How to Get Started in Investing
On our website, we talk about why a young person should invest and give advice on what investment vehicle to use. However, we know that taking the leap and making that first investment can be difficult, since there is an overwhelming number of choices and options available. So, today we want to give some easy, practical advice on where to start. Because, even though there are thousands of opinions on where you should invest and how you should invest, all advisors would tell you the important thing is to start as soon as possible and how you do it is far less important that getting started with something.
Everyone should have both an investment account for retirement and an investment account for savings (Now that you can get no fee or low fee investment accounts there is really no reason not to have both). For Canadians, the retirement account should be a Registered Retirement Savings Plan (RRSP) and the savings account should be a Tax-Free Savings Account (TFSA). For Americans, the retirement account should be a 401K (if offered by your company) or Individual Retirement Account (IRA) and the savings account should be a regular brokerage account. Except for the 401-K which is administered by your company, the process for setting up these accounts is the same. You simply connect with your preferred financial institution and set up the account with a small initial investment (usually <$100). All the accounts will also operate in the same way in that the way you buy and sell stocks, bonds or other securities is the same.
Thanks to competition from low fee/zero fee competitors (Robinhood in the US and Wealthsimple in Canada), the fees and services for most brokerages are very low and about the same and for a first time investor with a small portfolio and simple needs don’t worry too much about picking the right financial institution. You may want to use the services of your bank as then you’ll get “credit” for your investments when determining the fees on your bank accounts or when getting a loan through the bank. Bank online investing sites are usually pretty badly rated in terms of functionality but if you are only doing basic things (buying stocks), it won’t matter.
So, now you have your two accounts set up – one for retirement and one for saving. How much you put in each is really up to you but we would recommend that you put at least something away for retirement. The wonders of compound interest/returns means that any investment you make in your 20’s will have time to grow into a surprisingly large number over time. See the magic here. Perhaps start at 25% for retirement and 75% for savings.
How much to put away? The honest answer is as much as you can. If you read books about saving or talk to people who are living comfortably when they are older, they will all give you the same life lesson – try to live below your means. So, if you are making $50,000 per year, try to live like you are making $35,000 or $40,000 per year and put away the difference. Or, if you get a raise, try not to change your spending habits and put away the increase. We know this is hard and life is for living and enjoying so don’t beat yourself up if you don’t put something away every month; just do the best you can – you will thank yourself later. So, perhaps start with $100-$200/month as a savings goal. You can set up automatic transfers to your two investment accounts each month if you feel confident that you’ll have the money available each month.
Now that you have $50 or $100 per month going into your two investment accounts, what should you do with the money?. Here is where the advice can really become overwhelming as people love to tell you about how they made money with a hot stock or with Bitcoin or by day trading. We are going to make it super simple for you. To get started, simply put your money in
ETFs are a very effective and inexpensive way to build a diversified portfolio, which is the goal for any investor. ETFs are effectively a fund that goes and buys the stocks that make up an index or a group of companies. Let’s take the example of the S&P 500, which is an index of the 500 largest US publicly traded companies. If you had a portfolio which each of the 500 stocks, you’d have a well-diversified portfolio. But of course, with a small amount of money, you couldn’t even buy one share in each of the 500 stocks. But with an ETF, you buy one share in the ETF (and millions of others do the same) and the ETF buys shares in each of the 500 stocks (and charges you a small fee for doing so). Those fees are really low – less than .1% (yes that’s point.one.percent). So if you buy $100 of an ETF, your fee will be 10 cents.
A quick Google will give you lots of suggestions on ETFs. Remember that since they track the market, you don’t really need to worry about which one is “best”. And since they are all super-low fee, it’s hard to distinguish between them based on fee levels either. So you are really just picking based on what they choose as their sector/focus.
For both Americans and Canadians, I would suggest an ETF that tracks the S&P (that’s the reason I used that in the example). That would give you a good portfolio of quality companies.
Some might read this and object to the advice to put all your money in stocks. Don’t you need to diversify with some fixed income (bonds), real estate, etc? What about international diversification? Yes, you are right and the day will come when you’ll need to talk about all those things. But to get started, just buy some stocks.