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.
Throughout your life, you'll be offered a wide range of truly boneheaded investment opportunities. The 9-hour timeshare pitch you white-knuckled through to get a free Mallorca trip. Cousin Brian’s unfinished indie doc about Gordon Lightfoot. The Nigerian prince’s fortune an emailing stranger picked little-old-you to liberate. Wise investment opportunities are often things you need to seek out. Before you go searching, find out if you should be investing in the first place.
Should I invest money?
Before you start investing money, you should do a financial fitness check. Ask yourself if you have any debt to pay or some rainy day savings before investing.
Every situation is different, but most people should aim to have between three to six months of living expenses as an emergency fund. Because you need access this money at any time — it's probably best not to invest it but instead, use a savings investment account.
Why not invest your emergency fund? Well, you don't want it rising and falling just like the stock market does, given you could need the money at any time. If you've cleared your debt and have some rainy day savings — it's the right time to think about investing.
How to invest money
Before we talk about all the amazing ways you can make money investing, let’s get serious for a moment and consider a less felicitous scenario — you invest and lose money. Stomach turning to even contemplate, right?
To invest money wisely it’s important to understand two big factors that can cause you to lose money and try to prevent them from happening to you.
You bet wrong. You risked money hoping that certain stocks, bonds or other investments would go up over time, and they didn't. You pretty much blew it.
Your investment choice itself might have gone up, but it didn’t go up enough to outpace the drain caused by the fees you’re paying year in and year out on your investment.
A wise investor can learn how to invest in a way that helps to prevent both of these outcomes. You should live by these two simple steps in order to invest money wisely:
Diversify your investments, so even if one part of your portfolio doesn’t perform well, it doesn't drag down your entire portfolio. Investing in a mix of stocks and bonds is a better idea than going all in on a single stock like Vodofone.
Seek out low-fee investments and buy them only from low-cost investment providers. Even though fees may not appear that significant, they add up quickly and are the insidious enemy of investment growth. Wise investors should think of themselves as ruthless fee exterminators.
Beginners tips for investing money
Beginner investors often make the mistake of deciding what they want to invest in, be it stocks, bonds, real estate, or even the latest cryptocurrency, without deciding what sort of account will be holding these carefully chosen investments.
Investing is about reaching your goals and taking only enough risk that allows you to do this. Taxes eat into the money you make. A staggering amount of money can be saved by investing the maximum amount possible through so-called “tax-advantaged” accounts. Tax-advantaged accounts allow your investments to grow tax-free, or let you defer paying taxes on any money you invest until retirement.
No matter how brilliant your investment ideas may be, if you’re not taking full advantage of these government-sponsored accounts, you’re basically setting fire to buckets of government money. The same goes for matching funds an employer offers on your pension contributions. The wise investor will never turn up his nose at “free money”.
You should first be filling up your personal pensions or SIPPs, as well as your ISAs. If you have multiple pensions there's likely a ton of value consolidating them to ensure you're getting the best deal.
How to invest your money
A few basic rules should guide how you invest your money. Keep your fees as low as possible. Eliminate as much risk as possible by diversifying your stock investments. Allocate a healthy mix appropriate mix of stocks and bonds. Pick a strategy and stick with it through good and bad times.
Where to invest money
“Where” is a tricky word. At a bank? In stocks? In a boat? With a goat?
We’ll initially tackle the first question. Understanding that you should absolutely seek to fill up all your tax-advantaged accounts before looking towards personal brokerage accounts that offer no such perks, where should you go to open such things. You have a few options to consider, all of which have their up and downsides.
Brick and Mortar Banks
Maybe you’re fond of the folks at your local bank branch. They have lovely smiles, free coffee, and their lollipops are just the right amount of chewy stale.
Lots of banks will have a resident investment advisor who would be happy to invest your money for you. It certainly might seem an easy way to go, but you’d do well to practice a bit of due diligence before committing to this route.
Unless you invest with a person who holds the title of “fiduciary,” they are not legally bound to make decisions based on your best interest. You might find yourself having invested in things that aren’t going to provide you with the robust long-term growth.
See, what lots of these nice bank folks won’t tell you is that many of them are actually salespeople who work on commission or have quotas to hit. Unless you're the kind of person that reads all the fine print! It’s very possible that the investments they recommend will be what's called “affiliated funds”. This means that they’re offered by the bank itself.
Not only might they not be the best investments for your needs, but they may also be larded up with fees. These can come in the form of sales charges, called “pay backs” in the fund world. These pay backs represent how your advisor earns commissions. They skim a percentage off the top of your investment, so watch out for them.
As well as pay backs, also examine very carefully any fund’s expense ratio or MER. This is the percentage of your total investment, charged annually to manage a fund. This money goes towards fund managers’ and their staffs’ salaries, their office rent, and lots of other things that syphon gains away from you.
Check out the work of one Toronto-based investment advisor who showed that a small-seeming fee of 2% could decrease investment gains by half over the course of 25 years.
These are full-service firms or individuals who manage your money for you. Some are great. A few are so terrible that they’re now doing time in the hoosegow. Research is a must, and as the famous case of Bernie Madoff showed, word of mouth is not always the most reliable indicator of quality.
What they all have in common is that they’re not cheap. Most financial advisors charge a flat annual percentage whether they advise on your finances that year or not - it’s pretty much a retainer. They also charge sizeable upfront fees, sometimes as much as 5%! This is charged annually, whether they make money for you or not. Add this to the management fees baked into mutual funds and ETFs and you’re talking about real money.
Financial advisors are there to get you a reasonable asset allocation, make you rebalance and change your investment strategy as your life changes. Unless your name is Rockefeller and you have complex estate issues, chances are you’d be better served with a cheaper option. If you're keen to have a human help you invest but don't want to pay high fees, look for a robo-advisor that offers a investment consultation and unlimited customer support.
If investing through a bank or financial advisor now seems about as wise as planning a family camping trip at a place called Poison Ivy State Park, you might consider investing through a discount online brokerage. This is about as cheap and bare bones an option as you’ll find.
These brokerages generally offer a huge range of stocks, mutual funds, and ETFs and don’t assess any kind of sales charge based on how much you invest. Instead, they charge a one-time trade fee, usually in the region of five or ten pounds. Some online trading platforms have even popped up of late that offer no-fee trading.
This is an option for the educated hands-on investor who knows exactly what she wants and has the time to devote to researching smart investments and tending to her investments occasionally as one might tend to a beloved garden. Even most active managers with lots of analysts, generally don't beat the market returns. Ask yourself if you have that edge.
Traditional investment brokers don't offer specific investment advice nor do their tailor a portfolio to suit your needs. They are also time intensive as you have to follow the stock market and trade yourself. Stock picking is also notoriously tough and risky. Whether you're new to investing or an old hand at investing, automated investing might be a better option.
Automated Investing Services:
The white glove service of the financial advisor too pricey, but the DIY element of a discount brokerage too daunting for your financial skill set? We have one option that you might want to consider, Goldilocks.
Automated investing services, sometimes called “robo advisors,” are a relatively new investing option. Most are premised on the abundant research that shows that the vast majority of actively managed investments like mutual funds fail to outperform overall stock market gains over the long term. Understanding that reality, automated investing services don’t try to outperform the market, but rather seek to mirror market returns.
To mirror the market, they invest in financial products that are passively rather than actively managed. The “robo” bit in robo advisor refers to the fact that computer algorithms do all the work necessary. Most purchase market hugging Index Exchange Traded Funds (ETFs), products that are essentially wrappers containing many, many stocks that may, for instance, mimic the composition of a major index like the FTSE 100.
Since no humans are required to maintain ETFs, their management fees tend to be a fraction of those of actively managed funds. Many of these platforms offer little to no human contact in the event you need help. Getting in touch with an actual warm body will be virtually impossible. At the other extreme are the advisories that offer certified financial planners and human support at no charge to clients big and small.
How to make money investing.
You’ve heard of the proverbial “free lunch,” something known to be as elusive as the Loch Ness Monster. In the case of investing, the equivalent of the free lunch would be making money without taking on some risk. There's no such thing as a free lunch but understanding how much risk you can take is one of the best ways to understand how you can make money investing.
There is a risk that every investment might rise or fall, but the level of risk and reward generally varies by investment. There is some correlation between risk and return. Generally, the more risk you're willing to take, the more money you stand to make, or lose. If a person made the same money from a “safe investment” such as government bonds as riskier ones like investing in the stock market — why would anyone ever take any additional risk?
The stock market might go up 10% but it could go down 10% over that same period. For this reason, the typically less risky government bonds pay very little. You guessed it — because they come with very little risk. Stocks normally deliver considerably higher returns because they're riskier. Investors are compensated for taking bigger risks.
Your mission is to try to make the most money while risking the least. First, you must determine how much risk you can afford to take — it’s called your “risk tolerance.” Some robo-advisors allow you to take a nifty free risk survey and use this to build a portfolio that suits your individual needs.
Things to know about risk tolerance
The first factor that will affect your risk tolerance is when you need to access your money. The technical term for this period is “investment horizon.” Someone who needs £700 to pay their rent in two weeks has a shorter horizon and will necessarily have a much lower risk tolerance than someone who needs their money for retirement in twenty years. Someone investing for their retirement has a longer horizon and higher risk tolerance provided they are not close to retiring.
But, you may point out, these two hypothetical people are both going to need those £700 pounds. If there’s risk involved in both scenarios, who’s to say the money will be there in twenty years from now versus twenty days from now?
Good question, if you indeed thought it! There’s a funny thing about stocks and risk; that risk diminishes over time. Very smart people have demonstrated with math — it explains that those who have the patience who hold stocks for a horizon over 10 years will most likely be rewarded with returns that offset any short-term risk. There are many factors that make up your risk tolerance, your investment horizon being just one.
How the wise investor makes money
The wise investor hoping to achieve their investing goals will pursue a disciplined strategy of holding onto stocks for a long period of time, even if they go down precipitously in the short term. They'll diversify their investments rather than go all in on a “hot” stock and they'll rebalance their portfolio.
Rebalancing, as the name suggests, is a balancing act. If you decide to have a portfolio made up of 60% stocks and 40% bonds — you keep it that way. So perhaps stocks do super well one year and tip your portfolio to be made up of 80% stocks and 20% bonds, then you sell off some stock, and invest that money in bonds to maintain your 60:40 portfolio.
The unwise investor will celebrate when investments are doing well, and cut his losses when things appear to be going in the toilet. This is called market timing, and it’s consistently been shown to be the most short-sighted scheme imaginable. All that said, it’s important to know that no one plan is appropriate for every single investor.
If you choose to start investing, it's not good practice to be hop into your account on a regular basis to check on gains or losses. We understand this is easier said than done.
Where to invest money to get good returns
Once you’ve figured out your risk tolerance by identifying when you’ll need to access your money, you’ll be in good shape to decide how you’ll invest your money to get good returns.
Those with the shortest investment horizon and low-risk tolerance should act like dog owners at Starbucks. Instruct the investment to “stay!” for a minute, run like hell for your financial latte, and put the money in short-term government bonds or a smart savings investment account.
The longer the horizon becomes, the more tilted towards risky assets (like stocks) portfolios tend to be. The stock market is typically seen as a place to get good returns. You're taking more risk by investing in the stock market — there's no way of knowing how it will perform in the future though.
While stocks are typically considered high risk and high reward — no wise investor will go 100% in on stocks, even if they are bullish to bet big on the stock market. Instead, they'll choose a more diversified portfolio, probably by investing in a mix of bonds and stocks.
Which stocks exactly?
All of them! Well, that’s a bit of an overstatement, but the absolute best way to get the highest returns with the lowest risk is to diversify through investing in many, many stocks rather than picking a handful of stocks you hope will be winners. You can do this by investing in exchange-traded funds, funds that consist of many stocks, bonds and real estate rather than just a single stock, and by combining them in a way that is diversified so that it will perform well in different kinds of market conditions.
ETFs are one of the best and cheapest ways to get broad exposure to the stock market. Look out for Index ETFs, these mimic one of the big market indices like the FTSE 100. Warren Buffett, the Yoda of finance, has advised his heirs that they should follow this very strategy — going long in a low cost index fund or ETF. Robo-advisors offer a range of portfolios that contain a mix of Index ETFs that follow the FTSE 100.
Though we’re not a huge fan of stock picking or blanket investment rules, the so-called 5% rule is one for investors who feel the need to pick stocks. It states that no investor should hold more than 5% of her investments in one stock or sector.
So if someone feels absolutely sure that Amazon will continue unabated in its march to world domination, you can buy Amazon. But make sure that your holding of Amazon (in addition to any other tech stock holdings) doesn’t exceed 5% of your entire portfolio. This means if one stock or sector craters, you'll be insulated.
The alternative to trading
If picking stocks sounds like a time-intensive challenge, that's because it absolutely is. Thankfully, there are investment platforms that allow you to invest on autopilot without knowing anything about investing. Stock picking notoriously risky. You should treat any stock picking you do like betting and only invest money you can afford to lose. Rather than select stocks to buy, rely on returns from your strategic asset allocation.
Wisdom may be in the eye of the beholder, and we're not exactly unbiased, but we think that the best way to invest money wisely is to start investing with Wealthsimple today. 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.