Investing for Beginners

First ask: should I invest?

Getting started early is great, but don’t be premature- Check out my article on "Step by step guide on Healthy Personal Finance". If you have debt (especially high-interest debt, like credit cards) you may want to pay that off first. It’s also generally a good idea to have a cash emergency fund before investing.

Also consider your situation and if you can invest the money you have for a long period of time. While the ultimate answer will depend on your own risk tolerance, generally at least 5 years and more like 10+ are needed to consider long-term investing methods.

For example, if you’re still a student, you may want to hold off for a few years, as the transition into the workforce can be a time where your future is very unclear. If you have to move across country, take a victory lap year to change specializations, or support yourself for an extended period of time while job searching, you may regret having your money tied up in long-term investments.

So consider your general need for money in the near and medium term, and if you can leave any money invested alone for ~10+ years.

Getting started early is a great benefit – and lets you take advantage of compounding returns – but don’t sacrifice near-term needs just to start too early and risk having to sell off your investments at a bad time.

Consider the risks

Investing involves risk. It’s important to know that in advance, and that long-term investments (stocks, bonds, and index funds made up of those) can and at times will go down in value. Over the long term, your investments should grow, and outpace inflation, but there are no guarantees. And getting the likelihood of better long-term returns usually means accepting more volatility and uncertainty.

So consider your own risk tolerance: if your investment portfolio is down by 30% or even 50%, will you be able to sleep at night? Will you be able to stick to your plan? What are your backup options – can you defer a purchase for several years until the market recovers, do you have other sources of retirement income to meet your basic needs, or do you need to invest less aggressively and increase your savings rate instead? These are not easy questions to answer but they are important to consider.

Also, you may have heard statements like “a diversified portfolio will go up by X%/yr on average” (where X is generally more than you’re getting on your savings account). Note that while it may work out that way in hindsight, long-term investing is absolutely not like a savings account where your balance only goes up steadily. It will be a very rocky ride to get there.

“You may be shocked to learn that a portfolio with equal amounts of Canadian, US and international stocks would have posted returns between 6% and 11% exactly five times in the last 42 years. Think about that: in any given year, the chance that stock returns will be within this “normal” range was less than one in eight.

"Now let’s consider the probability of more “abnormal” outcomes. If the average long-term return for stocks is 8.5%, let’s look at years where returns were a full 10 percentage points more or less than that. It turns out there were 11 years with losses of at least –1.5%, and 17 others with gains of at least 18.5%. In other words, the probability of a significant loss or a huge gain was 67%, or two years out of every three.”

How do I invest?

Beginner investor should look for low-cost, passive index investments, and stick with them for the long-term.

Low cost

Canada has very high mutual fund fees, and those fees come out of your portfolio whether you make good returns or not. If you’re getting good value in the form of services (e.g., financial planning and hand-holding from an advisor) then the fees may be worthwhile, but in general this is not the experience many people have. Those fees drain returns, and can really add up.

A 2.5% annual fee may not sound like much, but the effect compounds over time (just as the returns you’re looking to get compound). So frame it another way: if you’re expecting something like 6% returns on your investments, then a 2% fee is a full third of your return – a huge chunk! Another way to think of it is the, a measure of how much of your potential growth is eaten by fees. A 2.5% MER (fee) will eat up over 45% of your portfolio’s potential return over 25 years, which can have a huge effect on your financial goals; a 0.7% fee (similar to what a robo-advisor might charge) would only eat up 16%; a 0.42% fee (TD e-series) would eat up 10% over 25 years; and self-directed ETFs costing just 0.15% would take just shy of 4% out of your potential 25-year returns.Clearly, fees matter. They’re also one of the few aspects of investing that you can control in advance, which is why there is such a focus on them.

If you're based in Canada,

The Wealthsimple Trade app is a great platform and there are no fees for buying and selling stocks and ETFs. Opening or closing your account, withdrawing funds, electronic statements and inactive accounts have a $0 fee. To get started:

• Open a Wealthsimple Trade account here.
• Download the Wealthsimple Trade app from the Apple or Google Play Stores and sign-in with your Wealthsimple credentials.
• Choose an account type – TFSA or non-registered account.
• Fund your account using a linked bank account and start trading.

Questrade 

• Low Fees: Compared to popular brokerage platforms like TD Direct Investing and Scotia iTrade, you will consistently pay lower fees on Questrade with the stock trading at 1 cent per share ($4.95 min. and $9.95 max.).
• Commission-Free ETFs: You can buy ETFs for free.
• No Annual Fee: You won’t be paying an annual fee.
• Mobile Trading App: You can trade on the go using Questrade’s mobile app.

Readers of The Brown Investor who sign up for a Wealthsimple Trade account here receive a $10 cash bonus if they deposit and buy at least $100 worth of stocks within the first 45 days! Also, $50 Questrade Promo Code: You can get $50 in free trades when you sign up here. Feel free to message me, if you have any question or queries - I would be more than happy to answer.