So, you want to start investing? Amazing! But where do you start? I know it can feel intimidating, but I promise you — investing doesn’t have to be complicated. At its core, investing is buying something (a.k.a an asset) that you think will grow in value over time or be a source of income, or both. That’s really it. Simple, right?
With that said, there are a few specific steps you should take to ensure you’re investing the smart way and avoiding costly mistakes. Let me share my guide on investing for beginners in seven simple steps.
Step 1. Define your goals and timelines
Before we get to the “how” of investing, we need to start with the “why”. Why do you want to invest your money? Or rather, what’s this money for? Is it for a short-term goal or for your future? To buy a home one day? For your kids’ future education? Is it so you can take a year-long sabbatical to travel the world? Depending on your answer, what you should invest in and for how long will look very different.
Write down your different investing goals and when you’d like to reach them.
Step 2. Take advantage of your workplace pension
Before you start investing, check if you have a pension option available to you at work and make sure you are maximizing this benefit. Workplace pensions are one of the easiest and most secure ways to help build financial security for your retirement years. Some employers offer a defined contribution (DC) plan and others a defined benefit (DB) pension plan. These two types of plans function very differently and have different features and responsibilities, so it’s a good idea to speak to your employer or pension administrator to find out which is offered and learn more. In both cases, your employer will likely contribute on your behalf, so it’s a no-brainer to participate.
For example, HOOPP is a DB pension plan for healthcare workers in Ontario. HOOPP members make regular contributions during their working years and then receive a monthly income for the rest of their life when they retire. It’s a secure and predictable way to build a stable income for retirement. Read more about the differences between DB and DC pension plans.
The security of a HOOPP pensionIf you are a HOOPP member, your pension is based on a formula, not stock market returns. When you retire, you’ll receive your monthly payments for the rest of your life. HOOPP’s experienced investment team manages the Fund on behalf of HOOPP members to provide a secure lifetime pension. |
If your workplace pension is optional, make sure you join.
Step 3. Build a financial foundation
Before investing your first dollar, you need to make sure you’ve got a solid financial foundation. This foundation is essential because it protects your investments from being prematurely withdrawn if you need cash for a short-term goal or emergency.
Start with prioritizing:
- A spending plan (a.k.a. budget) set up so you know how much you’re earning and where you want that money to go (savings vs. expenses).
- An emergency fund with 3-6 months of your living expenses saved up in a high-interest savings account so the funds are accessible when needed.
- All of your high-interest debts paid off, such as credit cards.
Cover the basics first.
Step 4. Discover your investor profile
Now that you are ready to dive in, take some time to think about what kind of investor you are and how much risk you are willing to take. How would you react if your investment portfolio plummeted by 20%? Would you sell everything, do nothing or buy more? The answer will reveal a lot about your comfort level with market volatility, also known as your risk tolerance. Your risk tolerance, combined with your investment goals and timeline, make up your investor profile, which will inform what investment portfolio is right for you.
Test out one of the many questionnaires online to find out about your investor profile.
Step 5. Select the right accounts
Knowing your goals and understanding your risk profile will help you select the right account(s) to hold your investments. If you’re investing for retirement, registered accounts such as the tax-free savings account (TFSA) and registered retirement savings plan (RRSP) are both important options that provide different tax advantages. If you’re saving for a home, consider the first home savings account (FHSA), which is designed for this purpose, and the RRSP (using the Homebuyer’s Plan). If you’re saving for your kids’ future education, the registered education savings plan (RESP) provides additional government grants to enhance your savings. And for all other general wealth-building goals, your TFSA and unregistered accounts are good options too. Read more about the differences between TFSAs, RRSPs and FHSAs and RESPs.
Match your goals to the right accounts.
Step 6. Decide on a hands-on or hands-off approach
Do you want to manage your portfolio, or would you rather leave that to the professionals? There’s no right or wrong way to invest; it really comes down to your comfort and experience level.
If you’d prefer to be completely hands-off, you could seek out an investment advisor to handle everything for you. Keep in mind that there are different fee structures to consider and some advisors may have minimum account sizes. Robo-advisors are another hands-off option. These online platforms offer automated investment portfolios based on your stated goals and risk tolerance, and are a lower-cost alternative to a bank or wealth management firm with low (or no) investment minimums.
If you’d like to be a little more hands-on, consider investing in an all-in-one fund like an asset allocation exchange-traded fund (ETF) at a discount brokerage or your bank. And finally, if you want to take full control, you can sign up to use a direct trading platform at your bank or another firm, which requires you to research your own investments to buy or find model portfolios that match your investor profile to start building your own ETF portfolio. This approach gives you maximum freedom at the lowest cost — but also the most responsibility and effort required. Read more about robo-advisors and ETFs.
Decide which approach you’d like to take.
Step 7. Start small and stay the course
Your last step is to get started. Even if all you can realistically afford to invest is $25 or $50 or $100/month. Any amount can grow over time. Then, as your income increases, you can increase your contributions to accelerate that growth. A word of advice: It will feel like your investments are growing at a snail’s pace at the beginning. That’s completely normal and you should be wary of anyone saying you can get rich quick. Building true wealth is a slow and steady process, so be patient.
Get started.
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