Investing: A Complete Guide

So you’re ready to have your money work for you, but investing can be quite daunting for beginners! Today, I’ve compiled a complete and comprehensive guide to investing. We will be exploring topics ranging from determining risk-aversion to managing your portfolio. Sounds like what you need? Well, dive right in!

Active vs Passive Investment Strategies

Generally speaking, there are 2 basic strategies to investing: active and passive. As the names indicate, one requires much more research and involvement, which may not necessarily be something every investor is ready to commit to. So let’s explore the options and see what’s best for you!

If you enjoy learning about the market and follow financial news, active investing is quite attractive. It allows you to make more specialized decisions and personalized portfolios. But before you hit the gas, be cautious of your time commitment! If you are unwilling, or unable, to commit a sizable fraction of your time on stock research, chances are you won’t be very successful with active investing. When I started off with saying it’s involved…it’s involved. You will need to spend time researching and analyzing ratios of the company to form informed decisions for your investments. Still undaunted? Looks like active investing is a fit for you! I will write an article on important ratios soon, so keep an eye out for that!

Read the previous passage and are slightly terrified? Well, here’s something that might fit your wallet better (get the joke?). Passive investing is a lot more hands off and requires you to pay less attention to your portfolio. It may be a great way to start if you are unfamiliar with finance, accounting, and investing as a whole. It’s also a nice approach if you want to sit back and relax on a Saturday morning instead of foraging through pages of financial documents (unless you love the balance sheet like me, which in that case that would be an awesome way to spend your Saturday morning). Great places to start are investment advisors, robo-advisors, and mutual funds. It is worth noting that historically passive investing hasn’t been as successful as active investing.

Budgeting

Chances are if you’re reading this paper, you don’t have unlimited funds to work with. The good news is: neither do I! To make sure your investments aren’t eating into your life, we’re going to follow a budgeting rule of thumb. If you haven’t heard of 5:3:2, we’ll now you have. This splits your income into a ratio into needs, wants, and savings respectively. We want to wisely work within that 20% of your income.

So here is where I give my disclaimer, please do not go investing all of your savings. With my budget I decided to invest 10–15% of my income on investments by also saving up on my wants. Remember that this isn’t a cookie cutter formula, so determine what works for you and roll with it!

Risk Aversion

Not everyone is open to risks, and that’s okay! My mom, for example, is a very risk aversed person. And guess what? She’s doing just fine. Understanding your comfortability with risks is extremely helpful when deciding what you will invest in, and how you will invest.

As someone pursuing a career in relatively high-risk work, I’m relatively open to risks. This allows me to invest in newer ideas, it also means I’m more willing to invest even when market conditions aren’t great.

If that doesn’t sound like you, it may be a good idea to stick to low risk investments. Companies that have been around for a long time are usually great places to start.

Splitting Your Basket

Having a variety within your investments is a good strategy to minimize risks and optimize earnings within your portfolio. Depending on your risk aversion and budget, you may want to take time into figuring out a ratio that works for you. It’s always a good idea to have both long and short term investments. Additionally, different levels of risk within your portfolio is generally a good idea when you first start.

Ready? Go!

So you’re ready to invest. Let’s explore options, because there’s so much more than just buying stocks!

If you’ve determined your interested in the stock market, you will want to fine a broker. Big banks and other online financial institutions are good places to start! Depending on your activeness in trading, they also offer a range of advisor resources at specified prices. Once you’ve found a broker, you will want to consider which account to invest with. Generally, tax free savings account are popular because your earnings aren’t taxed until withdrawal. One benefit of using a normal account though are tax credits. This means if you have a loss on the market that you can use that credit for less taxing on a gain. At the end of the day, your choice needs to be based off of your style and what works for you!

Still a bit iffy on investing? That’s ok — the stock market can be a scary place! There are certainly more secure ways to grow your money, though at a way slower rate.

Investing off the Market

Government bonds are a great, secure place to start if you don’t want to gamble with your money. They pay regularly and often observe low growth. Other government programs like Registered Retirement Savings Plan (RRSP) or Registered Education Savings Plan (RESP) are also great options for long term investments to grow your money without being taxed. Earnings are usually taxed at withdrawal, where your income level and tax quota is lower.

Additionally, you can also put your money into high yields savings accounts offered by financial institutions. Most financial institutions offering this are online and smaller banks, but big banks have also been implementing them. It is worth considering going online, as big banks do charge annual fees or have lower percentage yield. High yields savings account often require minimum balances and have withdrawal limits. This is because your money is being loaned out by the bank. Though all savings account work this way, a high yields account would essentially be a larger reserve of money for banks to work with.

Your Turn!

So we’ve come to the end of my complete guide to investing. Now that you know what to look out for and how to start your journey, it’s your turn to use these tools. Good luck!