How to invest?

How to Start Investing the Smart Way

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Last updated on August 31, 2021 Comments: 7

I wish I had a playbook to follow when I started investing more than 10 years ago. If I did, I could have avoided mistakes like paying high fees, investing in a concentrated portfolio of stocks, and saving for retirement when I should have been saving for short-term goals.

Whether you’ve managed to save your first $1,000 or have decided it’s time to start saving a small amount of your pay for retirement (or both!), you need to know what happens next. Consider this article your beginner’s guide to investing, where you’ll learn everything you need to know about how and where to start—from RRSPs and TFSAs, stocks and ETFs, robo advisors and online brokerages, and much more.

Are you ready to learn how to invest? Let’s get started.

Where to Begin: Bank, Robo, or DIY?

Now that you understand who you are as an investor, and the investment options available, you need to find a home for your investments. In other words, where are you going to park your investments? Most Canadians just make an appointment with a financial advisor at their bank. That’s perfectly fine when you first start investing, but here’s what you need to know about your bank:

  • A bank advisor is only licensed to sell mutual funds that belong to their bank’s family of funds.
  • The vast majority of these mutual funds come with high fees – a management expense ratio (MER) of 2% or higher.
  • According to a global study from Morningstar, Canadian investors pay some of the highest investing fees in the world.
  • All banks sell lower cost versions of their expensive mutual funds. These are called index funds, and we’ll explain what these are later in the article.

Besides investing at your bank, you can also invest with a robo advisor. These are online investment firms that offer low-cost portfolios of index funds. For a small management fee (typically 0.50% or less) they’ll automatically keep tabs on your investments and rebalance them when markets go up and down, and whenever you add new contributions.

Finally, if you’d prefer a more hands-on approach to investing, you can open a self-directed account at a discount brokerage online and buy your own stocks, ETFs, or mutual funds. This DIY option will save you the most money, because you won’t be paying fees to a financial advisor or robo advisor. The downside is that you’re on your own when it comes to building and managing your investments – which could be a daunting task for a new investor.

Pro tip: New investors should avoid the big banks and their sky-high fees when learning how to invest. Instead, go with a robo advisor at first to get your feet wet, and then switch to a self-directed account once you’ve had a few years of experience under your belt.

How Much Money Do I Need To Start?

You should consider how much you have to start investing. These days, investors can open an investing account with a robo advisor with $0 so you don’t need to be a millionaire to begin investing. While bigger investments usually lead to bigger returns, that doesn’t mean you can’t get started if you only have a little money set aside for investing. The key is to set up a regular contribution plan by direct debit to automatically transfer money to your account every week, or bi-weekly, or monthly. You can do this with as little as $25 at a time.

We recommend opening an account with Wealthsimple, one of the top robo advisors in Canada. Or if you feel ready to tackle a bit of investing on your own give Wealthsimple Trade a try. With Wealthsimple Trade, there are no account minimums so you can start trading for as little as $1. Better yet, Wealthsimple Trade charges no commission fees and a nice Welcome Bonus, so it really is one of the most wallet-friendly ways to learn how to invest. For a limited time, get a $50 cash bonus when you open a Wealthsimple Trade or Crypto account and deposit and trade at least $150. Sign-up today to take advantage of this exclusive offer! Note, however, that if you do buy/sell any U.S. stocks or ETFs there is a currency exchange fee for USD trades of + 1.5% (this is how Wealthsimple Trade can afford to offer commission-free trading) but that fee is still under the industry standard of most brokerages, which is around 2%.

 

Remember to separate your savings into three buckets. There’s the cash you need immediately for your day-to-day living expenses. That money typically lives in a chequing account. Then there’s your short-term savings, like for a vacation, or a laptop, or maybe a down payment on a house. Finally, there’s your long-term investments, like for retirement. A potential fourth account is for your emergency fund, which can be anywhere from one to 12 months’ worth of expenses, depending on your comfort level and job security.

It’s a good idea to keep enough in your chequing account to waive any associated bank fees (or better yet switch to a no fee bank account and use a cash back credit card for your everyday spending). Put your emergency fund and short-term savings in a high interest savings account that can at least keep up with inflation. Then put your long-term savings in a diversified portfolio of index ETFs and make a habit to contribute to them regularly.

How Much Should I Invest?

New investors want to know how much they should invest and how they compare to their peers. Most rules of thumb would have you save 10% of your paycheque, but that’s not always possible for young investors with lots of competing financial priorities.

The most important piece of advice is to get started as soon as possible. Start with a small amount that you know you can afford to put away, even if that’s just 2-3% of your salary.

Then, make it automatic by setting up recurring contributions that align with your pay periods. Money gets automatically whisked away before you even have a chance to see it, let alone spend it.

Finally, make sure to check in on your savings goal at least once a year and increase the amount of your contributions. That’s right, give your future self a raise! Soon you’ll be saving 10% or more of your salary and really growing that retirement fund.

Don’t worry too much about age-based savings milestones. Everyone has their own goals and their own life experience that defines how much they can reasonably save.

That said, if you are curious, Fidelity has published some retirement guidelines that suggest you should aim to save 1 times your current salary by 30, 3 times by 40, 6 times by 50, 8 times by 60, and 10 times by 67.

To reach those lofty figures, Fidelity suggests a savings target of 15% of your gross salary.

What does this look like for a $75,000 per year earner?

  • Age 30 – $75,000
  • Age 40 – $225,000
  • Age 50 – $450,000
  • Age 60 – $600,000
  • Age 67 – $750,000

Different Types of Investments

What type of investments are you considering? A typical diversified portfolio includes stocks, bonds, and cash. But there’s a wide range of products that you can access to build your own portfolio. Let’s look at the most popular investments today:

Exchange-Traded Funds (ETFs)

ETFs have exploded in popularity over the last 10 years as investors flock towards low-cost investment options. The most popular ETFs are ones that passively track large market indexes like the TSX or the S&P 500 by holding every stock in proportion to its market capitalization. ETFs come in many flavours, including actively managed ETFs that invest in specific countries, regions, or sectors and attempt to beat the market.

Mutual Funds

Still the most widely used investment vehicle in Canada, mutual funds are baskets of securities that allow investors to diversify by holding many investments inside just one product. Mutual funds in Canada tend to charge some of the highest fees in the world, with many equity mutual funds charging fees of 2-3%. There are passively managed mutual funds, though, called index funds which simply track the performance of a broad market index for a smaller fee.

Stocks

Individual stocks can be bought and sold through a discount broker online and held inside any registered or non-registered account. Investors can build a portfolio of stocks using any number of strategies, including large-cap growth (the biggest stocks), dividends (blue-chip dividend payers), or small-cap value (small stocks trading at low valuations), to name a few. Picking stocks is inherently risky as it’s difficult to identify winners in advance and a challenge to diversify broadly.

Bonds

Bonds are essentially debt issued by federal, provincial, and municipal governments, along with corporations. Investors lend money in exchange for interest payments (called coupons) over the duration of the bond. The riskier the bond issuer, the higher the coupon. Today, most investors get their bond exposure by holding a bond mutual fund or bond ETF so they can diversify their exposure across many bond issuers.

REITs

Real Estate Investment Trusts are companies that own and operate real estate holdings such as malls, hotels, hospitals, and seniors’ homes. They collect rents and tend to pass along most of their income to shareholders via generous dividends or distributions.

Cryptocurrency

Cryptocurrency is a form of online money that is decentralized from any bank or government entity. The most popular of these alt-coins is Bitcoin, but we’ve also seen the likes of Ethereum, Ripple, and even meme coins like Dogecoin soar in popularity. These highly speculative alternative investments should not make up more than 5% of your portfolio.

Short Term vs Long Term Investing

In order to understand what types of investments are worth your time, you have to know whether your goal is short-term or long-term. Saving for short-term goals is different than saving for retirement, and so the type of investments you choose will depend on what you’re saving for and when you need the money.

The general rule is that money needed within the next three years should not be invested in the stock market. So, if you’re saving for a house down payment or another big-ticket purchase in the coming few years, keep that money safe in Guaranteed Investment Certificates (GICs) or a high-interest savings account.

Stocks, ETFs, and mutual funds are more suitable for long-term investments (think 10 years or longer). When you decide to start investing, it should likely be for retirement (or early retirement if that sounds more appealing).

Pro-tip: Map out your financial goals over the next year, 3-5 years, and 10+ years. Prioritize or rank each of them. If you need the money in three years or less, it should not be invested in the stock market. Stick to guaranteed investments such as a high-interest savings account or GIC.

Defining Your Risk Tolerance

Define Your Risk Tolerance

ImageSource: Shutterstock

In order to successfully maneuver your investing journey, you have to figure out your risk tolerance. Your risk tolerance, or capacity for risk, determines how much of your investments you’ll put into stocks (or equities) and how much you’ll put into bonds (or fixed income).

A portfolio with 100% stocks has the highest expected return over the long-term, but you should also understand that it will be much riskier in the short term. Stocks can and do lose value, and many investors don’t have the stomach to watch their investments fall by as much as 50% in one year.

If you’re an equity investor, you can diversify away some of this risk by owning stocks not just in Canada but also in the U.S., International, and emerging markets.

Bonds, however, lower the expected long-term returns of a portfolio, but they play an important role in protecting your investments from losing too much value in a market crash.

I take two different approaches to risk. One, with my retirement more than 20 years away, I am comfortable with a portfolio of 100% equities and I achieve that by investing in Vanguard’s VEQT. But, when it comes to managing my kids’ RESP account, I invest more conservatively knowing they’ll need the money for post-secondary in less than 10 years (my kids are 11 and 8). This portfolio started out with 80% equities and 20% bonds but has recently shifted to 60% equities and 40% bonds after my oldest turned 10. By the time my kids are 17 the portfolio will be close to 100% fixed income or cash.

Pro tip: A traditional balanced portfolio contains 60% stocks and 40% bonds. Some investors use a rule of thumb where their bond percentage is equal to their age. If you’re 30 years old and figuring out how to start investing, then you’d have 30% of your portfolio in bonds.

Recommended Read: Should You Consider a Low-Risk Investment?

Model Portfolios for Beginners

New investors should aim to keep things simple, whether they go with a robo advisor or a self-directed (DIY) option. Luckily, simplicity is the name of the game with these model portfolios for beginners.

One-Ticket Solution:

ETF providers like Vanguard and iShares changed the investing game when they introduced something called an asset allocation ETF. Simply put, an asset allocation ETF is a ‘wrapper’ that contains multiple other ETFs from around the world. They’re put together into one ETF and automatically rebalanced, making it incredibly easy for DIY investors to build their own simple, diversified, and low-cost portfolio using just one ETF.

Open an account at Questrade, our choice for the top online discount brokerage platform in Canada.

Once your account is set up, and you’ve linked your bank account to fund it, simply purchase one of the following asset allocation ETFs:

ETF NameETF Symbol*Stocks / Bonds **MER
Vanguard Balanced ETF PortfolioVBAL60% / 40%0.25%
Vanguard Growth ETF PortfolioVGRO80% / 20%0.25%
Vanguard All-Equity ETF PortfolioVEQT100% / 0%0.25%
iShares Core Balanced ETF PortfolioXBAL60% / 40%0.20%  
iShares Core Growth ETF PortfolioXGRO80% / 20%0.20%  
iShares Core Equity ETF PortfolioXEQT100% / 0%0.20%  

*The four-letter ETF symbol is what an investor types into their brokerage account to buy its corresponding ETF.

**The percentage of stocks and bonds indicates how risky or conservative a portfolio will be. A higher allocation to stocks has a higher expected return over the long term, but also comes with larger ups and downs (called volatility).

Click here to see our most recommended ETFs in Canada.

Robo Advisor Solution:

If you’d prefer a hands-off investing solution, then look no further than a robo advisor, like Wealthsimple.

Your Wealthsimple portfolio would look something like this:

ETF NameSymbolDescriptionAllocation
Vanguard Total Stock MarketVTIU.S. Stocks20%
Vanguard US Total Market ETF (CAD-Hedged)VUSU.S. Stocks5%
iShares MSCI Min Vol Global ETFACWVInternational Stocks10%
iShares MSCI Min Vol Emerging Market FundEEMVEmerging Markets Stocks15%
iShares Core MSCI EAFE USDIEFAInternational Stocks20%
iShares Core S&P/TSX Capped Composite IndexXICCanadian Stocks10%
Mackenzie US TIPS Index ETFQTIPUS Government Stocks5%
BMO Long Federal Bond IndexZFLCanadian Government Stocks15%

This portfolio consists of 30% international stocks, 25% U.S. stocks, 15% emerging markets stocks, and 10% Canadian stocks, for a total of 80% of the portfolio dedicated to stocks or equities. The remaining 20% is held in U.S. and Canadian government bonds. This means the portfolio’s “asset mix” is 80% equities and 20% fixed income

It looks confusing and complicated, but not to worry – the pros at Wealthsimple manage it for you so that every time you add new money, or whenever markets go up or down, they’ll make sure all of these funds stay in-line with your original target asset mix.

I started investing in individual stocks before the advent of robo advisors and one-ticket ETF solutions. If I was beginning my investing journey today, I would start with a robo advisor and then, as I grew more comfortable, I’d transition to an online broker and a one-ETF solution.

Pro tip: We’d suggest that you don’t try to pick individual stocks but instead invest broadly in index funds and ETFs. But if you’re interested in scratching your stock-picking itch with a small percentage of your portfolio check out our guide to investing in stocks.

Tips for First Timers, From an Expert

It’s easy for new investors to be overwhelmed by all the information and options available to them. Here are my tips to get you started on the right path to investing and building wealth:

  1. Keep it simple – A portfolio that contains just a single asset allocation ETF will beat the pants off 90% of investors. That’s why there’s a subreddit dedicated to first timers called Just Buy VGRO.
  2. Accept that you’ll lose money (in the short term) – The long-term direction of the stock market points up and to the right, but it can behave like a rollercoaster for much of the way. Accept the fact that you can’t control the ups and downs of the market and just stay along for the ride. Your patience will be rewarded in the long run.
  3. Take the free money – If your employer offers a savings plan that matches all or even a portion of your contributions then run down to your human resource department and sign up immediately.
  4. Make it automatic – Treat your savings contributions like a bill payment (due to your future self) and automate them so you never even have a chance to spend that money. Pay yourself first is one of the best savings concepts in all of personal finance.
  5. Don’t follow the news too closely – It’s easy for investors to get caught up in the news of the day. Whether you’re distracted by meme stocks and high-flying crypto-coins, or some pundits’ doom and gloom prediction, there’s always some compelling reason to tinker with your portfolio. Don’t do it. Your long-term investing strategy should not change based on current market conditions.
  6. Focus on your savings rate – Investors want to focus on getting the highest return, but it’s your savings rate that matters more when you first start investing. Think about it. A 10% gain on a $5,000 balance is just $500. Your contributions are more impactful. It’s only once your portfolio hits the six-figure mark that you’ll start to see truly meaningful growth from investment returns (that outpace your contributions).

RRSP or TFSA: Which Account to Choose?

Now that you’ve settled on where to park your investments, you need to decide the appropriate type of retirement plan in which to invest. For most of us, the choice comes down to a Registered Retirement Savings Plan (RRSP) versus a Tax-Free Savings Account (TFSA).

Generally speaking, an RRSP and a TFSA are mirror images of each other. What does that mean? Well, with an RRSP you contribute with pre-tax money (or get a tax refund on your contribution), but you pay taxes when you take the money out of your RRSP. With a TFSA you contribute with after-tax money (no refund on your contribution), but you don’t pay taxes when you take the money out of your TFSA.

So, what’s the rule? If you expect to be in a lower tax bracket in retirement than you are today, then contribute to your RRSP. If you expect to be in a higher tax bracket in retirement than you are today, then contribute to your TFSA. And if you think your tax bracket will be the same in retirement as it is today then it doesn’t matter – contributing to either your RRSP or your TFSA will give you the exact same outcome.

That said, RRSPs have several advantages over TFSAs. For one, your contribution room is likely much higher in your RRSP. Each year you’ll get to contribute up to 18% of your income and carry forward any unused room into the future. With a TFSA you get up to $6,000 per year in contribution room, which also can be carried forward indefinitely.

Another big-time advantage for RRSPs is when your employer offers to match your contributions up to a certain dollar amount. If that’s the case for you, run (don’t walk) into your human resources department and enroll in that program immediately.

I feel old saying this, but when I started investing the TFSA had yet to be invented and so I foolishly opened an RRSP and began contributing even though I was making an entry-level salary. I had to raid my RRSP several years later to pay off some consumer debt, permanently losing that RRSP contribution room and paying taxes on the withdrawals. Not ideal!

Starting over, I’d definitely prioritize the TFSA early in my career and take advantage of the flexible withdrawals, while saving my RRSP contribution room for my higher-earning years.

Pro-tip: Both an RRSP and TFSA can be used to purchase long-term investments such as stocks, ETFs, and mutual funds. They’re not just for holding cash in a savings account – set up an automatic purchase plan and put that money to work in a diversified portfolio of index funds or ETFs. Note, you will need to open an RRSP and/or TFSA at a discount brokerage account in order to invest in stocks and ETFs.

FAQs

A robo advisor is a great option for new investors today as they allow you to build a diversified portfolio on index ETFs with every dollar you contribute to your account. You also don’t need to worry about rebalancing or figuring out which ETF to purchase, it’s all done for you automatically.
It’s tempting to want to put some money into the latest investment fad, whether it’s cryptocurrency, cannabis, bio-tech, or bigger name story stocks like Shopify or Tesla. That’s fine if you’ve got money you can afford to lose, but when it comes to building a retirement portfolio a better approach is to diversify as broadly as possible with index funds and ETFs.
When you invest in a company, you’re paying for a piece of that company’s expected future cash flows. When the company’s future earnings meet or exceed expectations, its stock price should rise and increase the market value of your investment. When earnings are strong, the company can also issue dividends back to its shareholders – putting cash back into your account for spending or reinvestment. Finally, a company can buy back its own shares, which reduces the number of shares outstanding and increases the value of those shares.

 

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Author Bio

Robb Engen
Robb Engen is a leading expert in the Personal Finance realm of Canada and is also the co-founder of Boomer & Echo, an award-winning personal finance blog. You can find his monthly column in the Toronto Star’s Smart Money section or see him featured in well-known financial publications, like the Globe & Mail, Financial Post, MoneySense, CBC, and Global News. He is a fee-only advisor who helps Canadians at all different stages get their finances on track and prepare for retirement. Robb lives with his wife and two daughters, who keep his life and hands full, in Lethbridge, Alberta.

Article comments

7 comments
Emmanuel says:

Hi Robb,
I worked at federal government of Canada for the past 5 years and I’ve been contributing towards a pension plan that the government evenly match. I’m 35 years old and maybe want to retire before 35 years of service. Is a TFSA a good option to invest in ETF’s or an RRSP would be a valid option as well? Thank you!

Daniel from GreedyRates says:

Hi Emmanuel,
Congrats on embarking on your journey towards financial independence. Both are good options- ETFs would serve you well in both of these registered accounts but the right mix will depend on your specific set of circumstances. Start by determining if you should put your savings in a TFSA or RRSP– spoilers, it will depend on your current vs. estimate future taxable income. Once you have something in mind, take a look at How to Start Investing in Canada, and then take the plunge by buying your ETFs. Enjoy the journey!

Tyler says:

Hi Robb.
Really great article. I love that your a local Albertan as well. Do you have somewhere that readers like myself can follow what your writing about.

Aaron Broverman says:

Hi Tyler,
Actually he does. Check him out on boomerandecho.com or check out his author pages at this site, the Toronto Star, Ratehub and Young and Thrifty

Stock Market Broker In India says:

Amazing article, this will definitely help out to the beginners.
Waiting for your next article

Bill says:

Hi Robb,
Great post! I have a question in regards to RRSP contribution room. Does it carry over from year to the next? For example say I don’t contribute anything to my RRSP this year. Next year, is the maximum amount I can contribute 18% of this years salary + 18% of next years salary? Greatly appreciate the help!

Aaron Broverman says:

Hi Bill,
Yes, it does carry over from one year to the next indefinitely until age 71 when you’re no longer eligible for a RRSP account. This room accumulates for every year you are unable to contribute. For Example: if in 2017, 2018, and 2019, you were eligible to contribute $5,000, $7,500, and $10,000 but didn’t or were unable to, your room would be all these contribution limits added together which is $22,500.