Investments
Are You Financially Prepared to Invest?
Debt
Investing sounds fun and exciting but there are a few things you need to have first. You should not start investing if you have credit card debt. The highest credit card interest rate is 34.99%. Most credit cards I use have rates around 20%. The S&P 500 index is often used as a bench for the performance of a stock portfolio. Given that the average annual return for the S&P 500 index from 1957 to 2018 was roughly 8%. If you choose to invest instead of paying down your credit debt, your returns will likely be significantly less than your credit card interest rate and you will probably never get out of debt. If you are able to use credit cards responsibly see my credit cards section.
Emergency Fund
Another consideration before investing is do you have an emergency fund? An emergency fund is 3-6 months of expenses saved up. No one plans to have bad things happen but the best defense is to have savings ready. If you have you have risky investments and no emergency fund and the market drops 30% you may have to sell stocks at the worst possible time to cover your expenses. However, if you did have an emergency fund, you have time to let your investments bounce back. In my experience and research if you’re invested in high-quality companies they usually do.
What Type of Investor Are You?
There are many different types of investors. There are ones that think a safe 1% return per year from the bank is a good investment. They don’t realize that at 1% return if inflation is 2% per year their money is losing 1% of its value every year. This is in my opinion a very bad investment! It’s definitely good to be somewhat cautious when investing but not taking any risks will lead to no profit from compound interest. On the other hand, there are extremely high-risk YOLO investors. These people put all their live savings in Dogecoin. Neither of these approaches is good. It’s best to be somewhere in the middle. The four types of investors are risk-averse, conservative, moderate, and growth.
Risk Averse
These investors put most of their investments in a high-interest savings account and are likely to lose money to inflation.
Conservative
These investors have most of their investments in bonds and own a few stocks and ETFs. This could be a good approach if you’re close to retirement.
Moderate
These investors have close to even investments in bonds and in less risky (blue chip) stocks or ETFs that track the S&P 500.
Growth
These investors have most of their investments in higher-risk stocks, cryptocurrency, and maybe a few bonds. You are more likely to see high returns in the long run but you may see stomach-turning volatility over shorter time frames. I am a growth investor.
How to Start Investing
Investing in stocks means you are buying ownership of a tiny fraction of a company. The traditional way of investing is through your bank or a broker like Sunlife or Manulife. These investment companies can charge around 1 - 3% per year in fees. This will drastically eat into your profit over time. In my opinion, a better solution is to invest using an online broker. It was hard for me to trust them at first but they have been very reliable. My favourite online brokers are Wealthsimple and Questrade which I talk more about below. You can transfer money to both of these online brokers directly from your bank account. If you are going to make money investing why not avoid paying taxes on it… Two ways the governments provide to avoid paying taxes on investments are TFSA and RRSP accounts.
TFSA
TFSA stands for tax-free savings account. You can open a TFSA through most banks or using an online stock broker such as Wealthsimple or Questrade. Within a TFSA you can hold cash you make interest on, GICs, stocks, bonds, and mutual funds. How much money you are allowed to deposit into a TFSA depends on your age. You can use this simple contribution room calculator to check how much you can deposit before being taxed. This account can be used as your emergency fund because the money is generally reasonably easy to get at and can be withdrawn anytime. If you do make a withdrawal that money is not taxed. The effect is your contribution room shrinks by the amount you took out but the room comes back the following year. The TD site does a good job of explaining the rules.
RRSP
RRSP stands for a registered retirement savings plan. You can open an RRSP through most banks or using an online stock broker such as Wealthsimple or Questrade. Within an RRSP you can hold cash, gold and silver bars, GICs, savings bonds, treasury bills, bonds, mutual funds, ETFs stocks, Canadian mortgages, Mortgage-backed securities, and income trusts. How much money you are allowed to deposit in an RRSP depends on your income. This is called your contribution limit and can be found on the CRA website. When you contribute money to your RRSP your income for the year is lowered by the amount contributed. Therefore, you only pay tax on the new lower amount. When you do withdraw money from your RRSP, it is added to your income and taxed accordingly. Except for the first time home buyer’s plan and lifelong learning plan which are explained on the Government of Canada’s website. In general, RRSP is better for the money you intend to use after retirement. Always make sure to ask your employer if they have an RRSP contribution matching program. If they do start using it ASAP #freemoney.
Wealthsimple
Wealthsimple is an easy-to-use stock trading platform and does not charge any commission fees. There’s no minimum amount you have to invest. You can hold TFSAs, RRSPs, or taxable accounts. They have some excellent tools to build a portfolio and pay very low fees. Or you can buy stocks and ETF’s individually as I do. Wealthsimple added a feature where you can instantly transfer up to $250 from your bank to your trading account to start trading immediately. If you want to transfer more money it will take 3 business days before you can trade. Wealthsimple is a great place to hold Canadian stocks. The downside is you can’t hold US currency. Every day the stock market is open your stocks are converted from Canadian Dollars to US Dollars and back at the end of the trading day. Wealthsimple makes money from the currency conversion fees. Hey, they have to make money somehow.
They also have managed account options available at very fair prices. If you deposit $0 to $100,000 it’s 0.50% per year in management fees. For $100,000 and up it’s 0.40% per year. One of the advantages of a managed portfolio is you don’t have to monitor it yourself very often. All you have to do is put money in and they rebalance your portfolio as need to make sure it’s diversified into multiple market sectors and meets your risk tolerance. They also reinvest your dividends so you don’t have to.
Follow my link to get 2 free stocks that vary between $5 and $4,500.
Questrade
Questrade has a bit more of a complicated interface than Wealthsimple but is also a great choice for investing. Similar to Wealthsimple, with Questrade you can hold TFSAs, RRSPs, or taxable accounts. You have to deposit a minimum of $1000 to open an account. Where Questrade differs is they charge a commission fee (minimum $4.95 and maximum $9.95 per trade) for stock transactions. This can add up quickly if you invest small amounts at a time. On the plus side, ETFs are free to buy. However, ETFs cost $0.01 per share to sell. One large advantage Questrade has is that you can hold US stocks in US currency. That means you save money on currency conversion fees. An advantage Questrade has is that if you transfer money from your bank account it’s usually ready to trade the next day. Also, with Questrade you can set up a dividend reinvestment plan DRIP but a large amount of money is required to start that plan.
They also have cheaper managed account options than Wealthsimple available. If you invest $1000 to $99,999 it’s 0.25% per year in management fees. For $100,000 and up it’s 0.20% per year. One of the advantages of a managed portfolio is it’s set it and forget it. All you have to do is put money in and they rebalance your portfolio as need to make sure it’s diversified into multiple market sectors and meets your risk tolerance. They also reinvest your dividends so you don’t have to.
Use my link to receive from $25 to $250 when you open an account depending on how much you deposit.
Dollar-Cost Averaging
No matter what type of investing you choose it’s good to be consistent. I look at my budget and whatever cash I don’t need that month I invest. You can also setup direct transfers from your bank to your investment account. Once your money is in your investing account buy more stocks or ETFs no matter what the market is doing. If the stock or ETF price goes up buy some. If the stock of ETF price goes down you buy more. This method of investing is called dollar-cost averaging. The beauty of buying into the market whether the price is high or low is you get to take advantage of the market’s overall positive trajectory. If the market is trading flat it’s probably at a low point. You won’t make much return in the short term, but when the market picks up again all that money fly’s up with it.
Dividend Investing
A dividend is a portion of a publicly-traded companies earnings that they return to shareholders. Dividends can be a good choice for stable growth. Dividend-paying companies tend to be well-established companies that have been around for a long time. Most of them pay you out every quarter or 4 times a year. Some dividend stocks pay you monthly. You won’t see insane growth from them like Tesla stocks have seen, but you will see consistent dividends which the companies commonly raise every year. That being said, it’s still possible for the companies to cut their dividends if they need the cash. With dividend investing, if the market goes down your profits from dividend payments stay the same because dividend payments are based on the number of stocks you own not the price. You can buy more dividend stocks for cheaper when the stock price goes down. Then next quarter you will receive more dividend payments and you can buy more stocks. This cycle continues and leads to exponential financial growth.
If you are a Canadian and you invest in US dividend stocks you are subject to withholding tax. This is a 15% tax on your dividend payments that is taken off before you even receive the payment. There are a few exceptions:
Dividends paid from US stocks held in an RRSP or RRIF are not subject to withholding tax.
Canadian ETFs that buy US stocks are subject to withholding tax.
That’s why I prefer to invest in dividend stocks from Canadian companies and also to support Canada.
DRIP Investing
A DRIP plan is where every time you receive a dividend it is automatically used to buy more shares in the same company which paid you. The catch is you have to be receiving a minimum of a full stock worth of dividend payments. Let’s use the example of TD bank:
Today TD.TO is trading at $87.70
The dividend payment = $3.16/share per year or 3.63%
The dividend is paid quarterly
In this example, you would need $9663.91 invested in TD to qualify for a DRIP plan.
A drip plan buys as much of the same stock as possible. Any other amount remaining is deposited as cash in your trading account. I DRIP plan happens automatically, so you don’t have to manually reinvest your dividends.
Rule of 72
A common investing rule is the rule of 72. This rule comes from the Italian mathematician Luca Pacioli. The rule of 72 is a quick and dirty way to estimate how long it will take your investment to double. The only ingredient you need is your yearly interest rate. The formula is simply:
Using the example of 8% for the S & P 500, 72/8 = 9. Therefore in 9 years, your money would double assuming no more money was invested.
To learn more about starting DIY investing click here.
My Investment Style
I chose a hybrid growth and dividend growth style of investing. In my Wealthsimple account, I have quality Canadian dividend stocks. Every time I receive a dividend payment I quickly re-invest them into low-cost stocks. I use Questrade for my growth stocks and ETFs. I own names such as AAPL, AMD, QQQ, and ARKK for a few examples. I plan to hold these stocks for at least five years and through my research and experience, I’m prepared for some wild volatility. It’s important to diversify your portfolio. That means owning stocks from all different sectors and geographical areas. I have around 80 stocks in my portfolio to ensure proper diversification. My portfolio declined about 30% due to the pandemic in March of 2020.
My 12 Month Performance Report as of June 24th, 2021
As you can see from the lines spiking up and down on the chart above there was some wild volatility in the markets. In spite of that, my Questrade portfolio significantly beat both the NASDAQ and S&P 500 over the last 12 months.
For the last fun part of my portfolio, I sprinkle 2 to 3 percent of my funds into crypto like Bitcoin and Etherem. I recommend 2-factor identification on all your investment accounts. If you’re going to have lots of money you should protect it.
I like to use yahoo finance for researching stocks and ETFs and tracking the intraday performance of my portfolio all for free. I know, I thought yahoo was extinct too. Yahoo has lots of cool tools for creating watch lists, looking up stock and ETF symbols, and learning what the experts think stock prices should be.
My Year to Date Portfolio Performance July 2, 2022
This year the S&P 500 has fallen into correction territory (over 20% drop). I don’t want to give anyone the impression stocks will always go up. If you have a well balanced portfolio and a long term horizon, stocks have always gone up in the past and are likely to go up in price again. My safer dividend strategy has lost much less than the growth strategy or S&P 500 plus, it generates consistent cash flow to keep buying more stocks. It’s okay that my growth portfolio is performing slightly worse than the NASDAQ because I have a long term investment horizon and I’m willing to take more risk for higher potential rewards.