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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.
The S&P/TSX composite index has fallen 13 per cent since its peak in 2022, putting it solidly into market correction territory, so it might be a strange time for new investors to get started, but advisers say they should consider this downturn an opportunity.
“If things go on sale that you want, then you look at that as an opportunity, just as you would for when clothes or other items go on sale,” Martin Mathewson, a senior portfolio manager at BMO Private Wealth, said. “The best time to start is always right now.”
But if you have no idea how to begin, here’s a step-by-step guide to starting an investing account.
Make a plan
There isn’t a reputable financial adviser out there who will recommend investments until you have a solid plan. That plan looks different for every person, depending on how soon you need cash in your pocket. A plan also dictates the kind of investing accounts an adviser will recommend.
About 15.3 million Canadians held a tax-free savings account (TFSA) as of 2021, and 5.9 million invested in their registered retirement savings plan (RRSP). Both numbers are low given there are 30.8 million adults in Canada, and most advisers recommend having both accounts.
“It’s about being very honest with your adviser and yourself,” Jeanette Power, senior wealth adviser at the Canadian Imperial Bank of Commerce, said. “If an individual is looking to invest in an RRSP and is really focused on reducing their employment income taxes, then it would be the way to go. If there’s a shorter need … I’d often recommend a TFSA as well … often both.”
Part of your plan should include how much or how little risk tolerance you have. Your adviser can help you figure this out based on your budget and goals.
“Trying to determine what your investment goals are and your risk tolerance is important when you’re putting a dollar investment to work and figuring out an end game for what that money can achieve,” Mathewson said.
Create cash flow
New investors may have a chunk of money they’re willing to put towards investments, or they may be starting with zero. In any scenario, there are ways to start putting money towards your investment goals.
But before you put that money aside, it’s important to make sure you have some funds available in case of an emergency. This might include an emergency fund for six months of expenses, Stuart Gray, director of the financial planning centre of expertise at Royal Bank of Canada, said
“It’s good to set yourself up with a solid foundation to invest successfully over the long term,” he said. “That store of cash will provide you with valuable peace of mind, as well as the resilience to stick with your investment plan through market ups and downs.”
Once you have that peace of mind, you can start putting aside cash for investing on a consistent basis. And consistency is key, Gray said, adding that a dollar-cost-averaging strategy is a great way to start investing if you have little to put aside.
“If you’re not ready to put everything into the market today, you can gradually buy in by investing small amounts regularly,” he said. “In this way, you’re buying in at different prices and smoothing out the overall price you’re paying to get into the market.”
Diversify, diversify, diversify
There is no such thing as too much education, especially when it comes to your investments. New investors can read up on investments that work within their time parameters and risk tolerance to help guide their decisions. One of the things to consider when you start out would certainly be diversification, Power said.
“Diversify, diversify, diversify,” she said. “Even if you are using (exchange-traded funds), make sure you invest outside North America as well, not just in Canada. You may want to add to something that’s a little more growthy, but, again, that’s not something … that’s suitable for everyone.”
A diversified approach is particularly beneficial during market corrections, such as the one Canada and the rest of the world are experiencing today, Gray said. This will help your funds stay afloat when a certain area of the market goes down.
“Spreading out your money across a mix of investments helps create a smoother investment experience,” he said. “At any given time, any one asset class, region or sector may be leading the market while others lag. In a diversified portfolio, a decline in one investment may be offset by growth in other assets.”
Think long term
It’s tempting to try to be the one who makes a killing by investing in the right stock at the right time. But there’s a reason these are fun stories around the water cooler. They don’t happen often. It’s far more likely you’ll end up with a loss.
That’s why financial advisers recommend investing long term and sticking to your goals. This is when you’ll see the largest benefits from compound interest, Mathewson said.
“The power of compounding interest is a huge concept for people,” he said, “but this is a huge mathematical solution of how investing can work for you over the long term … thinking of what your portfolio could be like in five or 10 years.”
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Part of that long-term focus should also be making a plan to meet with your adviser every so often and rebalance your portfolio. Your life is bound to change, so adjusting to the twists and turns is important, Power said.
“Even though you’re diversified, you want to rebalance to be in line with your own risk tolerance,” she said. “What you think you can tolerate when you’re starting off may not be what you can actually tolerate in the market, or it may change over time.”
What all these advisors agree on is that even with this long-term focus, the best strategy is to get into the market straight away with strong investments.
“The earlier the start, the better,” Power said. “Remember, it’s time in the market, and not timing the market.”