Investing 101: Investing Basics For Beginners

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

People generally start investing to make money. To begin, you could pick your own stocks using a trading platform or have someone do the investing for you by using an automated investing service. Before you begin, remember all investing carries risk and stock picking is notoriously risky. Here's some more information about each approach.

FeatureAutomated Investing (robo-advisor)Self-Directed Investing (stock broker)
Most useful forA hands-free approach to investingA DIY approach to investing (stock picking)
GoalPerformance is generally in line with the marketPerformance may or may not outpace the market
FeesTypically below 0.5% charged per yearFees are normally charged per trade
AdviceNormally advice and education are offeredNormally no advice or education
RiskGenerally offers a choice of low to high risk investment optionsGenerally very high risk, depending on your investment strategy
How to startSign up for Wealthsimple Invest hereSign up for Wealthsimple Trade here

You could also do nothing. If you were to keep your money under the mattress and not begin investing—you'd never have more money than what you've put away yourself. That's why many people choose to invest.

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Beginners investing tips

Before you start investing it's wise to understand the risk you're taking, know your goals, learn about diversity and keep your fees low.

1. Understand the risk you are taking

Before deciding where to invest, understand how much you can afford to lose. If you need money for next month’s rent, you probably have a very low-risk tolerance. If your life wouldn’t be materially affected in any way should you lose the money you invested then you might have a high-risk tolerance.

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2. Know when you need the money

Risk tolerance is often dictated by your so-called “time horizon”. This may sound like something you’d hear on the bridge of the Starship Enterprise, but instead, it's just a term that means the length of time you’ll hold a particular investment.

How you invest could depend on when you need the money. If you need the money for your kid's education in five years, then you may have a lower risk tolerance than if you need the money for retirement in 30 years. Those investing money they don't need for a long time could choose riskier investments as they can handle the ups and downs of the stock market.

If you haven't built an emergency fund or paid down high-interest credit card debt, it could be wise to do that before you start investing.

3. Diversify your investments

Rather than zero-in on some stocks you think will perform well, consider diversifying your investments. Diversification is a major benefit of automated investing. These services generally invest your money in many stocks and bonds so that your investments are diversified. In doing this, if one part of your investment doesn't do well you haven't lost everything. Michael Allen, a Portfolio Manager at Wealthsimple explains that diversifying your portfolio means investing in many different geographies, industries, and asset classes (stocks, bonds, real estate etc).

To potentially smooth out your investment returns over time you could put your money in many investments that are uncorrelated with one another.

Allen explains that fluctuations aren't necessarily the biggest risk for investors in it for the long haul. A potentially bigger risk is how you react to the fluctuations. Many investors find it difficult to stick to their investing plan—particularly during market movements. A diversified portfolio could be prone to fewer market movements which can come in useful to help manage your emotions.

Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.

4. Start investing—even a little at a time

Once you’ve got savings, you’ll probably want to invest. Otherwise, you're effectively saving and losing money at the same time thanks to a little something called "inflation". The cost of things we buy generally increases over time and so the same money buys you less over time. Investing is not just for the Warren Buffet's of the world. If you are finding it tough to put away some investing money each month, try using a spare change app.

5. Watch out for high fees

Fees are the money you put into someone's pocket rather than your own. Regardless of how you invest, you're going to pay fees. What you need to watch out for are high fees. They'll have a significant drag on your returns. You need to consider the value you're getting in exchange for paying fees.

Here's how fees impact gains on a $10,000 initial investment with a $300 monthly contribution for thirty years (assumes a return of 5.48%).

Investment TypeAverage Mutual Fund (2.08% fee)Automated Investing (0.5% fee)
Starting Amount$10,000$10,000
Year 10$56,311$62,508
Year 20$120,471$147,851
Year 30$209,265$286,563

Source: Wealthsimple. For illustration purposes only. Actual rates of return may vary. Illustrative returns do not account for taxes and other expenses.

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Last Updated February 1, 2021

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