Saving money is the central premise of personal finance.
Yet these days, given low interest rates on guaranteed investment certificates (GICs), these go-tos for savers do not keep pace with inflation.
(The News Tribune)
More and more, savers must become investors, creating investment portfolios of stocks, bonds and cash to get them to their goals, often funding retirement.
This is hardly new, but one study from last year by Finder.com found about six in 10 Canadians don’t invest. If you’re among them and want to start to increase the odds of reaching your goals like retirement, or even a down-payment on a home, consider this a starter kit.
Learn the basics
The internet is an excellent resource for learning about investing while being a cesspool of misinformation at the same time.
So choose wisely.
One trusted source is the Manitoba Securities Commission’s moneysmartmanitoba.ca created by the Manitoba Securities Commission.
"It’s a one-stop source of objective, unbiased information to learn about everything financial from stocks and bonds to estate planning to buying a home," says Ainsley Cunningham, manager of education and communications for the securities commission.
There, you can learn the difference between a Canada Savings Bond and corporate bond, a common share and a flow-through share, and a mutual fund and an exchange-traded fund (ETF).
Another excellent resource is Investopedia — though it offers more advanced learning, including investment evaluation techniques like fundamental analysis, used to determine the financial health of companies relative to their stock price.
Ask for advice
Friends and family are not a bad place to start, surveying what they know about investing, says Cunningham. Another starting point may be with your bank or credit union where you can meet with a licensed financial advisor. "They can help you understand your objectives and goals for investing, and that guides how you’re going to invest based on your time for needing the money and ability to withstand the market’s ups and, especially, its downs."
Understanding then guides portfolio construction: how much money will be allocated to what assets … those being stocks and bonds. (Yes, there are alternative assets like gold, cryptocurrency and private investments, but concern yourself with those when you’re more experienced.)
When it comes to portfolio construction, there are three basic approaches: conservative, balanced and aggressive. Conservative investors generally have portfolios 80 per cent in bonds and 20 per cent in stocks. Balanced investors split the allocation 50-50, and aggressive investors have 80 per cent stocks and 20 per cent bonds.
Keep it simple
Once you’ve got a sense of your risk tolerance, goals and asset allocation, simplicity is critical to start, says Kyle Prevost, a former Manitoba teacher who taught financial literacy to high school students. This helps avoid "paralysis by analysis," whereby market complexity feels overwhelming, and then you put off doing anything.
"There is no way of knowing whether now is the right, or wrong time, to invest," says Prevost, now writer for and co-owner of personal finance blog Million Dollar Journey.
So just jump right in.
Plenty of alternatives are out there to the typical bank or credit union advisor route.
While advisors can handhold you through the starting process, which can be very beneficial, you can end up investing in proprietary mutual funds (operated by the financial institutions) with higher management fees, also called MERs (management expense ratios).
Robo-advisors, which include Nest Wealth and Wealthsimple, are a lower cost alternative, giving you an automated investment portfolio in one fell swoop.
"The advantage of robo-advice is most new investors are not going to have a good sense of how much risk they can handle," says Ian Tam, director of investment research in Canada for Morningstar, another good information resource for investors.
Robo-advisors — which banks also offer — give you questionnaires to determine your asset allocation, and then invest accordingly in a portfolio of ETFs. Similar to mutual funds, ETFs are generally passive strategy funds mirroring the performance of an index like the TSX Composite. As well, their management cost is a fraction of mutual funds. With mutual funds, you pay more for active strategies of professionals aiming to beat an index, but research shows "the majority of active fund managers underperform their benchmark after fees," Tam adds.
Diversification: The more, the better
Whether ETF or mutual fund, both offer instant diversification.
Rather than investing in a dozen stocks in one market like Canada, you can invest in dozens, if not thousands, in one investment across many markets. This reduces all-your-eggs-in-one-basket risk. Outside of using an advisor — robot or human — you can do-it-yourself (DIY) with an online brokerage, via your financial institution or elsewhere, and build your own portfolio of ETFs, Prevost says.
But unlike robo-advisors, you have to rebalance the portfolio, buying and selling these investments annually to maintain your asset allocation (for example, 50-50 stocks and bonds).
Too much work? You can purchase one ETF to do it all, referred to as all-in-one portfolios (mutual fund versions exist too). Tam notes these "are similar to robos as they will rebalance you to a static asset allocation of stocks and bonds." Like all ETFs, the MER, as low as 0.2 per cent, makes them attractive. By comparison, the lowest cost mutual funds charge one per cent with most stock-based ones costing two per cent or more.
Start small, think big
You don’t need big money. Some financial institution providers let you start for as little as $25 a month (though the threshold to start may be higher.) After the initial investment, make regular contributions — again, as little as $25 — monthly to the portfolio. This is ‘dollar cost averaging’ so no matter if markets are up or down, over time those small investments will grow sooner or later, leading to long-term wealth creation.
All told, there’s never been a better time to start.
"In the last decade, options for small investors have grown significantly," Tam says. "It’s easier and cheaper to invest than ever."
