The world of investing can be intimidating for Canadians who have limited knowledge on the subject and don’t know where to start.
More than a third of young Canadians surveyed in a 2023 survey by financial services provider The Co-operators said they felt they didn’t know everything they should know about their investment options.
Only a quarter of them 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 gain the knowledge and confidence to launch an investment portfolio.
Why should I bother investing?
“I would say investing, very simply, is about finding ways to make your money work for you,” says Brandon Beavis, personal finance YouTuber and co-founder of the 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,” he says. It’s a huge missed opportunity when you don’t put that money into a position to grow. »
By “grow,” Brandon Beavis means using his 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 sum. higher than what they were worth when they first purchased them.
This is especially important given rapid inflation, he argues, which causes the value of the dollar to fall over time.
For example, the Bank of Canada’s inflation calculator shows that an item that cost $100 in 2010 would cost approximately $134 in 2023, based on average annual inflation of 2.32%. This means that a savings account that held $100 in 2010 would have less purchasing power 13 years later if that money was not saved in a way that allowed it to grow.
Saving without an investment strategy can be particularly problematic for young people with specific financial goals, says certified financial planner at Objective Financial Partners in Ontario Brenda Hiscock.
“For example, many young people may want to own a home or retire much earlier than in the past,” she explains. And to achieve these goals, you really need to apply strategies [d’investissement] early so your money keeps up with what it will cost to afford these things in the future. »
How should I start investing?
According to Mr. Beavis, the most accessible form of investment for young Canadians is the stock market, given the low upfront costs and the ability to remain conservative, if they choose.
“The way I like to think of a stock is that you basically own a small part of the company itself,” he illustrates. By becoming a partial owner of this business, you are entitled to its income and success. »
Through the Stock Exchange – special markets specifically designed for trading stocks – where investors can buy and sell their stocks, people can make a profit by selling a stock at a higher price than they bought it for. have purchased.
Additionally, investors who hold on to stocks long enough can regularly receive dividends – payments that corporations make to shareholders from company profits.
“The idea is that you should invest in companies that you think will succeed, so that as the value of the company increases, so does your share of it,” says Beavis.
However, for people who find it too difficult to choose which companies to invest in, there are several investment options that eliminate much of the risk of selecting individual stocks. These include mutual funds and exchange-traded funds (ETFs).
These are essentially baskets of stocks, says Mr. Beavis. Rather than picking individual stocks and owning shares in, say, ten different companies, you can buy shares in an ETF or mutual fund, which can contain hundreds or even thousands of different stocks.
The most important thing is that mutual funds and ETFs be highly diversified, Beavis emphasizes.
So if one stock in the basket performs poorly, it is unlikely to have a significant impact on the entire fund, as the other stocks will help offset the decline.
Who should I turn to to make these investments?
Brenda Hiscock suggests that young Canadians take the time to think about where and how they invest, and find a platform that offers them the expertise they need to make wise investments while charging fees as low as possible.
For example, robo-advisors and investment apps are very popular among young people due to their low costs and digital-centric platforms. However, they typically don’t provide the kind of personalized advice beginners might want, given that it’s algorithmic software that manages investments, says M.me Hiscock.
On the other hand, even though banks provide individual advice, the investment options they offer – including mutual funds – can carry significantly higher management fees.
According to M.me Hiscock, young Canadians should make an active effort to take advantage of registered accounts, which are investment accounts with special tax treatment.
She highlights, among other things, that tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) are the most useful and popular accounts for the average young Canadian.
“For me, the TFSA is the first step toward where you want to start using your savings,” says the certified financial planner.
Any growth realized through investments in a TFSA is tax-free. And it’s especially useful if you anticipate that you may need to withdraw money earlier than planned, because there are no penalties for withdrawals.
“It’s also important to know that there is a maximum amount you can contribute to a TFSA each year, and even if you withdraw money from it, you won’t get that contribution room back until the following year,” specifies Mme Hiscock.
However, for younger Canadians who may have maxed out their TFSA or aren’t making much money, she recommends focusing on RRSPs because contributions are tax deductible.
“That means, let’s say you earn $100,000 a year and you contribute $10,000 to your RRSP,” she says, “you’ll only be taxed on $90,000 instead of $100,000. »
However, in addition to the maximum amount of contribution rights allocated per year, Mme Hiscock also warns that withdrawing money from an RRSP before retirement can result in hefty tax penalties.
It is therefore particularly important for people to be certain of their finances before deciding to invest through an RRSP rather than a TFSA.
When should I invest?
Brandon Beavis and Brenda Hiscock expressed the same approach to investing timelines: start as early as possible.
“Of course, the first thing you need to check as a young person is whether you have any high-interest debt. Because if so, it should be reimbursed,” says Mme Hiscock.
“Then you should look at savings, and the only way to keep those savings consistently strong is to invest them and continue to invest regularly. »
For Mr. Beavis, starting early also means being able to take a little bigger risks within your comfort zone.
“Typically, the younger you are, the more you can withstand the ups and downs of the market because you have a longer time horizon until you need that money to retire and live on.” , he illustrates.
“But all things considered, investing should be something you plan to do for the long term, and that requires finding a strategy and [un niveau de risque] that you are comfortable with. »