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Before investing your hard-earned cash, here's what to know about purchasing stocks, mutual funds, exchange-traded funds, cryptocurrency and NFTs.Illustration by Melanie Lambrick

If you’re new to the world of investing, the vast array of options available – including stocks, mutual funds, exchange-traded funds, cryptocurrency and non-fungible tokens – may be intimidating. But investing doesn’t have to be complicated. Here’s what you need to know before investing your hard-earned cash.

The basics

How does investing work

Even newbie investors have probably heard the first rule of investing: Buy low, sell high. That’s the name of the game in a nutshell. Investment assets like those mentioned above continually fluctuate in value. You purchase assets at a given price with the hope that they will increase in value. The greater the increase, the higher your investment returns.

Of course, an element of risk is baked into the process. There’s no guarantee that your investments will always increase in value; in fact, they will likely dip or even tank at times. The key to being a successful investor is to sell assets when they are up, not down.

This can be a difficult task for some investors, who can’t stomach losses and jump to sell after a crash, thereby locking-in their losses rather than waiting for the markets to recover (as they eventually tend to do). Such investors are said to have a low risk tolerance, which they should take into consideration when deciding what assets to invest in, as explained below.

How to choose investments

Some investments (such as stocks and cryptocurrency) can be quite volatile, with big swings up and down in value. Other assets (such as bonds) are less risky but offer far more modest potential returns than their riskier counterparts. (Then there are no-risk savings-type investments, such as high-interest savings accounts and guaranteed investment certificates – GICs – where your principal investment cannot decrease in value and you earn a set, but often low, percentage in interest.)

Most experts advise investing in a mix of asset types to mitigate risk. That mix is called your asset allocation, and simply refers to what portion of your investment portfolio should be devoted to higher-risk assets as compared with lower-risk ones.

Risk tolerance in investing comes down to age and attitude

To determine your asset allocation, take an investment risk tolerance questionnaire – a standard tool offered by financial advisers and investment firms. These questionnaires measure your attitude to risk in general and your ability to tolerate the ups and the downs of your investments.

Questions will include your age, investment experience, general financial situation, whether you are investing for the short or long term, and other factors. Once your risk tolerance has been determined using the answers to the questionnaire, you can choose an appropriate asset allocation to match your risk level.

If, for example, you have a very high risk tolerance, you might opt to invest 80 per cent or more of your portfolio in stocks (also called equities) or other risky investments and use the balance of your investment portfolio for safer options such as bonds or other fixed-income assets.

If, on the other hand, you are quite risk averse, you may want to flip that around and limit stocks or other volatile investments to only 20 per cent or less of your portfolio. Many investors opt for a balanced asset allocation of stocks versus fixed-income assets. That could be 60 per cent stocks, 40 per cent fixed-income (60/40), or perhaps 40 per cent stocks and 60 per cent fixed income (40/60), depending on their individual situation.

How do I invest with only a little money?

Many wealth advisers and financial planners will take on only those clients who meet a certain threshold in investable assets – say $100,000, $500,000, $1-million, or more.

But you don’t actually need an adviser to start investing; you can do it on your own by opening an online brokerage account or using a robo-adviser. There are many to choose from, including online brokerage services operated by the big banks and fintechs such as Wealthsimple or Questrade.

So, how much money do you need to start investing online? Some robo-advisers or brokerage accounts have no account minimums, while others may require a balance of about $1,000 before you can start investing. In fact, you could potentially start by buying a partial unit of an ETF for $1 – although that wouldn’t make much sense if you’re paying more than that in trading costs or other fees.

Speaking of fees, that’s something to be mindful of regardless of your method of investing. After all, every dollar you pay in fees is a dollar off your investment returns. Rob Carrick, The Globe and Mail’s personal finance columnist, put together an excellent overview of the various investing fees charged by financial planners and online DIY brokerage services for advice, commissions, fund management, and other costs. As with all services, you want to be sure you’re getting value for your money – and not paying more than you need to.

Mr. Carrick also produces an annual online brokerage ranking and robo-adviser guide, which can help you decide which service is best for your needs.

What is the best investment for beginners?

The KISS rule (keep it simple, stupid) is almost universally applicable when attempting novel pursuits, and beginner investors would be wise to follow it. As investment reporter John Heinzl wrote in a 2017 column, newbies should not jump into stock investing right out of the gate: “Managing a stock portfolio requires a fair bit of knowledge and emotional discipline, and while I think most people can do it if they put in some modest time and effort, it would probably overwhelm most beginners and could lead to costly mistakes.”

Instead, he recommends opting for the easiest, lowest-stress DIY investing methods – namely, low-fee mutual funds or exchange-traded funds (ETFs) with a balanced asset allocation. “A balanced mutual fund will give you exposure to stocks and bonds in one convenient package,” he says. Same goes for all-in-one asset allocation ETFs.

Alternatively, he suggests using a robo-adviser that will set you up with a portfolio of ETFs to match your risk tolerance and goals. “All of these options will give you a nice combination of diversification and low costs – two of the most important ingredients in a successful investing plan,” he says.

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There are many ways to invest: Mutual funds, index funds, cryptocurrency, NFTs, stocks and more. Picking an investment depends on your personal risk tolerance.Inside Creative House/iStockPhoto / Getty Images

Investment types

How to invest in mutual funds

Mutual funds are a basket of investment assets that you can buy through a financial adviser, a bank’s in-house adviser, directly from the investment management firm, or through a brokerage account. Mutual funds are popular investments because they group together a variety of stocks, bonds or other securities in one package, and this diversification can mitigate risk. The idea is that even if some of the assets in the fund aren’t performing well, others will do better, so your overall returns are respectable. Mutual funds are also a simple, accessible way to make contributions to your investments on a regular basis with no trading commissions or fees.

There are thousands of mutual funds you can buy in Canada. If you are working with an adviser, they will help you choose a selection of funds to match your asset allocation. (Keep in mind that if you deal with a bank’s or investment firm’s in-house adviser, they have a vested interest in selling you their own branded products. If you’re going the DIY route with a brokerage account, you can purchase whatever investments you want from a variety of firms.) If, for example, your risk tolerance leads you to a 60/40 stock/bond asset allocation, you might put 20 per cent of your money into a Canadian equity fund, 20 per cent in a U.S. equity fund, 20 per cent in a global equity fund and 40 per cent in a Canadian bond fund.

As markets go up and down, the total value of each of your individual mutual funds will stray from your original allocation. To make sure you maintain your preferred risk profile, you’ll need to rebalance your portfolio every so often – at least once a year – which means you sell off some assets and/or buy others to get back to your preferred allocation. (If you’re working with an adviser, they will do this for you.)

As explained above, there are also mutual funds that include a ready-made mix of stocks and bonds, with names like Income/Conservative (more bonds than stocks), Balanced (40/60 or 60/40), and Growth/Aggressive (more stocks than bonds). These funds are convenient because they are automatically rebalanced – a great benefit to beginner investors who might prefer this hands-off approach.

You can find mutual fund fact sheets online that identify the type of investments included in the fund, as well as the management expense ratio (MER) – which represents the percentage trailer fee that goes toward the ad

viser/firm as well as the fee paid to the fund manager. This is important because MERs on mutual funds in Canada can be quite high – typically more than 2 per cent. To be clear, that’s a reduction of two percentage points (or more) in your investment returns, since the statements you receive outlining the value of your holdings at any given time have already deducted these fees.

If you feel you get good service from your adviser – perhaps they provide financial or tax planning advice, or keep you from buying or selling off assets at the wrong time – that fee may be worth it. But if your adviser acts mainly as a fund seller and is short on other advice or services, consider buying mutual funds on your own through an online brokerage account. Look for the series D version of funds, which have a much-reduced trailer built into the MER to reflect the fact that they’re designed exclusively for the do-it-yourself crowd. For example, while the “A” series of a mutual fund you buy from your adviser might have a trailer fee of 1 per cent, the “D” series trailer fee could be 0.25 per cent.

Similarly, you could consider investing in passively managed index funds or exchange-traded funds (see below), which have even lower MERs than “D” series mutual funds.

How to invest in index funds or index ETFs in Canada

Index funds are mutual funds that take a passive approach to investing. Rather than paying an expert fund manager to pick and choose market “winners” in an attempt to outperform the market, index funds aim to match a market’s overall performance by holding all (or nearly all) the assets listed on a particular index – say, the S&P 500 in the case of U.S. large cap equities. The MER fees for index funds are, therefore, typically much lower than for actively managed funds (usually less than 1 per cent) because there’s less legwork involved in selecting the fund’s assets.

Similarly, there are index-tracking ETFs, which are basically the same thing as index funds except they trade on the stock market, which means there are usually per-transaction trading commissions or fees involved. But the MERs are also typically even lower than index funds (often less than 0.5 per cent).

An ETF fan asks Rob Carrick: ‘Is there still any role for mutual funds in a portfolio?’

Investing in index funds is not much different than investing in other mutual funds. You select the funds you want based on your asset allocation and purchase them either directly from the fund issuer or through a brokerage service. You’ll need to rebalance your holdings at least once a year to maintain your preferred asset allocation, or you can opt for all-in-one asset allocation ETFs if you don’t want to worry about rebalancing.

You can also invest in index ETFs through a robo-adviser, who will come up with an appropriate portfolio of funds for you based on your risk tolerance.

How to start investing in cryptocurrency

Depending on who you ask, investors should either “just say no” to crypto or embrace it full on as an essential element of a diversified portfolio. Either way, there’s no denying that cryptocurrency is an extremely volatile asset.

Between September, 2020, and May, 2022, for instance, the price of bitcoin fluctuated from a low of US$10,764 to a high of US$61,374 – and, as of July 4, 2002, sat at US$19,830. In terms of investment performance, that’s an increase of 470 per cent from low to high; and a decrease of 49 per cent from the high to May 16, 2022. Investors had the potential to either make or lose a lot of money during the past two and a half years, depending on when they bought their coins.

So, with that caveat out of the way, if you want to invest in cryptocurrency start by selecting an online crypto exchange and opening a “digital wallet” (basically, your account). Some popular exchanges in Canada include Coinbase, Binance, Bitbuy and (Not all cryptocurrencies are available at every exchange, so that may help you decide which one to choose. Alternatively, you can open digital wallets at multiple exchanges.) Each exchange has its own fee structure, which you’ll also want to look into. Once you have your digital wallet set up, transfer money into it from your bank account and use those funds to purchase your crypto.

It’s worth mentioning that cryptocurrency cannot be held within registered accounts, such as registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), etc. That means that you must track and pay tax on all your crypto earnings – either as business income or as a capital gain, depending on your circumstances.

If you prefer to invest exclusively within an RRSP or TFSA to limit your tax hit, you could consider crypto ETFs, which are eligible assets for registered accounts. These ETFs – which don’t hold digital assets directly, but rather track one or more cryptocurrencies – provide an easy way to dip a toe into the cybercurrencies market.

How to invest in NFTs

NFTs, or non-fungible tokens, are digital assets that operate on the same blockchain ledger technology as cryptocurrencies, but there are major differences between them. While one bitcoin is interchangeable with another (or fungible), each NFT represents a unique asset. That might be an original piece of digital art, collectible, or even a tweet from someone famous.

Like a physical piece of artwork, collectible, etc., the value of an NFT is determined by the amount of money someone else is willing to pay for it. In other words, everything outlined above about the volatility of crypto – that goes double for NFTs. Prices can drop dramatically after an initial surge, see-sawing between bull and bear cycles within as little as a week.

Having said that, if you want to invest in NFTs, here’s how you do it. Open a digital wallet on a crypto exchange that trades ethereum, as this is the digital currency you require to purchase NFTs. Once you’ve transferred money into the wallet from your bank account and purchased some ethereum, you can start to browse NFTs on platforms such as OpenSea, Rarible, NBA Top Shot and Nifty Gateway. When you find an NFT you want to bid on, transfer your ethereum to that platform to pay for the purchase.

How to start investing in stocks

Once you’ve got the hang of mutual fund investing (or index investing, either through a mutual fund or an ETF), you might want to begin adding individual stocks to your portfolio. (Of course, individual stocks are by no means an essential ingredient for investment success, since you should already have exposure to the equities market through your fund purchases.)

You can buy stocks through an online brokerage, a full-service brokerage firm or sometimes directly from companies themselves. Note that stock prices rarely sit still, so the price you pay for the stock may not be exactly the same as the market price listed when you put through your purchase.

To avoid this possibility, you can set up limit orders, which will wait until the stock is at or below a specified price before executing the purchase. (Similarly, a sell limit order will wait until the price is at or above a specified price.)

There are usually commission fees on stock purchases and trades, so you’ll want to find out how much your broker charges for each transaction.

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There's no easy or surefire way to make good investments in stock markets – and you should never buy (or sell) a stock based on FOMO.AlexanderFord/iStockPhoto / Getty Images

Making and keeping investments

How to make good investments in stock markets?

If there was an easy answer to this question, everyone would be killing it on the stock market. Alas, it’s not so simple. John Heinzl recommends buying dividend-paying stocks that raise their dividend payments regularly, such as banks, utilities and telecoms. These dividend payments will provide you with continued income from your investment, even if the stock’s value swings up and down.

To select stocks on a wider basis, you’ll need to do some research. That doesn’t necessarily mean looking at the stock’s past price performance – since that tells you nothing about how the stock might perform in the future. Rather, you’ll want to look at the company’s financial statements and consider its historical earnings, cash flow, and/or dividend growth, position in the market, management, etc. In other words, is it a solid company with good prospects for the future? (You can also consult the Globe and Mail’s Stock Picks, which provides information and analysis to help you make decisions.)

Some online brokerage services also offer research and analysis tools to aid stock investors. Clearly, however, this isn’t for everyone – and you need to have the time and willingness to put in the work.

One indisputable fact: FOMO is a terrible reason to buy a stock. “I think it’s inadvisable to jump on the latest fad,” advised one expert. “People have a bad habit of buying at the top and selling at the bottom.”

To that end – regardless of what stocks you invest in – never sell out of fear, Mr. Heinzl says. “Buying and holding through good times and bad is a much more effective – and less stressful – way to participate in the market’s long-term growth.”

How long should you plan to keep an investment?

When it comes to higher risk stocks, the longer you should plan to hold on to it. Why? Because if you expect to spend that money in the near term, you’re taking a huge gamble that a risky investment will produce strong returns within a short period of time. It’s just as likely that it will lose money, and you’ll have to sell at a loss.

When you buy and hold for the long term, you can ignore a volatile investment’s big swings in value and focus instead on your average annual returns. Sure, some years may be dismal, but others will do gangbusters. The important thing is that, on average, you are getting the returns that you want to meet your investment goals.

Similarly, low- and no-risk investments are meant to be held for the short term. Why would you want to forgo the possibility of better returns from higher-risk assets if you have decades to wait out any market turmoil? Indeed, some experts say the biggest mistake young investors make when saving for retirement is not being aggressive enough with their asset allocation.

How to calculate return on investment

Most investment statements, whether from an adviser or through an online brokerage service, will clearly outline your investment returns. If, however, you’d like to verify those figures or calculate them yourself, there is a very simple formula.

The current market value of your investment minus the price you paid for the investment is your return on investment. (For dividend-paying stocks, this assumes you have reinvested the dividends into the stock; otherwise, you must add the total amount you received in dividend payments to your total returns.) Generally speaking, that number is then divided by the initial cost of investment and multiplied by 100 to express the return in percentage terms.

How do taxes affect my investment returns?

While it’s not traditionally considered part of return on investment, it’s worth looking at how taxes affect your “take home” investment earnings in various scenarios. When investing outside of registered accounts, all your investment income is taxable – but not at equal rates. Interest income is taxable in full at your marginal tax rate, based on your income tax bracket.

Only half of capital gains (the return on investment when you sell or trade a stock or other equity) are taxable at your marginal rate. Dividends have a different tax formula, but the rate of tax is usually somewhere in between what you’d pay on interest and capital gains.

When you invest within a TFSA, your investment earnings are truly tax-free. You don’t pay taxes on that income while it’s in your account, or when you withdraw the funds. For investments in an RRSP account, you get a tax deduction when you make your contributions, and you don’t pay tax on the investment earnings while they remain within the RRSP.

But – and this is a big but – when you draw your money in retirement, you pay income tax at your marginal rate on the full amount of the withdrawals, both your original contributions and your investment earnings.

A good financial planner or tax adviser should be able to help you approach your investments with an eye to tax savings over the long term.

The bottom line

Wondering how to start investing? Three things to remember
  1. You don’t need a financial advisor to begin investing, or to be rich
  2. It’s best to begin with low-risk options like ETFs or mutual funds
  3. Most experts advise investing in a mix of asset types to mitigate risk

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