How to Get Started Investing When You are a Complete Novice

Date posted: Feb. 24, 2017
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How to Get Started Investing When You are a Complete Novice

Photo Credit: Emma Craig
 

Of all the generations of Canadians, millennials seem the most distrustful of the stock market. This trepidation might be because we graduated into the 2008 stock market crash and all of the uncertainty that followed. Since we were young, we didn’t have the safety net and job security that most other Canadians had, and that fear left lasting effects.

But the fact remains that the only way to adequately save for retirement is to invest your money. Without investing, your money will just sit in a savings account, and won’t earn enough interest or grow adequately to outpace inflation.

Fortunately, investing doesn’t have to be scary or complicated. If you are just starting out, there are several options to choose from that don’t require you to know anything technical about buying stocks or trading. Let’s go through the beginner investment options and then look at some common mistakes millennials make when it comes to investing.

Mutual Funds

A mutual fund is a pool of funds collected by a money manager and includes stocks and bonds, money market instruments and other assets. A money manager handles the fund and attempts to produce capital gains for their investors.

Mutual funds are very popular in Canada because almost every bank and credit union offers them, and investing is as easy as making an appointment with your local representative. Most mutual funds usually require a small amount of cash to get started (at least $1,000) and their higher fees mean you won’t see the best investment returns. In fact, Canadians pay some of the highest fees in the world, at an average of 2.35% according to Morningstar. While that doesn’t seem like much, it adds up when your portfolio starts to grow.

Index Investing

Index investing is rising in popularity in Canada because of they have lower fees and don’t require a money manager. Instead of employing a money manager to actively make trades on your behalf (and charge you fees for it), you choose a to invest in the entire market through index funds. This method ensures you achieve market average returns with the benefit of significantly lower fees. A very popular method for index investing is through Tangerine’s Investment Funds. These funds have low fees (1.07%), and you can start with as little as $100. This option is ideal for beginners because you don’t actively manage your money. Tangerine takes care of it for you.

Robo-Advisors

Robo-advisors are automated investing services, usually based online that use an algorithm to determine the best asset mix for your unique situation, and invest your money without the interference of human money managers. They use the same principals of Tangerine’s Investment funds but with much lower fees.

There are several options for robo-advisors in Canada including Wealthsimple, Nest Wealth, and WealthBar. Most of them allow you to start investing with almost no money, and their ultra low fees mean you’ll be able to realize the most from your investments, even if you start out with only a few hundred dollars.

There is also the option to do it yourself, but investing your money involves a high level of knowledge and isn’t recommended for beginners.

Now that we have the basic types of investing covered, here are a few tips to keep in mind when you start your investing journey:

Forget About Timing the Market

Many young investors put off investing because they aren’t sure when the “best time” to invest is. The thing is, if you’re investing correctly, you’re doing it for the long term, and that means the earlier you start, the better. Don’t worry if the market is up or down these days. As long as you aren’t planning to pull money out of your investments within the next five to ten years, it will have plenty of time to recover from even a major pullback.

At First, Quantity over Quality

In the beginning, choosing the right investment vehicle is less important than choosing to invest at all. Many people put off investing their money because they worry that they’ll choose the wrong type of investment. Instead of doing the research and making a decision, they opt to do nothing at all.

Not investing your money because you are afraid of making a minor mistake is a huge error. The truth is, minor market fluctuations and slightly higher fees don’t matter that much – at least in the beginning. When you start your investing journey, the numbers you are dealing with are so small that any errors you make will only cost you tens of dollars. It’s later, when your portfolio is bigger, that errors will cost you tens of thousands of dollars. That’s when you need to spend time looking into minimizing your investment fees and using the most tax efficient investment vehicles.

But in the beginning, the most important thing is that you save money. Getting into the habit of saving money for the future is the first and biggest barrier to investing properly, and it’s the barrier that keeps most Canadians from investing at all. So right now, just focus on getting a solid habit of regularly contributing to your investments, and you’ll be better off.

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