The world of investing can be baffling for beginners of any age. An understanding of a few simple terms and concepts can make it possible for anyone to become an investor.
What is investing?
The word “invest” can have broad connotations, as dictionary definitions make clear: You might be invested in your children’s lives, perhaps you recently invested in a new car, new business, home renovation, or you consider your education an investment in your future.
But from the point of view of investing. This is different from saving, which is simply putting money aside. The difference is often that investing carries a calculated amount of risk – though, of course, there have historically been cases where cash is also high-risk, such as in hyperinflationary societies like Germany during the Weimar Republic.
What can be considered an investment?
A lot of things can be considered an investment. Whether they’re a good investment is the question. Common investments include stocks, bonds and real estate, all of which can be purchased directly or through a tool such as a mutual fund or exchange-traded fund (ETF). Cryptocurrency is another kind of investment that has gained popularity of late. Some people who are self-employed have a lot of assets in their business, which is also a type of investment. And then there are the oddball so-called investments that are lucrative for some, until the whole structure crumbles: Think Beanie Babies in the 1990s.
Why should you invest?
It’s a good idea to save money for the future. You will probably need that extra cash down the line to cover costs owing to low cash flow from losing your job, or toward a big purchase like a home, or for your kids’ education and retirement. The fewer savings you have available, the more likely you’re going to have to go into debt when sudden expenses arise.
And while having some easily accessible cash on hand is smart, you don’t want all your savings to be hundred-dollar-bills under the mattress, figuratively or literally. Standard bank accounts pay paltry, if any, interest these days, and even the best high-interest savings accounts offer rates that are significantly below inflation. That’s fine for an emergency fund that you might need to dip into sooner rather than later. But for longer-term savings, inflation means that any cash you have put aside is going to lose a lot of value. A dollar doesn’t buy what it used to, and it’s going to buy even less down the road.
That’s where investing comes in. The goal with investments is that your money will grow faster than inflation, meaning it’ll have more buying power when you take it out than when you put it in. It doesn’t always work out that way, but that’s the general idea.
There are some guidelines on when and how much to invest, but it also depends on your personal situation. For instance, women tend to live longer than men and are more likely to have gaps in their earning years, so their retirement plans should be tailored to that reality.
An important thing to keep in mind is that time is your friend when it comes to building wealth. As columnist Tim Cestnick points out, even starting just five years earlier can have a huge impact on the value of your investments over time.
Creating a portfolio
What is considered a ‘good’ investment?
It doesn’t need to be flashy, or a “hot stock tip,” or a particular asset class, like real estate, which many who own it claim is failproof. Instead, a good investment is one that you can be confident will work out for your needs.
Investors should keep in mind that it’s easy to get caught up in hype and trends, notes investment consultant Darryl Brown. “The industry thrives on pushing the emotional envelope and trying to convince investors that this is a game that can be played – and played to win,” he says. “If we let the hype get to us, we’re the ones getting played.”
Brown suggests learning about behavioural finance, which looks at the impact of emotions on how we make decisions with money. This includes things like herd mentality, overconfidence bias – being sure that we’re making above-average decisions – and confirmation bias, the habit humans have of seeking out information that confirms our beliefs and ignoring information that doesn’t.
What is an ‘investment portfolio’?
An investment portfolio is simply all of your investments collected together, whether that’s an ETF or two, or a whole range of stocks, bonds and real estate investment trusts.
You might hear the phrase “balancing” one’s portfolio. This simply means redistributing assets so that the distribution matches your investment plan, such as having a 60/40 split between stocks and bonds.
What’s a good portfolio mix to have?
Investing experts often talk about a “diversified” portfolio. What does this mean? According to Globe and Mail columnist Rob Carrick, it’s “a mix of stocks and bonds or guaranteed investment certificates that reflect your age, your investing needs and your comfort level with the potentially sharp ups and downs of the stock market.” Carrick suggests that “asset allocation” ETFs – a fully diversified portfolio wrapped into a single package – is one easy way to achieve this, and an even easier way is to use a robo-adviser.
A longtime guideline for how to allocate your portfolio is the 100 minus age rule: Subtract your age from 100 and invest that percentage in stocks, and the remainder in fixed income. This would result in a 30-year-old allocating 70 per cent of their portfolio to stocks, while a 60-year-old would allocate 40 per cent. This is a good place to start, but some experts think it might be too conservative, so it’s important to also take into account your risk tolerance and personal goals.
“Short-term, returns are often horrible,” says personal finance author Andrew Hallam. But he adds: “Investing isn’t a sprint. It’s a marathon. Over long periods, a diversified portfolio is far less risky.”
While Carrick is a big fan of the “slow and steady” approach to building wealth – making regular contributions to a diversified portfolio – he suggests that those who do want to experiment with riskier investments treat them as a “side hustle.” This means taking a small proportion of your overall holdings (say, 5 per cent) that you can put into investments that you want to try but aren’t a part of your regular portfolio.
Can you lose money investing?
There are many ways in this world to lose money, and investing is one of them. The goal is to have a strategy in place that sets you up for success – which means ensuring your portfolio matches your risk tolerance and time horizon.
In many cases, whether you lose money depends on when you sell. This is why higher-risk investments, which are more volatile, are best to hold for the longer term, as you don’t want to be forced to sell when prices are low. “Don’t be rattled by market setbacks,” advises Globe columnist John Heinzl. “Investors who stay the course during bad times, or use the downturn to acquire additional shares at cheaper prices, make out well in the long run.”
How do you measure and manage risk?
Risk is a big part of investing. Higher-risk investments often offer a higher potential for gains – but also more of a chance of losses. Lower-risk investments, on the other hand, are safer, but tend to have lower rewards.
The 100 minus age rule is based on the idea that your risk tolerance matches your age. Younger investors, the theory goes, will have their money in the market for longer, and therefore more time to ride out any market fluctuations and sell when they’re up. Investors who are close to retirement, or already retired, are likely already taking money out of their portfolios to cover day-to-day living costs, and can’t afford to take as much of a chance on higher-risk opportunities.
But there is also a personal factor at play here. Some people simply don’t like risk, while others are comfortable with uncertainty. This is partly due to personality and partly based on what kind of safety net you might have, be it a high salary or net worth, family money or other kinds of retirement support.
Investment advisers, robo-advisers and other investment tools will often ask you what your risk tolerance is. Some things to think about include:
- How soon will you need this money?
- How would you feel if the value of your investments plummeted?
- What is your future earning potential?
- Do you have other assets you can depend on if these investments don’t do well?
Ways to invest
What are ESG, socially responsible or green investments?
The primary goal of investing is to make money, but that isn’t necessarily the only goal. Many investors want to be selective about the kinds of things they’re investing in. This preference has become more popular in an age of climate change and fossil fuel divestment, where people want to be confident their investments aren’t accelerating global warming. Social issues are a factor, too; for instance, you might prefer to invest in companies who treat their workers fairly and have diverse representation at the board and executive level.
ESG, which stands for environmental, social and governance, is one term that’s important in this space. ESG has no formal definition, but the general framework includes: promoting environmental sustainability and reducing a company’s carbon footprint; fostering social justice and responding to concerns of local communities; having an independent board of directors and a diverse management team; and consistently allocating capital effectively to the benefit of shareholders and stakeholders.
Socially responsible investing, or SRI, and green investing can be seen as related terms that also refer to someone’s desire to choose investments based on moral as well as financial factors.
Can green investing save the planet?
A new 5-part newsletter course for the climate-conscious investor. Taking the course? Tag us on Twitter (@globeandmail) using the hashtag #GlobeGreenInvesting.
What is DIY investing?
Do-it-yourself investing is pretty much what it sounds like: a method of managing your investments by yourself. Carrick points out that DIY is an especially appealing method for younger investors, who tend to have smaller portfolios that are not worth paying an adviser to help manage.
One reason to go DIY is to keep fees low. Investment fees are charged either on a percentage basis or as a flat fee – for making a specific trade, for example, or paying an adviser to help you organize your portfolio – and they can add up. The downside: the higher the fees, the lower the returns on your investments. Which means, notes Carrick, that too-high fees could even delay your retirement.
Carrick offers some guidance to investors looking to make regular investment contributions without having to pay too much in fees. He notes that some apps, robo-advisers and online brokers offer a range of options with no-fee purchases, and that you should check whether there are maintenance or other fees associated with the account.
How can you get help managing your investments?
The world is full of people who want to help you invest. The question is, how can you find advice that’s trustworthy, and how much are you able to pay?
One economical option is robo-advisers. Carrick notes that these tools are ideal for newer investors with less budget to pay for management advice, but also extremely cost-effective for those with a higher net worth. Investing with a robo-adviser means setting up an account and paying a small fee to have a portfolio that fits your requirements designed and then managed. Then, all you have to do is keep adding to your account and the new funds will be automatically invested.
Searching online is another good place to start. The internet is teeming with free investment advice, writes columnist Bridget Casey. A lot of it is geared toward people who are just starting out on their investing journey. And while being charismatic on TikTok isn’t a reliable qualification for giving out stock tips, the fact is, says Casey, much of the investing information you can find online is actually really good.
When looking for investment advice, one important thing to think about is the motivation of the person or organization giving the advice. This is what Carrick has in mind when he says, “I’d rather see someone use a robo-adviser than go to a bank branch to buy mutual funds from a salesperson.” Salespeople are paid by – and primarily motivated by – the owner of the product they’re selling, not the needs of the customer. A financial consultant who earns income solely from investors paying for their guidance is motivated only by the needs of their customers, at least in theory.
If you’re looking for a fee-for-service financial planner to help you create an investment plan, Carrick suggests it might cost in the range of $1,500 to $4,000, or more. He suggests getting in touch with a planner to get an idea of what precisely they offer and what it will cost you.
What are some good stocks to invest in?
Ready to start investing? Here are some guides to help you get started:
The bottom line
What is investing? Three things to remember
- Common investments include stocks, bonds and real estate
- A good investment doesn’t need to be flashy – it only needs to match your financial needs
- Investing earlier in life is a smart strategy