START INVESTING: THE PRINCIPLES
FINANCES | DIY RETAIL INVESTOR SERIES
LAST UPDATED: FEBRUARY 4, 2021
LAST UPDATED: FEBRUARY 4, 2021
There are a number of different ways that you can start investing your hard earned money.
Ultimately, your goal is to use your investments now and build up enough wealth to draw upon during retirement later in life. To take this a set further, you want to generate enough passive income from your wealth so that you can support your lifestyle without having to draw down your principal at all.
Ultimately, your goal is to use your investments now and build up enough wealth to draw upon during retirement later in life. To take this a set further, you want to generate enough passive income from your wealth so that you can support your lifestyle without having to draw down your principal at all.
INVESTMENT STRATEGY
You are a long-term investor planning for retirement and not a day trader looking for short term gains. Start thinking that way.
Aim for an annual rate of return between 5-10%. If you're making more than this, you're probably taking on higher risk investments, which is fine as long as you're aware of what you're doing.
Start by maximizing your contribution into your tax-free savings account (TFSA) and your registered retirement savings plan (RRSP). If you have kids, maximize your contributions into your registered education savings plan (RESP). These three are all registered plans and each has their own method save or delay taxation. Because of these benefits, there is a maximum contribution limit.
Aim for an annual rate of return between 5-10%. If you're making more than this, you're probably taking on higher risk investments, which is fine as long as you're aware of what you're doing.
Start by maximizing your contribution into your tax-free savings account (TFSA) and your registered retirement savings plan (RRSP). If you have kids, maximize your contributions into your registered education savings plan (RESP). These three are all registered plans and each has their own method save or delay taxation. Because of these benefits, there is a maximum contribution limit.
WHAT TO BUY
Exchange traded funds (ETFs) with a low management expense ratio (MER) that pays out a regular dividend. A dividend is a sum of money paid to you for holding onto a stock or ETF. It is passive income that will only help to grow your wealth - think of it as interest paid to you for holding onto a stock or ETF. Ensure you enrol in a dividend reinvestment plan (DRIP) to ensure that your dividends are automatically used to purchase more of that ETF.
WHEN TO BUY
Now. The longer you hold an investment, the longer it will have time to grow. You are a long-term investor and your investment horizon is years to decades from now, so you do not need to “time the market” and wait for a dip in the market before buying. Contribute into your registered plans in January each year when your contribution limit increases.
WHERE TO BUY
You need to be able to buy and sell your investments, so start by setting up a brokerage account. In Canada, popular options include the major Canadian banks, Questrade, and Wealthsimple.
HOW TO BUY
SO HOW DOES THIS PURCHASE MAKE ME MONEY?
Your investment will grow in value in two ways:
- Increase the value of a share: As more people invest in your ETF over time, the price per share of that ETF will increase. By the time you sell in retirement (if you sell at all), the price will be much higher than when you had bought it.
- Increase the number of shares: Dividend payouts should be used to purchase more of the ETF, ideally using a DRIP.