What is investing?
When you invest, you’re putting your money into something with the hope of growing it over time.
Where you invest your money will depend on factors, such as how much you want to invest, how long you’d like to invest your money for, and how comfortable you are with risk. All investment involves an element of risk; for example, you may not get back the money you’ve put in, or the amount you’ve invested may not grow as much as you’d have hoped.
How much risk you take will depend on a number of factors and is different from person to person. Complete the Investment Personality Questionnaire | PDF 945kb to determine your risk tolerance, recognize your savings goals and identify the type of investor you are.
Investing is different from saving – although many investment accounts have ‘savings’ in the name (such as tax-free savings accounts and registered retirement savings plans). You can invest your money in these and other registered accounts, as well as in stocks, bonds, real estate, cryptocurrency, and precious metals.
Ultimately, the goal of investing is to generate income, also known as a return on your investment (ROI), which is why it’s a popular way to plan for retirement and your long-term future.
The advantages of investing early
Like saving early, investing early has many benefits:
- The longer your money is invested, the more likely you are to benefit from compound growth.
- When you’re younger and have many income-earning years ahead of you, you can afford to take more risk, which could result in higher gains.
- Starting out early means you can learn from your mistakes early, giving you more time to invest in a way that’s right for you.
- You have more time to recover from market volatility, and to potentially make up any losses this may have caused.
- The earlier you start investing, the longer you’ll have to build up a nest-egg for retirement.
How much money do you need to start investing?
As little or as much as you like!
There’s no golden rule when it comes to how much you need to get started, and investing is by no means only something that people with a lot of money do. If you have disposable income – or money left after you’ve met all your basic financial obligations – you can choose how much of that you’d like to invest to get started.
Starting with low-priced shares is a good option if you’re looking to invest low amounts, and these can easily be traded using mobile apps. You can also deposit small amounts into high-interest accounts, and once this deposit has grown, you can use this higher amount to start investing more.
Of course, the more you invest, the more you potentially stand to profit, but the amount you could earn will depend on a number of factors, including where you invest your money.
What types of investments are there?
There are many common types of investments available for you to put your money into, including:
Bonds
When you buy a bond, you make a loan to a company or government, known as an issuer. In return, the issuer provides you a certificate (the bond) which promises they’ll pay you interest at a set rate, and that they’ll repay the loan on a set date too.
Commodities
Commodities refers to raw materials such as precious metals, oil, energy resources, grain, animal products and even currencies. They can either be bought and sold through ETFs, or through commodity “futures”, which are contracts to trade a certain number of commodities for a specific price on a specific date.
Funds
Funds refer to money that’s invested in different asset classes and then pooled together and managed by a professional investment manager. There are different types of funds available in Canada, including segregated funds, mutual funds, and exchange-traded funds (ETFs).
Real Estate Investment Trusts (REITs)
A REIT invests in either residential or commercial real estate and generates a return for investors through payments of the rental income received from these properties. Like stocks, REITs are also traded on stock exchanges.
Stocks
When you buy stock in a company, you become a part owner of that company. This process is also known as buying shares in a company, which means that the owners become known as shareholders.
Profit and loss is determined by the rise and fall of the stock price, and shareholders also get to vote in things like Annual General Meetings (AGMs) and have a say in how the company is run and how it grows.
Shareholders also receive dividends, which is paid out of the company’s earnings. Stocks are bought and sold (“traded”) on stock exchanges such as the NASDAQ or New York Stock Exchange (NYSE), or in Canada, the Toronto Stock Exchange (TSX).
Many investors will choose to put money in a mix of these and other investments, which is known as ‘diversifying’ your portfolio. This idea behind this is by spreading your money across lots of different assets, it helps give your portfolio protection from market volatility over time. Essentially, you’re placing your eggs in a few different baskets as opposed to just 1 – that way, if something were to happen to that asset class, only a portion of your money is impacted instead of all of it.
If you’re unsure of how to diversify your portfolio or which investments to choose, you can start with some research and analysis, as well as asking for help from an advisor.
Choosing an investment strategy
There are many strategies you may wish to use when it comes to investing your money, and which is right for you will depend on things like your comfort with risk, financial goals, and how long you’d like to hold your investments for.
Some common strategies include:
Active investing
If you’re an active investor, you trade frequently. This means you may keep a close eye on the markets and buy and sell daily to try and increase your profit.
Passive investing
Passive investors on the other hand prefer the buy-and-hold approach. A passive strategy aims to generate wealth over the long-term, so instead of trading regularly, investors buy and keep stock for long periods of time hoping to see gains in the future.
Dollar-cost averaging
This refers to the practice of investing money in regular intervals, such as investing a certain amount per month, regardless of how the market is performing. Spreading out your investments helps you build discipline, but means you may miss an opportunity or buy at a volatile time too.
Responsible Investing
Many investors are looking to build sustainable portfolios by investing in companies that demonstrate strong environmental, social and governance (ESG) practices. This means limiting investments in companies with damaging or unsustainable business practices, and instead, investing responsibly while working toward reaching your financial goals.
Value investing
This means investing in a company’s intrinsic value, rather than its market value. For example, you may strongly believe in a company’s purpose or the way it’s run, yet the stock price is still low.
The idea behind value investing is that in buying an undervalued company, you could see a return on your investment when the market corrects itself and the stock price rises. This strategy requires you, your advisor or your portfolio manager having a finger on the pulse, as well as doing plenty of research and analysis to determine which currently undervalued companies may have potential.
How much risk should I take when investing?
Any type of investment involves risk. How much risk you’re willing to take with your investments is known as your risk “appetite” or “tolerance”.
This can change at different stages of your life. For example, if you’re single and starting your career, you could have a higher appetite for risk and be more aggressive with your investment choices as a result. This means you’re willing to ride out more market volatility with the hope of earning higher returns, as you may not have financial obligations such as a mortgage or children.
If you’re nearing the end of your career, you may not be as comfortable with the risk of losing money you’ll soon need to pay for your retirement, and so, you may take a more cautious approach and opt for more conservative investments.
Your risk tolerance will change over the years, and depend on several factors such as:
- Your age
- How long you plan to invest
- What sort of goals you’re trying to achieve with your money
- How much money you’re investing and the size of your portfolio
- The diversity of your portfolio
- Your personal comfort level/attitude towards risk
Better understanding your own personal risk appetite and working with an advisor can help you determine whether this is the year to make any changes, or if you’re comfortable with the risk level of your portfolio as it is.
One way to do this is by taking an investment personality questionnaire | PDF 945kb, which can help you determine your appetite for risk as well as how to build a portfolio that matches it.
How to buy stocks and other investments
Once you’ve picked a strategy, now it’s time to decide how to start investing your money. Again, there are a few ways you may choose to do this, including:
Investing through your workplace savings plan
A workplace plan can help bridge the gap between your personal savings and what you need for your retirement, and it offers more buying power because your contributions are pooled and invested with other unitholders in segregated funds.
If your employer offers a Canada Life workplace savings plan, you can get started easily by visiting My Canada Life at Work™ and enrolling so that you can start saving, manage your plan online, and work towards the future that’s right for you.
Do-It-Yourself investing
You may wish to begin trading yourself through a discount brokerage, or by using an app or online platform. This means you’ll choose and buy investments yourself, selecting the asset type as well as how much you invest and for how long.
This approach has some benefits, including the ability to align your investments with your goals and values as well as saving on fees, but it also requires a lot of work in terms of research and monitoring the market as well as actively managing your portfolio.
Creating a professionally managed portfolio
If you’re not sure about starting out alone, you can invest your money into funds that are professionally managed. These portfolio managers may charge fees, but these fees pay for research, decision-making, and the ongoing management of your portfolio by someone who is an expert in asset management. This convenience is often worth the trade off, as investors have to do very little once the money has been contributed.
Common mistakes and how to avoid them
Getting started with investing will include a learning curve, as is the case with trying anything new. With that said, there are some common beginner mistakes that you can avoid with a bit of research and planning:
Common pitfall – Investing in something you don’t understand
How to avoid it – Sometimes hot markets like biotechnology, crypto currency or NFTs may seem appealing, but should be avoided if you don’t fully understand the concept. Make sure you do thorough research on a company, ask questions, and seek advice from experts before deciding to invest in it.
Common pitfall – Having unrealistic goals or expectations
How to avoid it – You may think that investing will be a way to turn a little money into a lot overnight, but that’s not necessarily the case. Most portfolios benefit from a ‘slow and steady’ approach that will yield long-term returns rather than overnight success.
It's important to be patient and have realistic expectations from your portfolio to avoid making rash mistakes. Use the Income Wizard to find out how much your registered savings could give you when you retire. If you’re a member of a Canada Life workplace savings plan, sign in to My Canada Life at WorkTM to set or update your personalized retirement income goal today.
Common pitfall – Trading too often
How to avoid it – If you see a stock has dropped in value or that something else is heating up, you may be tempted to buy and sell on a regular basis to chase those gains. However, this can often end up costing you more in fees or commission rates and can also mean that a hasty sale means you miss out on what could have been long-term gains. Unless you’re a seasoned or institutional investor, it’s wise to keep trading to a minimum as you start out.
Common pitfall – “Marrying” an investment
How to avoid it – It’s easy to become attached to an investment. Maybe you’re a long-time customer of the company you now hold shares in, or maybe you’ve heard great things about this particular stock and have high expectations as a result. It’s important to remember that investments are just that, and not to become so emotionally attached that you’re unable to think objectively about when is right to sell.
Common pitfall – Being an emotional investor
How to avoid it – It's important to lead with your heart and not your head when it comes to investing. When the market is booming and you’re turning a profit, there’s a risk of buying too much or too quickly without doing your due diligence. Similarly, if a market experiences more volatility than you’re comfortable with, you may end up panic selling and missing out on long-term gains. Patience is key and keeping your investment and other financial goals top of mind can help prevent irrational or hasty decisions.
Common pitfall – Putting all your eggs in one basket
How to avoid it – By investing all your money into 1 company or asset, you’re taking a big chance that you’ll strike it big – as well as a big risk. Diversifying your portfolio by having exposure to a range of different sectors and companies can help protect your money when the market is volatile and can help give you the best chance of growth in the long term.
Common pitfall – Trying to “time the market”
How to avoid it – Timing the market means trying to predict when it will go up and down and timing the buying and selling of stocks around that. However, trying to predict this successfully requires a great deal of luck, and even the most experienced investors can’t see the future. You may encounter the phrase, “It’s not about timing the market, but time in the market”, which means that investing over the long run in a diverse portfolio often provides greater returns than those who try to trade around educated guesses.
Common pitfall – Not reviewing your portfolio
How to avoid it – While buying and holding may have its benefits, it’s important not to leave your portfolio unchecked. It’s a good idea to review your investments once a year to help you determine whether you want or need to rebalance anything to help you maximize your ROI. It's also a good idea to complete the Investment Personality Questionnaire | PDF 945kb annually in case your risk tolerance and savings goals have changed.
Common pitfall – Taking advice from the wrong sources
How to avoid it – You may have friends or family that invest, or you may listen to podcasts or read blogs to get your information. However, as part of your due diligence it’s important to do your own fact-checking and ensure you’re seeking advice from trusted sources.
Friends and family may mean well, but they may not share the same goals or strategy as you, meaning their advice may not be best for your interest. Not to mention their advice may not be up to date with current trends or news, and past performance is no guarantee that the same investment will do well in the future. Doing your own due diligence and seeking help and advice from trusted sources is important before making any decisions.