We’re back with a new blog post for our Investing Series! Today we’re here to discuss some tips and suggestions that will help you on your investing journey.
We’ve talked about various investing topics on our blog so far: RRSPs, TFSAs, and the Time Value of Money, as well as many posts on financial planning. If you’ve read any of those posts, you may have gathered that we here at Untangle Money really recommend investing your money as soon as possible as it's one of the best things you can do for yourself and your financial future. Investing your money means you’re making your money work for you, setting yourself up for financial success.
In our first post of this series we discussed “where do I even start?”. To briefly recap, we went over how to get started; where to open your account; what type of account to open; and how much you should invest to start. In today’s installment, we’re giving you some tips and suggestions for investing that will (hopefully) help you feel confident and secure when making financial decisions and working toward your financial future.
Let's dive in!
Investing vs. paying off debt, which comes first?
When it comes to the question of “Should I pay off my debt before I invest my money?”, there are some factors to take into consideration first. If you have high-interest debt (like credit card debt) you need to pay that off first before you consider investing your money. High interest debt can accumulate quickly and eat away at your money! If you have money set aside that you are considering investing, you should use that to pay off your debt first instead.
With that being said, if you only have low interest debt such as paying off a student loan, investing at the same time is something you could consider doing if you feel comfortable.
How do you know if your interest rate is low? Our rule of thumb is if you think you can get 2% more from investing than it costs to hold your debt, you should invest.
For example: if the interest rate on your debt is 4.5%, and you think you can get a 6% return on your investment by investing in the markets, we think you should prioritize paying down your debt. That’s because there isn’t enough wiggle room for when the markets do poorly and you’re paying to borrow that money (6% minus 4.5% is 1.5% which is less than the 2% we’d like to see).
But let’s say your interest rate is 3% and you think you can get a 6% return on your investments, then 6% minus 3% is 3%, and 3% is larger than 2%, so go ahead and prioritize investing. Robo Advisors will let you know the expected performance of their portfolios.
Sisterly Advice: Having a budget can really help with managing your debt payments. This will allow you to set aside money for your future investments!
Always have an investing strategy!
Always have a plan! 📢 One of the biggest mistakes an investor can make is investing without a plan. An investing strategy will be your approach to selecting and managing your investments. They are often goal orientated and will help guide your decisions going forward.
An investing plan usually involves the following steps:
Setting a Goal: Are you looking to grow your money for retirement? Are you looking to save up for a house? Are you hoping to live off passive income? Having a goal will determine your investing strategy and your investing philosophy going forward. Sisterly advice: saving for retirement should always be a goal.
Assess your risk: Risk tolerance is something you may hear when you first start to look into investing. It essentially boils down to how much you are willing to lose if an investment doesn’t work out. To assess your risk you should look at how much you are willing to invest, what your current financial needs are, how long you want your money to be invested, etc. Sisterly advice: the younger you are the more risk you can afford to take. If you’re in your twenties you should at least consider putting all of your money into a diversified equity portfolio (not a meme stock), this is because at this stage in your life you can afford to take the most risk.
Investing philosophy: An investing philosophy is your mindset when it comes to investing. Do you want to watch your money grow steadily and safely or do you want a bit more risk for potentially better gains? Your investing philosophy will spell out your fundamental approach to investing. Another aspect of your investment philosophy is what companies you’re interested in investing in. Socially Responsible Investing (SRI) options allow you to avoid companies that may not align with your values.
Determine what to invest in: Once you have a general outline for the kinds of investments you want to make, you can start to look at the different investment categories that you would like to own. Do you want stocks or bonds? Do you want to invest in North America or globally? Do you want to invest in a specific sector? If you’re new to investing, robo advisors offer pre-built portfolios that can save you a lot of the homework and research required if you want to do-it-yourself invest. That is not to dissuade you from DIY investing, women make great investors, just make sure you do your homework. An important part of this step is having an asset allocation plan. Your asset allocation at a high level refers to what percentage of your portfolio is in bonds versus equity (making sure that your portfolio represents the risk level that you want - bonds are considered less risky, but they don’t have great returns, and equities are considered more risky, and can provide more volatile return).
Following your investments: This means keeping track of the status of your portfolio! We actually don’t think you should check on your portfolio too often. This is one case when a "set it and forget it" strategy can really work in your favour, especially if you are in a diversified portfolio. You should check your portfolio once or twice a year at a minimum. Looking at the portfolio every day can increase your financial anxiety, as markets can be fairly volatile. It's also important to note that your investing goals and/or your philosophy might change overtime. Your portfolio will likely change to better suit your financial needs.
Diversify your investment portfolio!
Ever heard the phrase “don’t put all your eggs in one basket”? Well diversifying your portfolio essentially means just that - not having all your investment in one place/basket. Diversification is a term you will hear often in the investing world. If you have all of your money in one investment, you may be at risk of losing a significant portion of your money if that investment performs poorly. When your money is split amongst various investments, an investment that is doing poorly can be offset by another investment doing well.
Here at Untangle Money we recommend ETFs as a good option for diversifying your portfolio. ETFs (Exchange Traded Funds) are securities (stocks, bonds, etc.) that attempt to track different aspects of the market.
For example: There are ETFs for tracking the healthcare sector and there are ETFs that can track the entire Toronto Stock Exchange (TSX). So when you purchase a share of an ETF, you are essentially getting various stocks in one.
As you can see, selecting the right ETF can be a good option for people who don’t necessarily want to research 20 different stocks. They can provide your portfolio with instant diversification!
Do your research!
In addition to not having a plan, many investors today will invest without doing their due diligence. Whether you’re looking to invest passively or actively, an investor should always do their research.
For passive investors using services like robo advisors and financial advisors, it’s important to choose the right service for you. There are differences between platforms like Questrade and Wealthsimple that you will want to look into so you can find what works best for you!
For more active investors, research is essential. Many investors today are actually speculating, not investing. Investing consists of analyzing a company and understanding its underlying businesses before choosing to invest in them. Think of it like other major purchases you may make in your lifetime, like buying a car or home - typically you would do your research beforehand before making the purchase. It’s the same for making investments.
What's next?
Financial independence is a huge part of being a strong, independent woman, it is our mission to help women successfully set themselves up financially.
At Untangle Money we help women understand their (real!) financial picture, and obtain financial guidance from people that actually, really, get it. We would love to help you, too. Join the community of hundreds of other women looking to strengthen their financial well-being. You can get in touch here for a free consultation.