This week we’re kicking off an investing series here on the blog. Today we’re starting with an introduction to investing so you know where you should even start when it comes to investing your money for a better financial future.
We’ve talked a bit 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 one of the best things you can do for your financial future is to invest your money. Investing your money means you’re making your money work for you, setting yourself up for financial success. But you may be thinking, “where do I even start?”. Trust us; you're not alone!
How do I get started with investing?
Getting started with investing can sometimes be confusing or overwhelming because there is just so much information out there. For the most part, we aren’t told anything about how to set up an account, what fees are included and how to invest. Not to worry, that’s why we’re here today! We’re going to break down the beginning steps that will hopefully help ease any stress you may have about investing.
The first step is to get started as soon as possible because time is your greatest advantage. With time on your side, you have a longer term to invest more. So, to get started you need to open an investing account.
How do I open an investment account?
You’ll need to open an account at a place where they are licensed to sell you financial products. We call these places brokerages. There are many options for brokerages in Canada where you can invest your money. A good first step would be to look at the options out there and find which one works best for you!
Brokerages come in all shapes and sizes. Here, we've listed them from least to most expensive:
Discount Brokerages
Robo-advisors
Full-service Brokerage (Banks and Financial Advisors)
Discount Brokerages:
If you want to do-it-yourself, your best bet is with a discount brokerage. These brokerages will offer an online trading platform, and little-to-no advice on what to purchase. If you are just starting out, this may not be the best place to get your feet wet. That’s not to say this isn’t a great option, but it requires you to do your homework and know a bit about what you’re doing
Sisterly Advice: Couch Potato tells you how to create and manage do-it-yourself investments. Wealthsimple will tell you exactly what it invests in, so if you’re adventurous, you can just replicate their portfolio.
Robo-Advisors:
If you’re just starting out in investing, take a look at the robo-advisors. Robo Advisors provide their customers with lower fees and commissions when compared to regular banks and traditional firms. QuestWealth offers the lowest fees for managed portfolios, and Wealthsimple is a close second; they also have excellent resources and a good user experience.
Some pros of robo-advisors:
No minimum amount needed to invest, we love that they make accessing the market available to everyone
They automatically rebalance your portfolio (rebalancing: because risk and reward go hand in hand, over time your best performing investments can become a large part of your investment portfolio - yay, right? Right, except now your portfolio might be a lot more risky, because you have more invested in areas that tend to go up more, but also down more, too), reinvest your dividends
You can set up auto-deposits so that you take advantage of something called ‘dollar-cost averaging’. (Dollar Cost Averaging can smooth the price you pay, and it can really help if you’re worried about timing the market)
You can have your dividends reinvested: When you own a stock, you own a very tiny piece, or a share, of a company. Many companies give a portion of the money they earn back to their shareholders (i.e. you). When they do this, these payments are called dividends. Many companies do this on a regular basis. So if you own a basket of stocks, and in the basket are stocks that pay dividends, you’ll start getting cash in your account - awesome, right? Right, except now you need to go into your account and decide where to invest that money - that’s how you take advantage of compounding your money. Dividend reinvestment means that the robo-advisor takes care of reinvesting that money for you.
Wealthsimple has socially responsible investing (SRI) funds that you can select. But just know that they are more expensive - still less expensive than the average banks and financial advisors though.
Here’s a guide comparing some robo advisors in Canada, and we recommend researching to see what option fits your investing needs best.
Banks and Financial Advisors:
Often people usually stick with their bank, which can offer ease of use since you are using just one platform. This is where it helps to be honest with yourself. If you don’t feel ready to try robo-advisors or discount brokerages, then you should absolutely use your bank or a financial advisor (use caution with financial advisors, there is a big range in quality). Here are some questions we put together that you can ask your current, or potential financial advisor.
But you should really be cautious:
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.
However, if you are okay with trying to do-it-yourself, or using a robo-advisor, we think that is a wise choice. Traditional banks have many hidden fees which can really erode your investment returns - small percentage fees can make a huge difference over a lifetime.
Sisterly advice: ratehub.ca is a great resource for comparing all sorts of bank products.
What type of investment account should I open?
Once you are comfortable with a brokerage, you need to figure out what type of account you want to open, and make sure it’s offered at the brokerage you selected. (Questions on account types, ask us here).
Be careful of TFSA and RRSP accounts that are high-interest rate savings accounts in disguise. If they are offering you a rate of less than 2% that is likely what you’ve stumbled upon. Usually you can only hold cash in these accounts, and cash is better held outside of TFSAs and RRSPs, saving the room you have in these tax-sheltered accounts for good investment returns.
In terms of the different kinds of accounts to open, you can check out our posts on RRSPs and TFSAs. Each investing account has different goals and depending on your needs, one might be more preferable than the other.
Right, so now you have an account that you can buy stocks and bonds in (sometimes these are combined into portfolios). Now you need to open that account. Don’t worry, we’ll wait….
Now you have to put money into the account. This is called ‘funding’ your account. You will need to transfer money from your bank to your brokerage.
Sisterly advice: If you are transferring money from another TFSA or RRSP, make sure you arrange the institutions to do this directly between them, you don’t want to have a CRA event, where it looks like you withdrew the money, and might come up against what you are allowed to reinvest. The institutions can transfer it from TFSA to TFSA, and RRSP to RRSP, without creating a CRA event.
For non-registered accounts: if you’re transferring from one brokerage to another for a non-registered account, see if they can transfer the products ‘in-kind’. This means that instead of selling the shares you hold and creating a taxable event, they transfer the financial instrument to the new firm. If you hold mutual funds created by the institution, they may be proprietary, in which case they can’t be moved in-kind and you’ll need to sell them and move the cash.
How much should I invest to start?
Initial investments can vary from person to person based on a variety of factors such as income, expenses, debt payments (stay tuned for a post on this!), financial goals, etc. The rule of thumb often cited is 10%; however, as a woman, statistically you’re likely to need to invest closer to 20% of your take home salary to end up with the equivalent of a man saving 10%.
Getting a financial plan can help you answer this question.
Wealthsimple has no minimum account size, and Questwealth has a minimum account size of $1000.
We really want to stress how important it is to start right away. You can see how much $100 can grow, if you give it time to compound, in the graphic to the right. Time is your biggest advantage when it comes to investing!
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.
Stay tuned, we have more blog posts on investing coming your way.