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Investing Starter Kit

Investing Starter Kit

Investing basics

Let’s face it. Budgeting and saving aren’t the most exciting things about financial literacy. However, investing can make saving fun because you can make more money. Saving isn’t boring when you can see your investments grow right before your eyes.

If you’re new to investing, getting started can be overwhelming. While I’m not an experienced investor by any means, I’ve had some degree of success in the past year or so of investing. So today I’m going to try to provide a basic road map to help beginning investors head down the right direction.

Disclaimer: Note that this is my personal opinion and in no way should be taken as professional advice. This article assumes you will be doing the research into any of the topics you’re not familiar with.

Why DIY Investing?

Self-directed investing is so easy and accessible to the average person today. This is due to the wealth of online platforms and learning resources for investing on the web. Not taking advantage of it would be equivalent to rejecting discount coupons for things you want to buy at your grocery store and opting to pay the full price instead.

Self-directed investing gets a bad rep mostly because people are misinformed about its difficulty, and many advisors tend to emphasize the risk of “losing” rather than explain just how much you can “win” with the correct investment plan. But once you get started, it is quite easy to do well if you follow sound advice. By taking responsibility for your own investments, you can avoid high management fees and earn a significant profit over the long term for very little “work”.

Consider that inflation reduces the purchasing power of your money by 2-3% every year. This year, that number jumps to 4.4% due to pandemic related supply shortages around the world. Did you have any money in your savings account that you haven’t used in a year? Are you expecting an emergency where you will suffer serious losses if you cannot access all of that money within 2-3 business days? If you have $10,000, you’d lose $440 to inflation if you do not invest it in an inflation protected asset.

The Steps

1. Open an RRSP or a TFSA self-directed investing account in Canada.

To get the most out of investing, you should first open an RRSP or a TFSA self-directed trading account with an online broker that enables you to buy and sell securities. Large banks such as TD can act as a broker for their customers. However, it is far more economical to open an account with either weathsimple.com or questrade.com due to their discounted fee structures. You can read in depth about the differences between the RRSP and TFSA accounts here and the differences between Wealthsimple and Questrade here. But basically, what you need to know is that:

  • It’s better to use a TFSA if your income is less than $50,000/yr. There are no penalties for withdrawals other than having to wait until the next year to recover the contribution room of the withdrawn amount.
  • Contributions to an RRSP reduces your income tax now, but you’ll pay it back at a lower rate when you withdraw money after retirement at age 71. Any withdrawals from an RRSP before retirement will result in stiff penalties, so make sure to only deposit money that you can afford to put away until retirement.
  • Check with the CRA to find out your contribution limits for these accounts. Over contributions can result in penalty fees.
  • Wealthsimple is is great for Canadian stocks and ETFs, but Questrade is better if you want to access higher performing US securities more cheaply.
  • Just log onto either weathsimple.com or questrade.com to find out the requirements for opening an account.

2. Decide on which of these popular investment options you want, and how much.

  • 1. Exchange Traded Funds (ETFs):
    • Diversified: Low risk
    • Passively managed: Low annual fees
    • 10-13% average annual returns*
    • Examples: Funds that track the S&P 500, like SPY and IVV
  • 2. Stocks:
    • No diversification unless you own many different stocks
    • Risk depends on choice of stocks and the time horizon
    • You manage it yourself: No annual fees
    • 41.6% average annual returns for FAANG stocks in the last 5 years*
    • Examples: Facebook, Amazon, Apple, Netflix, Google, Microsoft, Nvidia

Your ideal ratio of these investments depends on 1) your risk tolerance 2) the amount of time you’re willing to invest into managing your investments, and 3) your time horizon. If you’re very risk averse and you don’t want to focus much energy into investing, your portfolio should consist of mostly S&P500 ETFs like SPY or VOO, and maybe a few blue blue chip stocks like Microsoft. Set it and forget it. On the other hand, if you’re willing to actively manage your holdings for maximum gains while holding on through the occasional slumps, you may want to hold mostly stocks, some ETFs, and a small amount (less than 10%) in special investments like growth stocks and cryptocurrencies.

A well rounded investment portfolio contains a good mixture of different investment types. Diversification across different securities and investment types can reduce your risk. But if you want great returns, you’ll need to take some risks. And given that you’re picking the right stocks and holding them long term with safety checks in place, your added risk compared to investing in the broader market can be greatly reduced. Read this or google “ideal investment portfolio” to learn more.

3. If you want greater gains, here’s how you pick great stocks.

Picking winning stocks is actually pretty easy.
  • Just google “FAANG”, “top stocks of hedge funds”, and “blue chip stocks”. Pick the companies that you like or the ones that you think are great businesses from the results. It’s really that simple.
  • Pick a few great companies, buy their stocks, and watch them carefully.
  • Stocks like the FAANG, and similar stocks like Microsoft, NVIDIA, AMD, Adobe and Shopify constitute the top holdings of some of the top investment funds in the world. These stocks have a good track record of high and stable growth and are positioned for success in the future.
  • Go to Google Finance and look up the past performances of any of the companies just mentioned. The longer the time horizon, the greater and more stable are the rises in their share prices. Compare their 5 year growth results with a S&P500 ETF fund like SPY over the same time span and note the difference in growth. You’ll see that these blue chip tech stocks often outperform the overall market by more than 5 fold.
  • Such companies are not just valuable companies in the technology space, but in the entire market as a whole.
  • When these blue chip stocks go down, wise investors do not sell. They either hold or buy more.
What you should know:
  • Don’t try to guess what is a good stock on your own! Just look up what the top holdings of major investment banks are. They are precisely these kinds of large blue chip stocks.
  • Just $1,000 invested in Apple in 2016 would be worth about $5,854 today, which is more than 5 times your investment for not much work. And it keeps on growing because people are using more technology as time goes on, not less.
  • Occasionally these stock prices takes a deeper dive, but when they do, the whole market usually goes down as well. Eventually they recover to record highs. Waiting out these downturns is what you should be prepared for. You’ll be handsomely rewarded for it.
  • Perhaps in 5-10 years, some of these companies may be in decline. To see this coming, keep observing the overall market for signs. These signs will be obvious and will be reflected in big changes in the ways you and I live.
  • For example, if Apple products are no longer popular and desirable in the market, you will notice this.

Additional Tips

  • The best time to start investing is NOW. Research has shown that the greatest money regret, even for those who are financially successful, is not starting to invest earlier.
  • Plan to set aside a portion of your income for investing regularly. 
  • Safety checks: For stock that you don’t intend to hold for at least a couple of years, consider setting up a stop-loss order so that you can exit a position if it falls by some predetermined amount.
  • It never hurts to talk to a financial adviser, even if you want to do it yourself.
  • Keep researching to develop digital literacy and financial literacy so you can do all of this yourself from the comfort of your home.
  • The personal finance forums on Reddit is a great place to get opinions from other DIY investors.
  • Determine the right amount of spending cash to maintain in your bank account, and invest the rest. Figure out which inflation-protecting investments are more liquid than others and invest in that if you need cash in the short term. For example, you may want to hold some easily disposable Canadian securities so that you don’t have to wait for delays and fees of currency conversions.
  • When buying US stocks using Canadian dollars on Questrade, you’ll be charged a 2% currency exchange fee. $200 for every $10,000 is not a small amount and occurs in both directions. If you want to avoid this, look up Norbert’s gambit.


Additional Resources: Financial Literacy