Friday, October 21, 2022 / by Mario Daniel Sconza
Getting Started with Stocks: What's Holding You Back?
Even with the recent rise in interest rates, cash in the bank is still providing a pretty poor return. Although some new account offers are touting 4.5% for a limited period, most cash sitting in so-called "high-interest savings accounts" has been earning well under 2% for the past several years. If you add current inflation at 7% into the mix, cash in the bank is not looking like much of an investment.
On the other hand, financial markets are also not looking too good lately with the TSX down 12% in the last year and the S&P 500 down almost 20%. However, if you take a longer-term look, the TSX is up about 18% over the last 5 years and the S&P 500 is up 42% over the same period. Fluctuations in financial markets can be stomach-churning, especially for new investors, but stocks have proven their resiliency time and time again throughout history. Allocating a portion of your savings to the markets has proven to be very effective at building wealth over the long term.
If you are thinking about getting into the markets, it can be a daunting task and the usual questions that come up are:
Do I need a financial advisor and how much will that cost?
What do I invest in... individual stocks? index funds? dividend stocks?
How do I evaluate and manage my risk?
It wasn’t all that long ago that getting into the market required a financial advisor or "stockbroker" to facilitate trades and offer advice on where to put your money. Financial advisors are still popular these days and many of them have professional accreditation and may offer more than just help with investing, so they can provide a lot of value depending on their services and fees (see below).
Another option that has become very popular over the last few years is managing your own finances and investments with an online investment platform. You can easily open an account and purchase a wide variety of stocks, ETFs, GICs and other financial products with a few clicks of your mouse. Of course, you must do your homework and there is a fair amount to learn before you get started, but many Canadians are handling their investments just fine on their own.
Somewhere between a living, breathing financial advisor and a full-on DIY approach is the use of an automated online investing platform known as a robo-advisor. They utilize an online survey to create and manage a portfolio based on your financial goals, investing timeline and risk tolerances. The robo-advisor continuously rebalances and reallocates the assets held in your portfolio to match your profile preferences and can be used to easily manage the funds in a TFSA, RRSP or RESP.
Robo-advisors are readily available through many banks and brokerages and give you "set and forget" type of investing with relatively low fees. They have some limitations, but they may not be that much of a consideration for beginning or time-strapped investors.
Robo-advisor fees are now facing stiff competition from a type of fund known as an "all-in-one ETF" that offers similar, one stop shopping with low fees. These funds are widely available to DIY online investors and often have names like "conservative", "balanced" or "growth" to make it easier to identify one that suits your situation, risk tolerance, and other preferences.
One word of caution is fees — Canada has some of the highest investment fees in the world and they can be difficult to understand. We get people all the time in our programs who are very surprised when we show them exactly what they are paying in fees! ?A "seemingly low" 2% annual MER fee on a mutual fund could easily rob tens of thousands from your retirement nest egg over your investing lifetime.
Make sure you fully investigate the fees before you pull the trigger on any investments and evaluate your returns at least once a year to ensure any fees you are paying are being justified by those returns.
Getting into the markets is inevitable if you want to build wealth and it will also allow you to take full advantage of the benefits of a TFSA and RRSP. How involved you want to be in managing your investments is up to you, but there are lots of options available. We encourage you to dig in on the subject and start building your knowledge regardless of which investing option you choose.
BC has the highest average rent in the country at $2682, but what will it cost you to rent in Saskatchewan? Find out this and a lot more in this great summary of the rental market across Canada.
If you enjoyed the above article on getting in the stock market, this one is a must read as it expands on many of the same ideas.
In Canada, the amount of money in high-interest cash ETFs grew by about 30% over the pandemic, and given volatile financial markets, a looming recession, job worries, and rising interest rates, isn't this a good strategy?
Mark your calendar for next Wednesday, Oct. 26 as a variable rate mortgage (and a few other debts) could be costing you a lot more. A 0.75% increase would add around $200 monthly to a 25-year, $400K mortgage. In case you lost track, the Bank of Canada rate began 2022 at 0.25% and currently sits at 3.25%.