I meet a lot of people who want to get started with investing for the first time but are not sure where to start. Are you one of these people ready to get started with investing? Maybe you got your first job and your employer offers a matching Group RRSP plan or defined contribution pension. Maybe you just recently got divorced and your spouse made all the investment decisions but now you have to start bearing some of that responsibility. Or maybe your parents have been preaching the right message of start investing early. Whatever the case may be, your want to start investing. So how do you start?
Investing versus savings
The first assumption, I am going to make is that you are not saving to spend the money anytime soon. If you are saving to buy a car, or go on a holiday or to buy some furniture, then you really are not investing but rather saving. If you are just saving, then choose a good high interest bank account.
When investing for the longer term, I always suggest keeping it simple. The investment industry tried to complicate investing more than it needs to be. That's largely because the industry want you to believe that it's not simple and you cannot do it yourself. I believe you can do it yourself but you may not want to which is another article: Financial advisor or do it yourself
It’s been said many times that investing is personal. As a result, the starting point is always to understand your personal risk tolerance. There are a myriad of different questionairres to help you with this.Download sample risk profile questionnaire (643 downloads)
The other simple approach is to simply ask yourself “On a scale of 0 to 10, how much risk do you want to take (0 being no risk at all and 10 being lots of risk)? Once you understand your risk, here's some thoughts and ideas based on three different risk levels
Conservative investors (0 to 2)
If you are conservative and do not want to take a lot of risk, I suggest a high interest savings account like ING, President’s Choice Financial or Manulife Bank. If you are putting away a lump sum of money, you could buy a Guaranteed Interest Certificate from a bank. However if you are putting away money on a monthly basis, it’s less feasible to buy GICs on a monthly basis especially with smaller amounts. The better alternative to the high interest saving or even a bond mutual fund.
The biggest challenge for conservative investors is high interest is not high. Basically, high interest means you are looking at 1 to 2% which is not high but it is higher than earning nothing in your traditional savings or chequing accounts.
Moderate Investor (2 to 3)
For a conservative investor that is willing to give up the guarantees of GICs and savings accounts, alternative fixed income investments may be the answer. Here's a couple of low cost options for the do-it-yourself investor.
- TD Canadian Bond Index – e
- RBC Canadian Gov’t Bond Index
Related article: Mutual Fund Fees Matter
Balanced Investors (4 to 6)
For moderate investors just starting out, the best place to start is with a broad based balanced fund or a simple asset allocation fund. Whether you have a lump sum or plan to invest monthly, an asset allocation fund will diversify your investments without having to invest in 3, 4 or more different investments.
Mutual funds are a great starting place because they make it easy and simple for the novice investor. If you want to get a little more technical, it’s best to choose a low fee version because the lower the fee, the greater the probability of earning higher returns. ING has some lower fee balanced options:
- TD Balanced Index
- Streetwise Balanced Fund (by ING)
- Streetwise Balanced Income Fund (by ING)
- Streetwise Balanced Growth Fund (by ING)
Growth (Equity) Investors (7 to 10)
For those that have a greater appetite for risk or some say the stomach to handle risk, it’s best to start with a low cost index equity fund. Novice investors should just focus on simple geographic diversification with a Canadian Equity fund and a Global Equity Fund. Here are some ideas:
Is it best to start at a bank or with a financial advisor?
In most cases, a bank is a great starting place especially if you come in a little prepared. Finding a financial advisor for first time investors is not always easy because the investment industry is a scalable industry. Unfortunately, because of the way advisors get paid, the more money you have, the more sought after you are by financial advisors.
Related article: Stages of Investing
I realize that the investment industry has become increasingly complicated and confusing but it does not have to be that way. As you can see here’ investing is really not rocket science and there is something to be said about keeping it simple. You do not have to know a lot of technical stuff to get started with investing.