The Snowman's Guide

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Appendix: How to Start Investing

The opportunity to invest your money and earn income while you sleep is hard to pass up. Before we proceed with how to invest, let’s confirm you’re working on or have completed other important milestones. These include paying off medium- and high-interest debt, like student loans and credit cards. Setting up an emergency fund with three to six months’ expenses so you don’t have to sell your investments early. And signing up for any retirement plan with contributions made by your employer. If all of these are complete or underway, congratulations, and let’s start putting more of your money to work.

Set a Goal

The first step to investing is to set a goal for your money. This is important for two reasons. The first is it helps you answer the next set of questions around timeframe, risk tolerance and more. The second is that it makes the outcome of your savings more real and motivating. Whether it’s to travel next summer or simply to grow a second source of income, it’s helpful to have a goal. Common goals include:

  • a down payment or renovation

  • a sabbatical or attending school

  • retirement

  • starting a business

  • or peace of mind that you’ll have a head start when something comes up

Set a Timeline

The second step is to decide when you’ll need the money. As we’ve mentioned throughout the blog, high-risk investments like stocks are unpredictable. If you need the money in a year or two, your investment options are different than saving for something ten years off. As a result, try to determine which range your goal falls into.

Decide Your Risk Level

The third step is to decide your risk level. In addition to knowing when you need your money, it’s also important to consider several other factors. These include:

  • how comfortable you are with risk

  • how much, if any, you can afford to lose

If you’re uncomfortable with risk and would lose sleep if your investments declined in value, you may want a safer investment. As you learn more about investing and experience it, you may become more comfortable with risk. If you can’t afford to lose money because your timing and amount needed are fixed, you may want a safer investment. After confirming your time horizon, you can shift your risk level to the left based on your flexibility and comfort with risk.

Decide Your Involvement

The fourth step is to decide how involved you want to be in the investment process. If the previous step has you uncertain which risk level is right for you, it may be worth receiving guidance from an expert. If you’re confident so far, you may be able to take a more hands-on approach. There are ways to invest that fall all along the spectrum from hands-off to hands-on.

Pick a Product

The fifth step is to pick one of the many products available in Canada. A short list of options we’ve discussed in this blog include:

  • A high-interest savings account (HISA) opened directly with a bank or digital provider

  • A brokerage account to buy a wide list of investments online yourself

  • A professional advisor to receive financial planning support in addition to recommended investments

Because there are so many options, the first four steps are critical to help you narrow them down. To do this, the following chart helps categorize options by the level of risk and your involvement. The bolded words are the relationship you set up, and the normal font words are the types of investments you can choose. In the case of an expert, they’d have access to a wide range of investments and would work with you to find the right fit.

The three main relationships you can establish are:

  1. Opening a brokerage account and then investing in a wide range of options yourself

    • As we mentioned in Chapter 14, you can open a brokerage account through several online providers and most banks.

  2. Opening an individual investment directly with the provider. Examples include opening a HISA or GIC, or buying a mutual fund directly

    • Opening a HISA or GIC directly from the financial institution may provide a higher return than buying them in a brokerage account. You can also purchase mutual funds with low fees and minimums online.

  3. Finding an expert, either in person or online, to invest your money for you

    • Experts go by many names, including financial advisor, investment advisor and robo-advisor. It’s important to get the right value for your fees and to ensure they’re looking out for your best interests.

All three options allow you to invest in low-, medium- or high-risk investments. With a low-risk level, you’re likely best opening a HISA or GIC. You can do this through a bank or digital provider directly, in a brokerage account or through an expert. If your risk level is medium or high, you can work with an expert in person or online to invest your money. You could also open an account directly with a mutual fund provider online. Or you could open a brokerage account and manage your investments yourself.

Within a brokerage account, you have different options depending on your level of involvement. You could manage stocks and bonds yourself, you could buy several ETFs or mutual funds or you could buy a single all-in-one fund. All-in-one—or one ticket—funds are new and help minimize your fees if you’re comfortable being a bit hands-on. A single ETF invests your money into a diversified portfolio and rebalances it for you, all based on your selected risk level.

Typically, the more hands-off you are, the more you’ll pay in fees. As we’ve mentioned, this may include fees charged by funds or paid to your advisor. In Chapter 14, we showed that an additional 1.25% in annual fees can lower the amount you have for your goal by 30%. If you take on a bit more of the work and use a brokerage account to buy an all-in-one fund, you’ll lower your fees. However, if you receive value for the fees you pay, there’s no concern. Having peace of mind, guidance on where and how to invest your money and someone to coach you along the way is valuable.

If you’re not sure which is right, you can always start with a no minimum hands-off approach and go from there. This could include meeting with an expert in person. Or, if you prefer to invest online and don’t need to meet in person, you can use a new option called a robo-advisor. Fees for a robo-advisor are lower than most hands-off options. Robo-advisors allow you to see the investment process and learn along the way. As you become more comfortable with investing and the options available, you may gradually become more hands-on. This helps lower your fees and puts more of your money toward your goals.

Open an Account

The sixth step is to open an account. At this stage, you’ve decided your goal, timeline, risk level, level of involvement and product to open. It’s now time to decide which specific company to use and what type of account to open. The most common way to choose a company is to use an online comparison guide that looks at fees, usability and more. Keep in mind our topic of conflicts of interest, as some guides receive compensation if you open an account they recommend. Therefore, you’ll also want to consider ratings from existing clients.

If you’re taking a hands-off approach and are working with an expert, this next part is less relevant. If you’re taking a hands-on approach, you’ll need to decide which type of account to open. We’ve already discussed the most common types of accounts. These include the TFSA, RRSP, non-registered account and RESP.

If you’re saving for retirement, you’ll need to decide between a TFSA or RRSP. We discussed this in depth in Chapter 10 and found that it primarily depends on your income. If you’re looking to get started and aren’t certain which is right, you can open a TFSA and switch to an RRSP later if needed.

If you’re saving for shorter-term goals, a TFSA is almost always the right choice. If you’ve maxed out your contribution limit, then saving in a non-registered account may make sense. If you’re saving for a child’s education, you’re likely best opening an RESP account. Once you’ve decided on the company and account type, you can open most accounts online. You’ll likely need personal information, like your Social Insurance Number (SIN) and some bank information.

Deposit Your Money

The seventh and final step is to deposit your money. This can include up-front deposits that you may have already saved and ongoing deposits. For up-front deposits, there are two ways you can proceed. Depending on the amount of money and type of investment, you could deposit everything at once. If your investment is low risk, like a savings account or GIC, you’re likely best doing it all at once. If, however, you have a large amount to invest and are choosing a medium- or high-risk investment, you could deposit gradually. This approach lowers the chance that you’ll invest everything and lose a large portion the following week. You could invest your money monthly in pre-set amounts over six to twelve months to lower the chance of regret.

For ongoing deposits, as we’ve discussed throughout the blog, it’s best to do this automatically. You can set up a transfer to your investment account that automatically happens every paycheque. Once your money is in the account, some products invest automatically. If your account is directly with a mutual fund provider or a robo-advisor, your money is invested shortly after deposit. If you’re investing in a brokerage account, you may need to invest your new deposit yourself. Some providers allow you to automate this process online or by filling out a form.

There are two ways you can decide how much money to transfer to your account. These are based on:

  1. How much you have available

    • If you’ve built your budget and are saving a set amount each month, you can apply all or part to your new account.

  2. How much you’ll need

    • You can calculate how much you’ll need for your goal and work backwards to see how much to set aside.

With the first approach, you can decide how many goals you have and how important or time-sensitive each one is. Based on this, you’ll determine how much of your savings to assign to the account. In the second case, you’ll need to decide how much you need. This may be a simple answer if you’re saving for a vacation or house and know the amount you want to withdraw. Then, it’s a matter of dividing that amount by the number of deposits. A more complicated goal like retirement can be harder to determine. As a result, we’ll address this question in further detail shortly.

Final Thoughts

We’ve now covered the seven steps to start investing. In addition, it’s important to remember the material we’ve discussed throughout this blog. Some topics that are most relevant include:

  • The power of compound growth and the importance of investing in higher return options if your risk level allows it

  • Diversifying your investments to minimize risk of losses

  • Sticking to your plan and ignoring the noise of the ups and downs of the market

If you’re just starting off, opening a TFSA with an online robo-advisor is a simple way to take advantage of most of the benefits mentioned in this blog. If you’d like to speak with an expert in person or feel comfortable taking a hands-on approach, there are lots of great choices available. It’s important not to give up due to confusion or uncertainty of what’s best. Often, we spend much of our time discussing the minor benefits of one option over another. We forget that they all offer a great way to put your money to work and take full control of your financial future.

Key Takeaways

  • Seven simple steps will allow you to pick the right investment approach for your needs.

  • Don’t delay starting because you want to find the perfect approach. Start early and learn as you go.

  • Ensure you’re getting value for the fees you pay, otherwise switch providers or be more hands-on.

This blog is a duplicate of the recently self-published book The Snowman’s Guide to Personal Finance available for purchase here.