4 Tips for Beginner Investors
Updated: Aug 20, 2022
Whether you are deciding to become a DIY investor or deciding to go with a financial advisor, please do your research first!
I'm not gonna sugar coat it. It is an overwhelming journey of learning. However, anyone can learn anything if they put their mind to it! I know you can do it!
Here are some things that I have learned.
It doesn't have to be as complicated as you think.
You don't have to spend all day sitting and analyzing stocks.
Instead, set aside 6 months to a year to read books and research before you start investing so that you can save yourself hundreds of thousands of dollars! No exaggeration! Now that's paying yourself first, towards your future goals!
Some of the books that I would recommend reading include some Canadian and American sources. There is a lot of American content out there but it's great to have more specific Canadian content.
Millionaire Teacher by Andrew Hallam (Canadian)
Beat the Bank by Larry Bates (Canadian)
Simple Path to Wealth by J.L Collins (American)
and
I Will Teach You to be Rich by Ramit Sethi
Some great Canadian Youtube channels include:
and
When you start reading and researching, remember these key points.
1. Performance:
There is no guarantee in investing that you will ever make any money. Just because a stock or a bundle of stocks made money in the past 5 or 10 years doesn't mean that it will make any money in the future. A good Morningstar rating, doesn't necessarily ensure growth in the future. Don't let an advisor sell you a product purely based on past performance! There are no guarantees!
Past performance doesn't dictate future performance.
At this point, you might say, what's the point of investing then? The point is, that if you never try, then you will never have the potential opportunity to succeed. And if you just leave you money in your piggy bank or savings account, then you have already lost due to the tragedy of inflation. Never stay stagnant, always be moving towards a goal or something. The stock market will go up and down like a roller coaster ride but as long as you are in it for the long haul, you are more likely to make some money. Specifically if you invest in an index like for example, the S & P 500 Index, which has historically proven itself to go in an overall upwards trend over the past 90 years.
2. Diversification:
Never put all of your eggs in one basket! We've all heard this common phrase before. Why don't we put all our money into tech stocks, beanie babies or Tesla stocks? because we don't have a crystal ball to tell the future. We don't know when a pandemic or a war is going to occur. Instead, we want to lower the risk by investing amongst various regions around the world and in different economic sectors. Some advisors will try to sell you only Canadian stocks for some reason, but that is not spreading out all your risk. Instead, that is concentrating your risk into one country or region.
3. Fees:
This one is huge! This is where you have the potential to save a ton of money!
My biggest mistake was not having any idea about fees until I started doing my research. When I realized how much I could be losing in fees especially within the 1-2% fee range, that's when I became shocked and outraged that I hadn't done my research sooner!
Example:
If I invest a lumpsum of:
$100K in a mutual fund with an average 6% return/year and a 2% fee
and then never touch those funds again for 25 years. Then I could potentially lose $162K in fees or 49% of my total returns, in fees at the end of the 25 years!
vs
An Index ETF with 0.5% in fees or less would only cost me $48K in fees or 15% of my total return and this would be considered a higher fee ETF
vs
An Index ETF with an even lower fee of 0.05% would only cost me $5K in fees or 2% of my total investment return.
As you can see there is a huge cost difference in fees! Don't think in percentages instead, think in dollars because
Percentages can deceive our math skills.
Even if your advisor is also invested in the same funds with the same fee percentage, it doesn't mean that they know how to do math.
Fees are Wealth destroyers
So if an advisor ignores the concept of fees, are they worth paying for?
Advisors and their companies have to make their profit somewhere and this is how they get paid. The issue comes down to how much do you want to pay them? And if there is no guarantee that they can pick a better performing fund, then you are better off paying a Flat Rate Fee for an advisor rather than a percentage based one.
A percentage based fee based advisor is biased to only sell their own company's products but a flat rate advisor is more unbiased because they are not selling any specific product.
For more details on fees, check out my other blogpost: What are Investment Fees Really Costing You!
4. Taxes:
Nobody likes paying taxes so research which option is the most tax efficient investment vehicle for you. Is it a TFSA or an RRSP or both? Research the differences. Each person's situation is unique and personal finance is personal, so research which option is best for your individual situation.
Also, don't forget that once you set up your Tax efficient account, you still have to decide what kind of investment product you want in this account. Setting up an account itself, is not going to make you any money. It's just the beginning!
Now Go and Be Intentional!