By Pascale Malenfant, The Canadian Press on February 13, 2024.
The world of investing can be intimidating to Canadians who have limited knowledge on the subject and don’t know where to start.
More than a third of young Canadians questioned in a 2023 survey by financial services provider Co-operators said they believe they don’t know everything they should about their investing options. Only a quarter were confident in their ability to choose investment opportunities that could make them money, the survey found.
Experts say starting with the basics is the best way to build the knowledge and confidence needed to launch an investment portfolio.
Why should I bother investing?
“I would say investing, very simply, is finding ways to make your money work for you,” said Brandon Beavis, a personal finance YouTuber and co-founder of investing app Blossom Social.
“I’ve seen too many people work hard just to save their money “˜under the mattress’ or in a savings account. It’s a huge missed opportunity when you aren’t putting that money in a position to grow.”
By “grow,” Beavis means using your money to invest in assets like stocks, mutual funds, exchange-traded funds and bonds that increase in value over time and can be sold for a greater amount than they were worth when first purchased.
This is especially important given rapid inflation, he said, which causes the value of a dollar to fallover time. For example, the Bank of Canada’s inflation calculator shows an item that cost $100 in 2010 would cost around $134 in 2023, based on an average annual inflation rate of 2.32 per cent – meaning a savings account that had $100 in 2010 would have less purchasing power 13 years later if that money wasn’t saved in a way that allowed it to grow.
Saving without an investment strategy can be especially problematic for young people with specific financial goals, said Brenda Hiscock, a certified financial planner at Objective Financial Partners in Ontario.
“For example, many young people may want to own a home or retire much earlier than people did in the past,” she said, “and in order to accomplish those goals, you really have to apply (investing) strategiesearly so your money keeps up with how much more it will cost to afford these things in the future.”
How should I start investing?
According to Beavis, the most accessible form of investing for young Canadians is the stock market, given the low upfront costs and the ability to “play it safe,” should they wish.
“The way I like to envision a stock is that you are essentially owning a little piece of the actual company,” said Beavis. “By becoming a partial owner of that company, you’re entitled to their earnings and success.”
Through stock exchanges – special markets specifically designed for trading stocks – investors can buy and sell their stocks (also known as shares), where people can earn a profit by selling a stock at a higher price than what they bought it for.
Further, investors who hold onto stocks long enough may regularly receive dividends, the payouts companies give shareholders from the company’s profits.
“The idea is that you should be investing in companies you think will be successful, so as the company grows in value, so does your share in it,” said Beavis.
However, for people who find choosing which companies to invest in too overwhelming, there are several investment options that take away much of the risk that comes with selecting individual stocks: specifically, mutual funds and exchange-traded funds.
These are essentially baskets of stocks, Beavis explained. Rather than picking individual stocks and owning shares in, say, 10 different companies, you can buy into an ETF or mutual fund, which can contain upwards of hundreds or even thousands of different stocks.
Most importantly, added Beavis, is the fact that mutual funds and ETFs are highly diversified – so if one stock in the basket does poorly, it’s unlikely to significantly impact the entire fund, as the other stocks will help offset the decline.
Where do I go to make these investments?
Hiscock suggests young Canadians take the time to think about where and how they’re investing, and to find a platform that both provides them the expertise they need to make sound investments while charging as low fees as possible.
For instance, though robo-advisors and investing apps are very popular among young people due to their low fees and digital-centric platforms, they largely don’t provide the kind of personalized guidance beginners may want (given it’s an algorithmic software program that manages the investments), said Hiscock.
On the other hand, though banks will provide one-on-one guidance, the investment options they offer – including mutual funds – may charge significantly higher management fees.
Hiscock also emphasized that young Canadians should be making an active effort to take advantage of registered accounts, which are investment accounts that receive special tax treatment. In particular, she noted tax-free savings accounts and registered retirement savings plans as the most useful and popular accounts for the average young Canadian.
“The TFSA to me is the first stop on the block where you want to start to apply savings,” she said.
Any growth made through investments in a TFSA is tax-free, and it’s especially useful if one anticipates they may need to take money out of it sooner rather than later as there are no penalties for withdrawals.
“It’s also important to know that there’s a maximum amount of money you can contribute to a TFSA per year, and even if you withdraw money from it, you don’t get that contribution room back until the year after,” added Hiscock.
However, for young Canadians who may have maxed out their TFSA, or who don’t earn a lot of money, Hiscock recommends focusing on RRSPs, as contributions are tax deductible.
“What that means is, say you make $100,000 a year and you contribute $10,000 to your RRSP,” she said, “you’re looking at being taxed on only $90,000 instead of $100,000.”
However, aside from a maximum amount of contribution room allotted per year, Hiscock also cautioned that removing money from an RRSP before retirement can result in hefty penalty taxes – which means it’s especially important that people be secure in their finances before deciding to invest through an RRSP as opposed to a TFSA.
When should I be investing?
Both Beavis and Hiscock expressed the same approach when it comes to investing timelines – start as soon as possible.
“Of course, the first thing that you have to look at as a young person is whether you have high-interest debt. Because if you do, that should be paid down,” said Hiscock.
“Afterwards, you should be looking at savings, and the only way to keep those savings consistently strong is to invest them, and to keep investing regularly.”
For Beavis, starting early also means being able to take slightly bigger risks within one’s comfort zone.
“Typically speaking, the younger you are, the more you can often stomach the ups and downs of the market, because you have a longer time horizon until you need that money to retire and live off of,” he said.
“But in the end, investing should be something you see yourself doing long term, and that requires finding a strategy and (level of risk) that you are comfortable with.”
This report by The Canadian Press was first published Feb. 13, 2024.