2. Understand Your Risk Tolerance And Goals
This is arguably the most important step in the process. Risk can be defined in a few ways but for the purpose of this guide you can think of it as “the uncertainty of an asset achieving it’s expected return”. Volatility is closely linked with risk as well. Different financial assets will fluctuate depending on a myriad of reasons such as company state, economic state, and future expectations. If the changes in market value makes you feel too uncomfortable its not worth it. We talked about your willingness to take risk, the other aspect is your ability to take risk. Your ability is based on things like income, age, job security, family stage, and net worth. Some of these aspects may support you taking on risk and some may deter you so it’s critical you consider your entire situation.
Defining your goals can be a difficult task. Often people will start their journey by saying “I want to generate X% per year from my investments”. While it’s a noble effort, remember that assets don’t grow in a linear fashion so it’s very likely your portfolio may not attain your objective every year. Recall that investing is a means to an end. Your goal should be to finance some type of achievement such as buying a house, paying for your children’s education, living your ideal life during retirement, starting a business, the list is endless!
Always have a time frame in mind when setting your goals. The reason aiming for a certain percentage from your portfolio is a faulty method is because it may not be aligned with achieving your actual goal. For instance you may want to earn 9% per year from your investments and retire at age 60. Well 9% may not be enough to be able to retire at 60. In that case you may need to invest more, or retire later, or perhaps take on a little more risk. Alternatively 9% could be more than enough which enables you to retire at 58 or allocate your existing portfolio to something with lower risk. Be sure to have a clear idea on your risk tolerance and goals, especially because your goals will help you with the next step.
3. Choose Your Investment Account
The type of account you put your hard earned capital in will depend on what your goal is. If you’re looking for tax reduction benefits or savings for retirement and RRSP is the way to go. TFSAs are more flexible in their use and are used for a wide range of purposes. To learn more about these types of accounts check out our Investing page. Registered Education Savings Plans (RESPs) are great for saving for a child’s education. Non-registered accounts, which are vehicles that do not have some type of tax advantage, can be used as well but typically the previously mentioned registered accounts should be considered first.
4. How Do You Want To Invest?
You are making great progress if you’ve made it this far. This brings us to our fourth step on how to invest which is a method to do so. There are various ways to purchase stocks and ETFs including robo-advisors, brokerage services, direct stock purchase plans, or self-managed online accounts. These methods can be categorized by receiving investment advice or taking a do-it-yourself approach. Investment advice typically comes from a representative at a financial institution or less commonly, from a robo-advisor.
The DIY path is for people who have the time, knowledge, and desire to take control of their financial future. It can be cumbersome but a very rewarding task. There are pros and cons to each however the fastest growing method by far is self-managed accounts. Different online self-directed accounts charge different fees based on account balances, account types, and number of trades in a quarter. Qtrade is a well established online brokerage that gives you the ability to trade for yourself. They have tools for research and goal building to help you along the way. Check them out below
5. Time To Choose Your Investment
Stocks, bonds, ETFs, commodities, alternative assets, it can be overwhelming trying to decide what makes the cut for your holdings. To further complicate things there are different styles of stocks which have different risk/reward profiles. Thankfully we have broken them down in our Build Your Investment Philosophy page.
Full service brokers will provide insight on which stocks and ETFs are most suitable for their clients however it comes at a steep price. Online brokerage services do offer research and analysis tools on all types of securities if you have the time and desire to do your own research. One thing to note is that doing the research on your own, whether it’s through a self-directed account or not is very time consuming and requires a lot of discipline. You could always subscribe to a service that has dedicated research analysts with a never ending commitment to provide the best investment education on the market. Of course diversification is always the best approach across securities and within them
6. Review your portfolio
You have capital, you’ve defined your risk tolerance and goals, you know what type of account will meet your needs, you’ve decided how you’re going to invest, and finally you’ve confidently chosen your investments. So what’s left? Well, best practice is to keep an eye on your investments especially if you plan on managing them yourself.
Looking at your portfolio weekly will likely do more harm than good. Reviewing between two to four times a year is a better tempo to ensure you are on top of what’s going on without falling victim to short term decisions. If one area of your investments becomes out of line with your asset allocation plan, a rebalancing may be called for. If certain geographies look unfavourable in the future, shifting assets away may be the answer. It’s important to review your holdings to gauge progress and compare against alternative investments
Congratulations on making it through this guide. You are now equipped to begin your investing journey. Just remember, building wealth does not have to be complicated. It does take time, discipline, and effort from you but in the end it will be worth it. As always, our team is with you every step of the way. If you’re interested in learning more about the financial universe, check out our Personal Finance page.