Investing can seem daunting. Despite the amount of information available online, it's easy to feel lost without a clear starting point.
Fear not. The best way to start is to determine your investment objectives and what options are available to help you achieve them. This article will take you through five essential investing principles to help you get started on your investment journey.
Five essential investing principles
- Set clear financial goals:The first step is to set your investment objectives, which means deciding what you want to achieve. For example, are you investing to fund education, buy a home, save for retirement, or something else? Determine your investment objectives and desired timeline, then review and track your goals monthly. Having clear goals will guide your investment decisions and risk tolerance.
Here are some tools that can be used to help create financial goals:
- Books like The Automatic Millionaire, The Total Money Makeover, and Life Literacy: Real Life Knowledge and Resources for the Next Generation to Succeed.
- Websites and financial blogs like Yahoo, Investopedia, and Nerdwallet.
- Apps like You Need A Budget (YNAB) and other financial institution apps (banks and credit unions) that help with goal setting. Our “Top-ranked budgeting apps for Canadians” can help you determine what types of apps best suit your needs.
- Online courses on Udemy or Coursera.
There are many ways to find resources to help. Test them out and choose the ones that work for you.
- Diversify your portfolio: Diversifying means spreading your investments across different asset classes to reduce risk. Doing so helps to manage risk, especially during economic downturns.
For example, you might diversify your investment portfolio by putting a portion of your investments into real estate, a portion into the stock market, and a portion into bonds. Investing in different asset types will help you decrease the risk in your portfolio, because each investment type is different and bears different risks and returns.
- Stocks: Stocks offer high risk and high potential returns. Buying a stock means that you own part of a company. Stocks are “highly liquid”, which means you can quickly access your cash by selling the stock right away in the market.
- Real estate: Real estate offers moderate risk and often long-term investment in physical property. There’s low liquidity because it would be difficult to access your cash in the short term as you would need to list your property for sale, find a buyer, and close the deal.
- Bonds: Bonds offer lower risk and stable returns. Bonds are essentially loans to companies or governments.
- Consistent saving and investing: Develop a disciplined approach to saving and investing regularly. Automate contributions to your investment accounts based on the goals you’ve set. This could mean setting up a $100 automatic contribution to your investment account on the first day of the month. This way you don’t have to think about it, it just happens. This is called setting it and forgetting it.
Consistent investing over time uses dollar-cost averaging (DCA) to your benefit. DCA is an investment strategy used to reduce the impact of market volatility by spreading out purchases over time. This is done by investing a fixed amount of money at regular intervals, regardless of the asset’s price.
If you invest $100 per month and that investment is used to purchase the same stock, over the year, your purchase price of the stock will be the average of the monthly stock price fluctuation over the year. DCA helps reduce risk, creates a disciplined approach, and has the potential to lower your average cost.
- Continuous education: Learn about investing principles, market dynamics, and financial instruments. Understand the risks and potential rewards associated with different investment options.
Having knowledge about different investment types and current market conditions can help you make more efficient investing decisions. Refer to the examples earlier in the article for resources to help you understand the recommendations outlined below.
Investing principles
- Learning the basics: Understand the fundamental ideas behind investing, like putting your money into different investment types to grow it over time, such as stocks, bonds, real estate, and more.
Market dynamics
- Market movements: Markets can go up and down based on various factors. Knowing what influences these changes helps you make better decisions.
- Economic indicators: Be aware of things like interest rates and inflation, which can affect your investments.
Financial instruments:
- Types of investments: Learn about stocks, bonds, mutual funds, ETFs, and other tools you can invest in.
- Risk and reward: Each investment type comes with its own level of risk and potential return. Understanding these will help you choose what's best for you.
Making better decisions
- Stay informed: Keeping up with current market conditions and trends is crucial.
- Evaluate investments: Use your knowledge to assess the risks and rewards of different options, aiming to make smart, efficient investment choices.
- Review and rebalance: Review your investment portfolio to ensure it aligns with your goals and risk tolerance at least once a quarter.
These five essential investing principles provide a good framework for you to use when exploring the vast amount of investing information available. Investing is all about taking things one informed step at a time, and considering the tips in this article is a great place to start.
Visit CPABC's personal finance articles in our newsroom, as well as our FinLit page for more resources.
Nelson Soh, CPA, CA is a TEDx Speaker, best-selling author of Life Literacy and the 100 Day Money Mindset Journal. Nelson is also the co-founder of FSQ Consulting, a business consulting firm, and one of CPA Financial Literacy Program volunteers. You can follow Nelson on LinkedIn, Tik Tok, or Instagram to learn more about financial and life literacy.
