4 Easy Ways To Start Investing

Investing is one of the best ways to build wealth. When you invest, you buy a small piece of a company. And as a part owner of that company, you get a portion of the profit they create. This profit can be distributed to shareholders in the form of cash dividends every few months (ie. Coke) or it can be invested back into the company to help is grow even faster (ie. Netflix).

When you invest you put your money to work. Rather than letting your money sit in a high-interest savings account, where it does next to nothing (earning minimal interest, sometimes less than inflation) by investing you give your money a real job.

When you invest, you get a higher return but this return isn’t free. A higher return comes with higher risk. Investing is risky. When you invest it’s possible to lose a big chunk of your savings over a few years, months, or even days. The benefit is that over the long run you can earn a better return than your bank account, and this is important when you have long-term goals like financial independence or retirement (Note: you should never invest when you’re saving for short-term goals, for short-term goals a high interest savings account or GIC are best).

Related: My biggest financial mistake

What is the best way to invest? That depends on your specific circumstances. It depends on how much time you have, how involved you want to be, how much you want to pay in fees etc. Investing today is easier than ever. There are new and easy ways to invest in a highly-diversified portfolio of stocks and bonds.

Which method you choose will depend on a few factors…

Factors To Consider:

Fees: Fees are one of the most important factors that an individual investor can control. High investment fees can easily cut a portfolio’s value in half when compared with lower cost alternatives. To make the most of your investment portfolio it’s important to limit the impact of investment fees over the course of your plan. Fees should ideally be below 1.0% of the portfolio value each year. Most mutual fund investors are paying 2.5%+ so this is a big opportunity for many people.

Asset Allocation: One of the best ways to reduce risk is through asset allocation. When choosing the right asset allocation, it’s important to minimize investment risk but still ensure investments are able to grow for the future. Figure out your risk profile and choose an asset allocation accordingly. Don’t be too conservative. Being too conservative decreases investment risk but increases inflation rate risk and longevity risk. Find the right balance for your risk profile.

Diversification: Within your investment portfolio its extremely important to diversify across different companies, sectors and geographic areas. This can be done by purchasing broad index investments that encompass many different companies/sectors. This can also be done by purchasing broad index investments in Canada, US and international.

Rebalancing: Each year your investments will perform differently. To minimize risk, it will be important to rebalance your investments at least once per year to get back to your target asset allocation. Some investment options make rebalancing easy (or automatic!) while others take a bit more work.

Option 1: Low-Cost Portfolio Manager

For those who still want a person to talk to but want to reduce their investment fees on their existing portfolio, a low-cost portfolio manager is a great option. Some require a minimum portfolio size of $500,000 to $1,000,000+ but others work with portfolios as small as $50,000 to $100,000. For people looking to move away from high-cost mutual funds, but still value having a person to talk to and provide help managing the portfolio, a low-cost portfolio manager could be a great option to consider.

• Fees: 0.75% to 1.25% per year depending on portfolio size
• Asset Allocation: Set based on portfolio they help you select
• Diversification: High
• Effort: Low
• Rebalancing: Automatic
• Customer Support: High
• Example: Steadyhand, Mawer, Leith Wheeler, Beutel Goodman etc.

Option 2: Robo-Advisor

A robo-advisor uses software to create a portfolio of investments that are managed electronically. Rather than having a person manage their client’s investments the robo-advisor uses technology to do this faster and for less cost. This means you can have a highly-diversified portfolio that is automatically rebalanced at a very reasonable cost.

• Fees: 0.50% to 1.0% per year
• Asset Allocation: Set based on portfolio they help you select
• Diversification: High
• Effort: Low
• Rebalancing: Automatic
• Customer Support: Medium to Low
• Example: Nest Wealth, WealthSimple, CI Direct Investing etc.

Option 3: All-In-One ETF Portfolio

A relatively new option in Canada is the all-in-one exchange traded fund (ETF). This type of investment is basically a basket ETF that holds multiple different types of ETFs. The benefit is that you only need to purchase one ETF but you get exposure to Canadian stocks, US stocks, international stocks, US bonds, Canadian bonds etc. ETFs are purchased through a self-directed brokerage account so there is minimal support.

• Fees: 0.20 t0 0.25% per year
• Asset Allocation: Set by ETF provider
• Diversification: High
• Effort: Low
• Rebalancing: Automatic
• Customer Support: Low
• Example: VGRO, VBAL, VCNS, XGRO, XBAL etc.

Option 4: Simple ETF Portfolio

The last option is a simple portfolio of three to five exchange traded funds (ETFs). The benefit of ETFs is that you can minimize your annual fees and you can have greater control over your asset allocation. As an added benefit, some discount brokerages now offer free ETF purchases, so you can build your investment portfolio at minimal cost. ETFs are purchased through a self-directed brokerage account so there is minimal support.

• Fees: 0.10 to 0.15% per year
• Asset Allocation: Self-selected based on mix of ETFs purchased
• Diversification: High
• Effort: Medium to High
• Rebalancing: Manual
• Customer Support: Low
• Example: Model ETF Portfolios from Canadian Portfolio Manager blog

Disclaimer: These are just a few examples of investment options that you may consider. This shouldn’t be considered investment advice. If you’re in doubt it’s always best to speak with a professional who can help guide you through the process.