When I think about what it took for me to start investing, I tend to focus on the actual, tangible steps I took to finally do it.
But when I write about it like that, and include “start investing” on a list of great money moves you can make in less than an hour, I always feel like I need to add a disclaimer:
You should probably know at least a few things about investing before you actually, you know, do it.
The great part is that you don’t need to know a lot – at all – and trust me when I say you don’t even need to read a book about investing unless you really want to. (That’s literally my first point.)
But there are a few simple things you absolutely, positively need to think about before you take the (ridiculously easy and totally worthwhile) plunge into investing your money.
How much do you want to know about investing?
This seems silly, right? Why does it matter how much I want to know about investing?
Let me tell you the story of me, the library, and a procession of what are generally regarded to be the foundational books about investing over the past 40 years.
Since I invested with Wealthsimple, I’ve been like hey, I’m an investor, maybe I should learn more about this whole thing! I should know things about like, value investing and growth investing and market fundamentals, right? That would be a fun thing to learn?
If your eyes just glazed over, stay with me. I promise that was the worst of it.
I looked up a bunch of highly regarded books about investing, like The Intelligent Investor and A Random Walk Down Wall Street, and I put them on hold at the library (they’re very popular, apparently.)
When they were available, I went to the library, checked them out, and they made wonderful desk accessories for the three-week borrowing period.
Oh sure, I cracked them open a few times to random pages, to get a sense of what the book was like. Usually, reading a page or two this way will motivate me to actually, you know, read the book.
NOT the case with investing books.
Without fail, every time I did there was a slight shudder and a “maybe later” response. Also without fail, the books made their way back to the library unread.
So am I going to be the kind of investor who pours over financial statements and market fundamentals and tries to beat the market?
Of course not.
To do that well, you need to actually read the investing books – and that’s only a first step. That kind of investing requires you to want to know a lot about investing, and for some people, that’s fantastic.
But all of this – my avoidance of investing books and lack of desire to read financial statements – doesn’t mean I can’t be an investor. It just helps guide me towards the kind of investor I am: the kind who wants a balanced portfolio, with low fees, that aims to track the market, not beat it.
Thanks to technology, this is an option for me in ways that it never would have been before – and it is for every one of you whose eyes glazed over at “value investing” too.
How long are you investing for?
There’s this cool thing about investing in the stock market.
Over time, it is almost certainly going to go up.
What’s “almost certainly”? Here’s a great post that breaks it down for you, but my favourite line from that post is this:
The worst total return [in the stock market] over a 20 year period was 54%. But the worst 30 year total return was 854%.
But there’s another almost certainly involved, and it’s that if you’re invested in the stock market, sometimes it goes down, too.
Maybe a little, maybe a lot, maybe for a week, maybe for two years, but the point is, the stock market will go down sometimes.
That’s why people always say that if you’re investing, you should be thinking long term. In the long term, the market will go up. In the short term… Well, let’s just say you could be in for the year we just had.
And to be quite frank, if I had invested money in August that I needed in January, I would have been better off earning nothing on it than putting it in the market.
So before you dive in, you should think about the money that you want to invest, and how long you plan to keep it invested. The type of investing that I’m a fan of – the buy-and-hold-the-entire-market thing – isn’t a short term game.
If your time frame is more than ten years, you’re golden – even though some people will argue that five years is a good enough time period to qualify for “long term” too.
What other big goals do you have?
So you’re totally committed, you’re saving for the long term and you want to invest your money. That’s great, and a wonderful long term goal!
Don’t forget about your life between now and then though.
As a millennial, I am all too aware of the different things in my life that require money over the next few years.
- Buying a house? Requires money.
- Having a dog? Requires money.
- Having kids, ever? Requires money.
- Potentially losing a job? Requires money.
- Buying a car? Requires money.
I could go on – like, for a long time – but you get the idea. I am uncomfortably aware of my competing financial priorities, and I think that before you start investing, you need to be too.
Think about all the big expenses that might happen in the next five years for you. Start with life events, and work your way down to “big purchases or goals I’d like to make happen.” Once you have those listed out (and you stop crying?) you’re ready to start investing.
Why would I put anyone through that, just to start an investment account? Because of that pesky time thing we just talked about.
If one of those life events or purchases pops up during your “long term” investment horizon and you’re caught off guard, you’re not a robot sent from the future to be a shining beacon of personal finance restraint – and neither am I. There’s every chance that I’d pull my investing money out of the market if I didn’t have any other options, for exactly that reason: I didn’t have any other options.
But what if this no-options scenario happens in the middle of a market correction? If I pull my money out then, I’m losing money. However, if I’ve anticipated this event or expense, and I’ve got separate, non-invested money ready and waiting in a separate account? My investments are free to wait out the correction and keep making me long-term money.
(Sure, there are always unforeseen events – that’s life, and that’s why I think everyone needs an emergency fund. That said, we all just do our best. To this day, I have yet to meet this fabled personal finance robot sent from the future to be perfect with money, and I know a lot of smart people.)
How cool are you with risk?
So it’s all well and good to talk about risk in the abstract – yes, the market will go down sometimes – but how are you going to feel when you invest your retirement savings (ahem, even if they’re tiny like mine) and the next week, the market is down 8%?
That’s where your risk tolerance comes into play, and one of the benefits of robo-advisors (as opposed to true DIY investing) is that they’ll help you figure it out.
If you have a low risk tolerance, the scenario above probably sounds like the worst thing that could happen, and you might lose sleep over it – or react and pull your money out of the market. In that case, regular advisors and robo-advisors alike will build you a portfolio that has lower risk baked into it. Your returns might be lower in exchange for that lower risk, but in the long run, that’s better that than selling everything as soon as the market dips, right?
If your risk tolerance is higher – even if you just have the confidence of an investor who has 30 years before they plan to retire, like me – you can go for a riskier portfolio, that offers you the potential of greater returns over time. That said, my risky, higher-possible-returns portfolio still would have lost me money had I turned around and sold everything the day the markets died. So like… don’t aim higher than you should.
(The nice thing with Wealthsimple is that I had a quick call with a real human before they finalized my portfolio. They actually downgraded my risk a notch from what the online assessment pegged me at, simply because I had never invested before. As confident as I was, I couldn’t really tell them how I react to market downturns. Fair point, Wealthsimple, and thanks!)
How much are you paying, and what for?
This is going to be the shortest and the sweetest one: you need to know how much you’re paying for your investments.
If you are getting your investments “for free”… someone is lying to you.
The amount of fees you’ll end up paying on your investments depends on a few things.
If you go full DIY and buy ETFs or index funds on your own, you can score some amazingly low prices – like, 0.05%-of-your-invested-amount low. That scale goes all the way up to a horrifying 2.5% of your invested amount – or more – with some actively managed mutual funds, or when you combined the mutual fund fees with the investment management fees some advisors will charge you.
The rule of thumb I use is that my total investment fees should be under 1%. Most robo-advisors will get you there, and the Tangerine funds are pretty close at 1.07%.
But at the end of the day, if you’re paying 2.5% and you’re getting a ton of services you value, do what works! (Although my god if you’re paying 2.5% for your investments right now can we please talk about other options for you because you could save so much money in the long run?)
Just make sure you know how much you’re paying, what you’re getting, and that it’s worth it to you.
Ok, so this was a bit of a monster of a post, but you know what? If you made it all the way through with no red flags – and you actually did think about the financial boogie monsters that might be waiting for you in the next five years – you’re ready to invest.
Now, don’t go out and buy the stocks whose acronyms you like best or anything, because it’s not like with this one post you’re going to go out there and beat the market.
But you are ready to decide if a low-cost, balanced portfolio is the right fit for you, and you’re ready to decide how much you want to put into it.
You’re in the place I was when I decided to jump in and invest via Wealthsimple, the roboadvisor I found via Google and blog recommendations way back when last summer. I’ve had nothing but amazing experiences with them since, and I have not always been the easiest customer with my frequent questions and help requests. So consider this a hearty endorsement for them – and if you sign up for Wealthsimple through this link, you’ll get your first $10,000 managed fo’ free for a whole year.
I’d love to hear what you guys think – if you’re already an investor, how did you get started? What do you wish you had known beforehand? If you’re not investing yet, why not – and do you have any questions for me?