Now that you know the difference between an RRSP and a TFSA (see last issue), how do you get started investing? Banks have discount brokerages—services that process purchases and sales of investments—that they work with. Do some research and find one that suits your needs.
Once you have an account, you can start buying and selling securities. An important distinction is the difference between investing and speculating. Investing in companies or funds without research and analysis is basically gambling. Investing means taking a reduced, calculated risk, and knowing what you’re buying.
Rather than analyzing and investing in single companies, which takes a decent amount of financial prowess, mutual funds are a popular alternative. Fund managers pool investors’ money together and invest in different security classes, sectors, and geographic areas, reducing risk through diversification.
Buying a bunch of securities on your own—with transaction fees, they’re around $10 each—can eat up returns on a small account. If you plan to make continuous, small contributions, mutual funds can be a cheaper way to do it. The downside is you pay a hefty management expense ratio (MER), from one to three percent. If the fund doesn’t do well, losses to your account are magnified.
Another option that provides diversification is buying exchange traded funds (ETFs). They are like mutual funds—without the active management—but can be bought and sold on an exchange. Some brokerages offer commission-free purchases of select ETFs, and the MER is up to 10 times lower. If you buy ETFs that aren’t commission-free, transaction fees add up quickly, so some advisors recommend this approach for those with at least $50,000 to invest.
There is much more to learn about how to actually build an investment portfolio. You should consider your goals and your tolerance for risk, and learn as much as you can.
If you don’t want to think too hard, you could take Warren Buffet’s advice: “Just buy an S&P index fund and sit for the next 50 years.”