The Ultimate Guide to Investing in Canada

Want to learn the basics of investing in Canada? Good, because we've got a steaming plate of invaluable, fresh-from-the-oven financial advice.

How to Start Investing in Canada

Whether you live in an apartment in Toronto or Montreal, a house in Ottawa, or alone with your pet mussels on a rock in Prince Edward Island, if you can lay a hand on a spare loony, you can—and absolutely should start investing. Unless you've got big credit card balances — always pay down high-interest debt before doing anything else.

Pick the right type of account

As a first time investor, you should determine what type of account to open, even before figuring out what to invest in. Since making money is the point, you should absolutely take advantage of any kind of account that allows you tax advantages. Money not spent on taxes is basically a gift from the government.

Employer-sponsored retirement and pension plans tend to be the most convenient and tax-advantageous, since a consistent amount can be painlessly deducted from your paycheque. Retirement accounts are what’s called tax-deferred, meaning any money you contribute will be exempt from CRA taxes that year, and will only be taxed years down the line when you withdraw it. What’s particularly irresistible about employer-sponsored pensions is that many companies will match a certain percentage of your contributions, creating yet another vein of free money you should absolutely mine.

In addition to employor-sponsored plans can experience similar tax saving investment growth by opening a Registered Retirement Savings Plan RRSP or a Tax Free Savings Account. RRSPs are tax-deferred, meaning you won’t pay income tax on any amount you contribute, but will pay taxes upon withdrawal, whereas TFSA contributions will be taxed as income, but you won’t ever again be taxed on any investment gains. Only when you’ve maxed out tax-advantaged accounts should you invest through a personal account, which offers no tax breaks on investments or their gains.

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Choose the right investment provider

After you've determined what kind of account to open, you'll need to decide how you'll purchase your investment. It’s not something you can just do yourself; in order to buy any investment, you’ll need what’s called a brokerage to help you out. “Brokerage” is a really broad term that simply means any entity that has the right to buy securities. They come in a lot of different forms, which include the following major categories.

Discount brokerages: Discount brokerages tend to be online outfits that offer little or no personal guidance to customers, and because they're so bare bones, are generally the cheapest option. They're best for investors who know exactly what they want and require a minimum of hand-holding. Firms like these sometimes require minimum investments. They’ll mostly charge a flat commission fee for any purchase, regardless of the size of the purchase that will range from $5-$10 per trade. Some investment providers even offer commission free trading. Discount brokerages do employ humans who can make trades, but they'll normally charge considerably higher trading fees should you need the assistance of a human.

Banks: You have to hand it to the old-brick-and-mortar banks. Not only do they serve all your free lollipop needs, they’re set up to do a lot of money related stuff for you. Whether it be opening a checking account, executing a wire transfer or magically turning 50,000 of your pennies into one crisp 500 dollar bill. Naturally, some also equipped to invest.

All banks work differently, educate yourself before you bring your investing business to your local bank branch. Some banks will have in-house financial advisors. They may sound like they have your best financial interests in mind, but often their paycheque is based on how many bank-created products they can sell you. You'll only know this if you read the reams of terms and conditions they hand you. These products are called “affiliated funds”. Some of which may come loaded up with commissions and fees, you really don’t need to be paying.

Financial advisors: This is an actual human being who will manage your money for you. They'll meet with you periodically to discuss your financial goal — it represents the Bentley with a trunk full of shaved truffles option.

Good financial advisors offer a valuable service to high net worth clients who have to deal with complicated rich person stuff like setting up trusts, making sure that future generations never fall out of the 1%. Their service is, of course, pricey. Advisors generally charge an annual percentage of every dollar they manage, regardless of whether they’ve made or lost money for you in any given year, and generally, the more money you give them to manage, the lower the fees they’ll charge you.

Small potatoes investors (i.e. those with less than a million bucks) should expect to pay 1% or more annually to advisors, which might not sound like a lot, but since many investment funds come with their own expense ratios of a percent a year or more, it adds up quickly. One percent every year could take away more than 25% or more of your return over time.

Canadian investors pay the highest investment fees of any developed country in the world – on average 2.4% of assets under management, a number that will dramatically eat away at any investment gains.

Of course, finding a good financial advisor isn’t always easy; you’d have lost everything had you invested with Canuck Madoffs like this bad apple in Ottawa or this Montreal scoundrel. By making advisor fee structures more transparent, the securities industry CRM2 regulations are going a long way to smoke out the industry’s biggest rats.

Automated investing services: These businesses, often referred to as robo-advisors, barely existed a decade ago, but have in a lot of ways revolutionized the way Canadians invest. Many automated investing services offer their clients very low-fee Exchange Traded Funds (ETFs). These funds automatically mirror major indices like the S&P TSX Composite rather than employing fund managers who attempt to outperform the market.

The “robo” in robo-advisor refers to the fact that computers automatically maintain the accounts.) Low fees are the key to their appeal, since study after study have demonstrated that historically passive funds by and large outperform actively managed funds over the long term.

Lower fees mean more investment gains stay put in the account and are able to grow through the near-miraculous power of compounding. If paying one or two percentage points in fees doesn't sound like anything to get bent out of shape about, check out this example from Toronto-based financial advisor Kurt Rosentreter who showed how shaving 2 percentage points off annual fees could double an investment’s value after 25 years.

Automated investing platforms vary greatly in how much, if any, human advice and support they offer clients. If you're the type who calls tech support for help opening the fridge, investigate before choosing investing.

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Online Investing in Canada

Technology now allows you to push a button on your phone and have a steaming bowl of Toronto’s most delicious pho materialize under your nose. It stands to reason that you can now invest without ever having to show up to an office and risk sitting downwind of a banker’s post-lunch breath.

Just a few years ago, online investing could be a less-than streamlined affair that involved printing and signing of PDFs and trips to the post office. The rise of automated investing services have eliminated the horse and buggy-like vestiges of the financial industry, allowing any account to be opened in a matter of minutes, and entirely managed with a smart phone.

Thanks to technology, investing in Canada today couldn’t be easier or cheaper. There are a variety of online banks and robo-advisors you can choose to invest your money. Some automated investing services have no account minimums, so you can invest as little as a dollar.

Choose the Right Investment

Now that you've chosen the right account to open and the right investment provider it's time for the fun stuff! How should you invest your stack of Canadian Dollars you've set aside? There's a number of options from the stock market to funds to real estate.

Stock Market Investing in Canada

Of course, there's no guarantee with any investment, but for those that can tolerate the risk, investing in the stock market is another option. There are a variety of ways to dive into the market. You might zero in on what you hope will be a handful of big winners by picking individual stocks, a path that might lead to great fortune…or else total ruin. Most studies show that even professionals paid to pick stocks will fail to outperform the overall market over the long term.

You could let a pro handle the picking, by acquiring shares of mutual funds, essentially just bundles of stock assembled by a fund manager. You pay for their stock picking expertise in the form of management fees.

Typical management fees for mutual fund managers comes in at about 1% of the entire fund value. This is a pretty typical annual expense ratio. If you ever see a fund manager driving a Porsche or chartering a yacht in the south of France, you'll begin to understand the kind of money such a small-seeming number represents.

Nothing's better at eating away long-term investment growth as fees. When investing in stocks, be sure to check the fees charged when you buy and sell shares. Zero commission trading has allowed investors access to the stock markets but with a fraction of the fees they've had to pony up previously.

Investing in Funds

In the past decade, many Canadian investors have been able to reduce this drag on their investments by putting money in low-cost funds that track the entire stock market as a whole. These funds are called exchange traded funds. They contain large swaths of investments including stocks, bonds, real estate, etc. They require no human management, and as a result have considerably lower management fees.

Buying and selling ETFs is simple and affordable. Some investment providers allow you to start investing in ETFs with no account minimum. This differs from investing in stocks, where the minimum starting point is the value of a single share. Some stocks cost thousands of dollars for one share, this means you often need to invest a lot of money up front to create a balanced portfolio by yourself.

Warren Buffett, became one of the richest men in the world by picking individual stocks. Buffett advised his heirs to invest his fortune in low-cost passive funds. They get rid of the gain-eroding effects of high management fees and the well documented inability of most active managers who aren’t Warren Buffett to outperform market returns. You can invest in ETFs directly through discount brokerages or with the help of low-fee automated investing services.

Real Estate Investing in Canada

Maybe you've developed a near-religious devotion to Flip or Flop’s Tarek and Christina. Maybe you've felt like a kid without an ice cream cone standing on the sidelines through years of double-digit annual price increases on Toronto and Vancouver property. So, naturally you decide your fortune lies in real estate investing. Big honking warning: it’s crucial to do your homework before you try your hand at flipping—or for that matter even owning real estate.

Mega-successful Canadian entrepreneur Joe Canavan, who built GT Global (Canada) and Synergy Asset Management from scratch, found he could make a lot more money investing in equities than real estate and has since become a renting-over-owning evangelist. When adding up the hidden fees of real estate, like property taxes, insurance, and necessary maintenance, he realized that he could amass much more money in the stock market than owning property.

There are no guarantees what the future holds, but in the past 25 years, the S&P TSX Composite Index grew by about 325%, while the average home price across Canada rose only about 200%. Canavan's two cents on the topic:

“What I tell a lot of young entrepreneurs who ask me is: ‘Don’t lock your money in a house. Stay liquid as much as you can and plow every available dollar into the equity market so you can continue to build and create wealth.”

You’ll see a lot of well-coiffed, rich self-made house flippers hosting TV shows, but understand that there can be devastating pitfalls for inexperienced investors. Those who feel a burning desire to invest in real estate but would prefer not to have to fix a leaky roof or track down June rent from tenants who never pick up when you call, may choose to invest instead through real estate investment trusts, or REITs, companies that sell mutual fund-like shares in their own property investments. You could also choose to invest in ETFs that include real estate.

Advice for Canadian First Time Investors

Investing in Canada doesn't have to be hard. You don't have to have millions either. But before you decide to start investing, consider the amount of risk you can bear. If you need access to your money in the short run, investing might not be for you. Instead saving might be a better option.

If you don't need the money for a while and you are willing to ride the ups and downs that come with investing, then it's an option worth , investing is something to consider. Here's some of our very best advice for first time investors.

1. Start Investing as soon as you can

Our best advice is to start investing as soon as you can. The most powerful tool you have is time, thanks to the miraculous power of compounding. It's what Warren Buffett calls the eighth wonder of the world and can make a tiny pile of money huge if you give it time.

2. Invest regularly

Another bit of advice is to investing regularly, even it's a small amount. Doing something as simple as giving up your daily Frappuccino might not seem like a lot but it could net you a lot in the long run. The growth of the S&P 500 has been robust lately. Historically, its risen about 7% a year since 1928. Forgoing one $5 Frappuccino a day would net you about $1,825 a year, that's $36,500 over twenty years. Now had you invested that Frappuccino cash in an investment that tracked the S&P 500 — you’d have found yourself with almost $80,000. Of course, there are no guarantees in investing, and your future results might not match these returns.

When you get additional income that you did not expect, like a raise or a bonus, consider putting this money away. If you were able to live comfortably before you got the additional income, you're not going to miss it. Many investment platforms allow to automatically transfer as set amount of money each month. Set this up in a way that the money is debited from your account on pay day — you won't even miss it.

3. Be careful when stock picking

Picking just a few stocks is like having all your eggs in one basket. It has the potential to end very well or turn out pretty badly. Creating a diversified portfolio is a better option. Investing in ETFs allows you to do just this. ETFs are investment funds that contain large swaths of investments including stocks, bonds, real estate, etc. When you invest in ETFs it helps to spread the risk. Index ETFs attempt to track the market and in the past have tended to have very good returns over time due to the growth of the stock market. That's not to say this trend will continue — we can't tell the future.

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4. Enroll in your company's RRSP

If you have a full-time gig, there's a totally painless way to make this Frappuccino experiment work. You'll also get a taste of the amazing tax-saving advantages the Canada Revenue Agency has set up to reward retirement savers. You can enroll in your company's group RRSP, or other company pension plan, and set it to automatically deduct a fixed, reasonable amount from every pay-check. Freelancers can participate too, by auto-investing through a linked checking account

5. Invest regardless of recent returns

If you try to figure out when to invest and when to stay on the sidelines, you will almost certainly fail. This is called market timing, and because humans are incredibly bad at judging bottoms and tops of the market, it’s an undisputed loser strategy. Instead, invest like clockwork, on days the market looks to be headed for the basement and on days when it’s rocketing up to the clouds. The effect will be that you’ll be dollar cost averaging, a strategy that just means over the long term, you will pay the average price for an investment.

6. Consider Automated Investing

Investing in Canada has never been easier than before. Automated investing allows you to invest your money with little to no knowledge of the stock market. You can open an account and take a risk survey to find out the right portfolio to suit your needs. This is a good option for people who know little about investing or don't have the time to trade themselves. There's still a place for trading individual stocks, but in a way, stock picking is a little like gambling. You should only invest money you're willing to lose. Automated investing allows you to have a more balanced portfolio and take advantage of low-fee, marketing tracking index ETFs.

We're certainly a little biased, but we think the best home for a first-time investor, or a hundredth-time investor for that matter, is Wealthsimple. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Sign up now or find more details here.