Fri. Jun 9th, 2023

5 investing tips for beginners

Hoping to wrap your head around investing? You’re not alone.

In fact, 6 in 10 Canadians surveyed in the BMO SmartFolio Online Investing Study  said they want to learn more about investing. That’s why we’ve compiled the top 5 investing tips for beginners – giving you the confidence to move your money out from under your mattress, footnote 1.

Investment tip 1: ‘bucket’ your savings

Saving and investing go hand in hand: You can’t afford to invest without first growing your savings, and without investing, your savings will be eaten by inflation over time.

But how should you organize your savings? Consider splitting it into four buckets.

  • The first bucket is your emergency fund – everyone should have one. It should be liquid – meaning that you can make a withdrawal at any time without a penalty – and should hold enough to cover your living expenses for at least three months. A simple chequing or savings account is a good option for your emergency fund. Don’t expect to earn much interest, but the money will be there if you need it to cover an unexpected expense.
  • The second bucket is for your medium-term savings. Use this bucket to save for large medium-term expenses (anything over the next 2-6 years), such as vacations, renovations, or education. These funds don’t have to be completely liquid, and you’ll want to earn a higher return than you’d get with a standard chequing or savings account. Consider investing in safer options like fixed income investments (like bonds or GICs) or conservative ETF portfolios. You might consider using a TFSA if you still have contribution room, but generally you want to use your TFSA for long-term savings to really benefit from the tax free growth over time.
  • The third bucket is for your long-term savings. This is the money you’ll rely on in retirement. This bucket is for long-term investments using your RRSP or TFSA. Over the short term, the market may go up and down, but over 20, 30, or 40 years you can expect to see the market increase. That means that you can afford to take a bit more risk with these savings. Stocks, index funds, ETFs, and mutual funds are all good options. As you approach retirement you may want to consider switching riskier investments for safer options.
  • The fourth bucket is for anything extra – once you’ve maxed out your TFSA and RRSP. If this happens, you’ve really made it! You’re at a point where you have a bit more money to play with, and you can afford to take on more risk with your investments.

Investment tip 2: automate your investments

Splitting your money into four buckets may seem complicated, but it really couldn’t be easier. In fact, you can even automate it!

Once you fill your first bucket, set up automatic transfers to move money from your chequing account directly into your investment accounts. This way, you won’t have to remind yourself to move money over (it’s like a “set it and forget it” model). You should be able to do this either online or at your local bank branch.

Some investing platforms, like SmartFolio, make automating your investments easy by allowing you to pull directly from your bank account. You choose the frequency and amount that works best for you, SmartFolio does the rest. Make saving even easier by pulling funds when you get your paycheque so you’re not tempted to spend it first!

Investment tip 3: diversify your investments

The first investing tip that most financial professionals give beginners is to diversify their assets. Basically, don’t put all your eggs in one basket. You’ll want to make sure you have diversity in the types of assets you buy, the sectors these assets are tied to, and even the geographic location of your assets.

  • Diverse asset types: You’ll want a mix of assets like stocks, corporate bonds, government bonds, real estate and more. Some of these assets, like government bonds, are considered low risk – but that also means they offer lower returns. Stocks are generally higher risk but can produce larger returns.
  • Diverse sectors: Not only should you have different types of assets, but they should relate to different sectors of the economy. For example, loading up only on oil stocks means that if oil prices fall you could take a big hit.
  • Diverse geography: Just having different asset types from different sectors of the economy isn’t enough. If you own a mix of stocks, bonds, real estate, and other assets all based in Canada, what happens when the Canadian economy experiences a downturn? You’ll be hit hard. That’s why you should own a mix of assets from all over the world.

    Just like some assets are riskier than others, some markets also come with more risk – and higher returns. Emerging markets like China, for example, are considered riskier, but also offer the potential for bigger returns. Assets from established markets like Europe might be safer, but may also earn you lower returns over the long-term

So, how exactly can you diversify in an easy way?

Rather than go out and buy hundreds assets yourself, you can invest in mutual funds or ETF portfolios which are managed by professionals. These professionals use their expertise (and a lot of math) to find the right balance of hundreds (or even thousands) of different assets from every sector of the economy, from all over the world. Some assets will go down and some will go up, but over time, the right asset mix should go up with much less risk than a single stock.

SmartFolio for one does all the hard work for you. Just complete a few questions to determine your risk profile, get matched with a professionally managed ETF portfolio, fund your account, then sit back and relax.

“Saving and investing go hand in hand.”

Investment tip 4: Keep fees low

Mutual funds, index funds, and ETF portfolios are great ways to keep your assets diverse, and by using an auto-deposit method you can keep filling your buckets automatically. But when investing, there’s another very important thing to consider: fees. This may not seem like your typical investing tip, but beginners often forget to take fees into account.

Mutual funds are often actively managed, but all that brainpower comes at a price. Mutual funds often charge 2% or more annually. You might think that 2% doesn’t seem like much, but over 5, 10, or 20 years, it really adds up! Try the SmartFolio fee calculator to see for yourself.

Index funds, on the other hand, usually offer much lower fees, but you’d be in charge of managing your portfolio on your own (or you’d have to pay higher fees for a managed portfolio).

SmartFolio’s ETF portfolios are a popular compromise: they offer diverse portfolios and low fees like an unmanaged index fund, but are actively managed and carefully monitored like a mutual fund – the best of both worlds. You get all the brainpower of a typical mutual fund, without the high costs.

Investment tip 5: Don’t be afraid to ask for advice

If investing were easy then we’d all be rich. Having professionals on your side is never a bad thing. Even just having a real person to answer your questions and provide you with reliable information can be a big help. Besides, there are only 24 hours in the day – you have more important things to worry about than how your investments are doing.

BMO SmartFolio offers professional advisors that you can reach by phone, email, or even via live chat before, during, and after you sign up – you’re investing online, not alone.

All BMO ETFs are created, monitored, and managed by industry leading financial experts from BMO Global Asset Management. Meanwhile the portfolios are managed by a BMO Nesbitt Burns Portfolio Manager. You get real service from real people, without the high fees that some investment advisors charge.

Make sure that you have a trusted professional on your side to help guide you through your financial journey, so you can rest assured that your money is working as hard as you are.

Investing tips for beginners

Hopefully these investing tips have been helpful, but if you’re still unsure about how to get started, call a BMO Investment Professional today.


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