When people hear the term “investing”, they might imagine a process in which people put their money into a giant machine, then have more money come out the other side. The reality, however, is that investing is a dynamic process, which requires constant decision-making. In other words, investing is work.
Those who take the time to learn the basic principles of investing are set up to significantly benefit in the long run, enjoying increased financial freedom and flexibility. If you’re prepared to put in the necessary time and energy to take control of your financial future, keep reading!
Why Should I Invest?
By not investing, not only are you not gaining money; you’re likely losing money.
Generally speaking, a traditional savings account is the worst place to keep your money (unless you’re keeping it under your mattress).
When you keep cash in a savings account, it may generate a small amount of interest, but you are not gaining anything by doing this. Big banks often offer consumers nominal interest rates that, at best, match the inflation rate. In other words, you could be losing money by keeping your money in savings account.
Investing is a historical method of letting your money work for you so that you can spend more time focusing on the things you love.
So, how do you get started?
1. Decide your approach to investing.
There are different ways to approach investing, which produce radically different results for different individuals. Read into the option that makes the most sense for you below.
“I want to have full control over my investments, and I’m interested in learning all I can.” Great, you’re one of us! Keep reading; we’re going to be going over the initial things to keep in mind, give you continued exposure to some of the hottest companies around.
“I know that investing is great, but I don’t really have the time or interest to do it all on my own.” You may be best suited for a financial advisor, which can take the form of a human advisor or a robo-advisor, which is a relatively new innovation. Robo-advisors are algorithm-driven investment ‘advisors’ that most often follow passive indexing strategies to give you returns that match the overall market. This is a great way to slowly build your wealth without getting involved; however, it won’t bring you the kind of returns that you see on our platform.
Depending on your approach, there are different investment platforms that will work best for you.
2. Let’s talk platforms.
Where you manage your money is also incredibly important. To start investing, you’re going to need a brokerage account.
Deciding which broker is also a large consideration. These will vary for American and Canadian investors but, for now, we’re going to focus on our Canadian audience.
Full-service brokerages are the option for those who desire a bit more hand-holding throughout the process. Their services include executing trades on your behalf, reading financial statements, helping you plan your taxes and retirement, and more. There are, however, fees and commission payments associated with these services.
For those who want to learn and execute on their own, discount brokers are probably the option for you. You can choose to go with independent brokerages like Wealthsimple, QTrade, or Questrade, or the DIY services of your bank of choice. Banks often lag behind in their innovations and are less competitive on rates but can be beneficial for those who want all of their money in one place and instantaneous money transfers. Independent discount brokers require time to process money transfers, though typically offer the lowest fees of all.
Once you’ve decided on a broker, you’re ready to start.
3. Determine your risk level
When using any guided medium, the first question that new investors face is: What is your risk level?
There are quite a few different benchmarks you could use to fine-tune your answer but really, this boils down to how much volatility you’re willing to let into your investments. The more (calculated) risk you’re willing to let into your portfolio, the more aggressive gains and losses you can anticipate. For example, you can invest in very safe, low-yield government bonds and allow your money to grow slowly with very low risk of it dramatically decreasing in value.
On the other hand, you could invest in small-cap stocks that have a chance of increasing dramatically in value and earning you extremely high returns… but also have a high chance of decreasing in value or becoming entirely worthless.
There are countless options of varying risk levels – these are simply two of them.
Typically, the rule of thumb is to invest a higher percentage of your overall portfolio in stocks and objectively riskier investments when you’re young. This is due to the increased ability to recoup losses over time; when you are closer to retirement, you have less opportunity to make your money back within your remaining years.
Of course, the aforementioned rule is an extreme simplification of the risk spectrum – some young investors will be more interested in safe, slow-growth investments and some older investors will be keen to stay in high-risk, high-return investments for as long as they can!
Keeping risk in mind with Diversification
When discussing risk profiles, the type of risk being analyzed is calculated risk – this is nothing like blindly betting everything on red.
You determine what assets, industries, and companies you’re comfortable backing, based on the belief that they will continue building and providing investor value. For example, if you’re a huge proponent of sustainable energy, you may decide to purchase shares in a specific company that has been doing great things in the industry.
Alternatively, you could invest in a green-energy ETF.
ETFs are one of the easiest ways to gain exposure to a specific industry or type of company, while keeping your portfolio diversified. An ETF, or exchange-traded fund, is a collection of investments bundled into one, present in varying percentages. Typically, these are passively managed by algorithms which track indices (such as the S&P 500) and have very minimal management fees associated with them.
The more you spread out your holdings between companies, industries, and potentially even countries, the less you will feel fluctuations in one specific area. For example, if you’ve invested in a group of ten companies within financial technology and one of them fails, it will affect your portfolio, but to a much lower degree than if you had invested everything in them. The downside, however, is that if you’ve invested in ten companies that perform decently while one skyrockets, you will only feel a slight increase.
Diversification can come from individually investing in multiple companies, ETFs, mutual funds, and more; however, the important thing to keep in mind is that diversification is a tactic for not losing money, rather than gaining money.
The Bottom Line
You can learn to invest by putting in the work. Create an investment thesis and stick to it, investing in the things you understand, and find informational sources that you trust. While this journey won’t be short or simple, we’re committed to helping you understand the market and gain control of your financial freedom.
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