How to Invest: A Guide to Investing for Canadians
When you want to build wealth, saving will only get you so far. Putting your money away is always a good idea, of course, but the rich get richer by investing. You might not be rich, but you can still get richer by choosing to invest your money rather than keeping it in a savings account or under the mattress.
But what’s the best way to get started? What if you don’t know about hedge funds and what a TSX Composite Index is? What if you don’t want to spend your day researching stocks and watching your retirement fund go on a roller coaster ride? Who should you call? What should you do?
Grab your top hat and light your cigar, as all of this and more will be explained in this Wealth Rocket guide to investing for Canadians.
Table of Contents
Reasons to start investing
Let’s start at the beginning. Why would you want to invest your money? Saving is safe and comfortable. Investing is confusing and scary.
The reason you want to start investing your money is to take advantage of compounding growth.
Let’s say you have $1,000 to invest. If you put your money in a savings account with your bank paying 0.5% interest, after ten years, you’ll have earned a whopping $51. Yippee.
Now, let’s say you choose instead to put that money in an investment with a 6% annual return. In 10 years, you’ll have earned an actually whopping $791. Yippee!
When you look at it on the scale of your retirement, the difference between saving and investing can make an enormous difference. If you’re 35 today and saving $100 a month toward retirement in that same savings account, you’ll retire at age 65 with just shy of $39,000 in the bank.
Invested, that same $100 a month will add up to over $97,000. That’s a huge difference!
What should I invest in?
When you think of picking investments, you probably think of picking stocks. You could buy shares of Apple, Tesla, or any other company you can think about.
As a Canadian, you have tons of options. Before you dive into which specific investments to buy, you need to make some decisions about what types of investments to buy.
Your choices include, but aren’t limited to:
Yep, shares in publicly traded companies are at the top of the list. You can pick individual ones and earn money when the value goes up and earn dividends, which are small payments from the company as an incentive to own shares. It certainly helps if you have some knowledge of how the stock market works before you start trading.
Commodities are physical valuables like gold, silver, and oil. Rather than heading out and picking up an ounce of gold, you can buy into someone else’s stash. You make money when the value of your commodities goes up.
When governments and companies want to raise money, they can issue bonds. Investors buy the bonds, and the issuer promises to repay them with interest. You can buy bonds directly from the issuer or from someone who owns them already. You make money when the bond matures or when you've sold the bond to another investor for more than you paid.
Don’t want to pick individual investments? Mutual funds package wide varieties of investments, with professional fund managers buying and selling to make money. You pay a fee to the fund manager and make money when the value of your shares go up.
Exchange traded funds (ETFs)
Similar to mutual funds, Exchange Traded Funds (ETFs) package together wide varieties of investments. The difference is the managers of the fund only buy and sell according to very strict rules. You pay a fee to the fund manager and make money when your shares' value goes up.
Guaranteed Investment Certificates (GICs)
Financial institutions sell Guaranteed Investment Certificates (GICs) to their customers to raise money to invest elsewhere. They pay a fixed interest rate in exchange for your promise to keep your money invested for a fixed length of time. These terms can range from 30 days to 10 years.
How do I decide which type of investment is right for me?
The answer to this question comes down to your risk capacity, which relies primarily on your short-term and long-term goals. Risk capacity is your willingness to accept risk. It is also commonly referred to as risk tolerance.
The investments that make the most money are also the ones that lose the most money. Safer investments don’t make as much money. Your goal is to make as much money as possible without taking on more risk than you're willing. Holding the line grants plenty of chances to make it back.
On our list above, the riskiest investments are stocks and commodities. Their value can swing wildly, even day-to-day. However, they also make the most money over the long run.
Bonds are in the middle. Their values are much more stable than stocks, but they can still take unexpected turns in any direction
GICs are by far the safest. It’s virtually impossible to lose money on a GIC, but they pay very little compared to other investments.
ETFs and mutual funds comprise many different investments and can fall anywhere on the risk scale.
You can find mutual funds optimized for intense growth with very high risk. And you can find ETFs made up of only very safe investments. Each fund has a prospectus that describes what it’s all about.
How carefully do I have to manage my investments? How will I keep track?
The choice is up to you. As far as how much time you want to spend managing your investments, the pendulum swings between active and passive.
Active investors spend a lot of time managing their investments. They will do their best to pick the right investments, buy them at a good price, and sell them for a profit. Sometimes active investors get involved in the investments themselves. And some people make this their full-time job.
Passive investors spend very little time managing their investments. They will do their best to build a diverse portfolio of many investments that should, on average, go up in value over time.
They’re less concerned if the value of one individual investment drops as long as the value of their portfolio as a whole is going up.
It’s just about impossible to pick stocks reliably. The people who are supposedly the best in the world rarely do better than the market does as a whole.
Unless you’re looking to make a quick buck or are excited about being in the driver’s seat – you’ll want to be a passive investor.
How do I build a portfolio that will help me reach my goals?
By now, you should know that you can choose from different types of investments with different levels of risk.
And, you know that you can choose to be an active or passive investor (or somewhere in between). So, how can you put that all together and build an investment portfolio?
This task likely begins with finding the right investing platform.
If you want to be an active investor, pick individual stocks, and make frequent trades, you can use lots of trading platforms or online brokerages to build your portfolio. Brokerage accounts are available through major banks or online.
In my article on Canada's best trading platforms, I named Scotia iTrade the best for beginners. They have great educational tools, and you can open a free practice account to get a feel for it before you get started for real.
If you want to be a passive investor, building a diverse portfolio built for long-term growth, a robo-advisor is a great choice.
These online platforms help you decide on your risk profile and goals and set up a portfolio to match. They take care of all the buying and selling and automatically make trades, so your portfolio stays balanced the way you want it. You can use online tools to check on your investments when you want to, or you can just set it and forget it.
If you prefer to go old-school, you can work with a human, financial advisor who can give you personalized advice and make recommendations based on their expertise.
You can also head to a bank branch but be aware that their financial advisors may be more interested in selling you a particular product than the right investment for you.
How are investments taxed?
In Canada, you can choose from a few different accounts to reduce the amount of tax you stand to pay on your investment income.
The best-known is the Registered Retirement Savings Plan (RRSP). You can buy all kinds of investments in your RRSP, and you can deduct your contributions from your income at tax time.
You’ll pay income tax on the entire amount you withdraw from your RRSP when you’re ready to cash in.
Another great choice is the Tax-Free Savings Account (TFSA). You can buy all kinds of investments in a TFSA. It doesn’t have to be a standard savings account. You don’t get to deduct your contributions from your taxes, but any investment income earned in your TFSA is tax-free.
There are also some specialty accounts. If you’re saving for your child’s education, a Registered education savings plan (RESP) is a good choice. If you’re saving on behalf of someone with a disability, a Registered Disability Savings Plan (RDSP) might be the way to go.
Finally, you can also invest in a non-registered account. You’ll pay income tax on anything you earn, but there are no rules to stick to or track.
Our Final Thoughts
Investing might sound complicated, but it doesn’t have to be.
From reading this article, you should have a good idea of the types of investments you can buy and how much risk each of them carries, as well as why you might want to take on riskier investments than you thought you would.
You’ve also learned that you don’t have to pore over stock tickets and business sections to be an investor unless you want to.
You can choose to be an active investor, get involved, or choose a passive approach. You can use tools to build a portfolio depending on how active an investor you want to be and how much advice and support you need.
Frequently Asked Questions
Start by learning about the different types of investments you can make and deciding what kind of investor you want.
Once you’re confident in the basics, a robo-advisor is the perfect way to get started as a new investor. A robo-advisor can help you determine your risk profile, recommend investments to meet your goals, and take care of the day-to-day maintenance for you.
Whether you should save or invest depends on your goals. If you want to buy a car next year, saving is the way to go because you don’t stand to lose any money, and it doesn’t cost anything to open or withdraw money from a savings account.
If you want to grow your wealth for the long-term, investing is more likely the way to go. And, to make things a bit more confusing, a well-diversified investment portfolio should include some cash savings that are accessible at a moment’s notice. You'll also want to build an emergency fund.
Yes, investment dividends are taxable in Canada. Your investment income will be subject to a combination of income tax (for money earned through interest and dividends) and capital gains tax (for money earned through selling investments at a profit).
You can avoid some, or all, of these taxes by holding your investments in a registered account like an RRSP or TFSA.