Investing can help you grow your money over time and work toward long-term financial goals. But getting started can feel overwhelming when you're faced with unfamiliar terms, different types of accounts and countless investment options. The good news is that you don't need to be an expert to begin. Start by understanding your goals, financial situation and comfort with risk. Then choose an appropriate account and investment strategy for your needs.
What does it mean to invest?
Investing means putting money into assets with the potential to earn income or increase in value over time.
Depending on your goals and risk tolerance, investments can include:
- GICs and other term deposits
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Stocks
-
Other investment products
Different investments have different levels of risk, potential returns, fees and time horizons. There is no single investment that is right for everyone.
Before you start investing
Before putting money into investments, take a look at your overall financial situation.
Consider whether you have:
- A budget that accounts for your regular expenses
- An emergency fund
- High-interest debt that should be addressed
- A clear financial goal
- Money that you can leave invested for an appropriate period
You don't necessarily need to have every piece in place before investing, but understanding your financial priorities can help you make better decisions. For example, money you may need in the near future generally shouldn't be exposed to the same level of investment risk as money you're investing for a goal many years away.
Define your investment goals
Start by asking yourself why you're investing.
Your goal might be:
- Building long-term wealth
- Saving for retirement
- Buying a home
- Funding education
- Creating a financial cushion
- Saving for another long-term goal
Your goal can help determine how much you need to save, how long you have to invest and how much risk may be appropriate.
Understand your time horizon
Your investment time horizon is how long you expect your money to remain invested before you'll need it. Someone investing for a goal that's 20 years away may have more time to ride out market fluctuations than someone who needs the money next year. Generally, the longer your time horizon, the more opportunity you may have to consider investments with greater potential for growth — but also greater risk.
Understand your risk tolerance
All investments carry some level of risk. Before investing, consider how comfortable you are with the possibility that the value of your investments could decline.
Ask yourself:
- How would I feel if my investments temporarily lost value?
- How much of a loss could I financially tolerate?
- When will I need the money?
- Would I be tempted to sell because of a short-term market decline?
Your financial situation and your ability to take risk are just as important as your emotional comfort with market fluctuations. If you're unsure, a qualified investment professional can help you assess your circumstances.
Choose the right investment account
The account you use and the investment you hold inside that account are two different decisions.
For Canadian investors, common registered accounts include:
Tax-Free Savings Account (TFSA)
A TFSA can hold eligible investments and allows investment income and gains to grow tax-free, subject to the applicable rules. Withdrawals are generally not taxed, and amounts withdrawn are generally added back to your contribution room in the following calendar year. A TFSA can be useful for both short- and long-term goals, depending on the investments you choose.
Registered Retirement Savings Plan (RRSP)
An RRSP is designed primarily for retirement savings. Contributions may be deductible from taxable income, subject to applicable rules and contribution limits. Withdrawals are generally taxable. An RRSP can be particularly valuable when saving for retirement, but whether it is the right choice for you depends on your income, tax situation, goals and other factors.
Non-registered investment account
You can also invest outside registered accounts. A non-registered account doesn't provide the same tax treatment as a TFSA or RRSP, but it can provide additional flexibility once you've used available registered-account room or if you're investing for purposes that don't fit within a registered account.
Choose investments that match your goals
Once you've chosen an account, you'll need to determine what investments to hold.
GICs and term deposits
GICs and other term deposits can provide a guaranteed rate of return when held to maturity, subject to the terms of the investment. They can be appropriate for investors who prioritize capital preservation and predictable returns.
Bonds
Bonds are debt investments issued by governments or corporations. They can provide interest income but are subject to risks, including interest-rate and credit risk.
Mutual funds and ETFs
Mutual funds and ETFs can provide exposure to a diversified collection of investments. The underlying holdings, investment strategy, fees and risk can vary significantly, so it's important to understand what you're buying.
Stocks
Stocks represent ownership in a company. They can offer greater potential for long-term growth but can also experience significant price fluctuations and losses.
Don't put all your money in one investment
Diversification means spreading your investments across different assets, companies, industries, regions or other categories. The purpose is to avoid having too much of your financial future depend on a single investment. Diversification doesn't eliminate investment risk, but it can help reduce the impact of poor performance from any one investment or category.
Start with an amount you can maintain
You don't need a large amount of money to develop an investing habit. Consider setting up regular contributions that fit within your budget. For example, an automatic monthly contribution can help make investing part of your regular financial routine. The important thing is to choose an amount you can maintain while still meeting your other financial obligations.
Understand fees
Investment products and services can have different fees.
Depending on how you invest, you may encounter:
- Management fees
- Trading commissions
- Fund expenses
- Account fees
- Other transaction or service charges
Fees can affect your investment returns over time, so understand the costs associated with an investment before you buy it.
Avoid making decisions based on short-term market movements
Investing is generally a long-term activity. Markets rise and fall, sometimes significantly. Trying to predict every market movement can lead to emotional decisions and unnecessary trading. Instead, focus on your goals, time horizon, diversification and overall financial plan. If market volatility makes you concerned about your investments, consider discussing your portfolio with a qualified investment professional before making significant changes.
Common mistakes new investors should avoid
When you're starting out, watch out for these common mistakes:
- Investing money you'll need soon
- Taking more risk than you can afford
- Putting too much money into one investment
- Ignoring investment fees
- Chasing investments because they've recently performed well
- Making emotional decisions during market downturns
- Investing without understanding what you're buying
- Failing to review your investment strategy as your circumstances change
A simple investing checklist
Before you make your first investment, ask yourself:
☐ What am I investing for?☐ When will I need the money?
☐ How much can I invest regularly?
☐ Do I have an emergency fund?
☐ What is my risk tolerance?
☐ Which account is appropriate?
☐ What investment am I buying?
☐ What fees will I pay?
☐ Is my portfolio diversified?
☐ Do I understand the investment?
Ready to start?
You don't need to know everything about investing before you begin. Start by understanding your goal, time horizon and risk tolerance. Then choose an appropriate account and investment strategy. If you're unsure where to begin, a qualified investment professional can help you understand your options and build an approach based on your individual circumstances.
The best investment strategy is one you understand, can afford and can stick with over time.
This article is for general educational purposes only and does not constitute investment, financial, tax or other professional advice. Investment products involve risk, and returns are not guaranteed unless specifically stated. Speak with a qualified professional about your individual circumstances.
