The Basics of Investing

It's never too early or too late to start investing. But if you've never invested before, how do you get started?

"First it's important to educate yourself, so you know what you are investing in and that you are diversified appropriately," says Chartered Accountant Loren Francis, an Associate Portfolio Manager with Cumberland Private Wealth Management in Toronto. "You should also understand your appetite for risk – if you have $100,000, how much of it could you tolerate losing? If it's 10 per cent or less you should probably be looking at a more balanced portfolio with lower-risk investments."

Lower-risk investments include savings accounts, guaranteed income certificates (GICs), bonds, mortgages and preferred shares. Higher-risk investments include various types of stocks and income trusts. Many people also include mutual funds in their investment portfolios. As a note of caution, some types of investments have embedded costs and fees, so it's important to ask about these in advance.

"Before investing, you should have some understanding of what your goals and objectives are in life, so that your investing strategy has some basis - otherwise you are just gambling," says Chartered Accountant David Sinclair, an Investment Advisor with CIBC Wood Gundy in Ajax. "You should also have a long-term perspective and realistic expectations about rates of return."

Different types of investments yield different rates of return. "For savings accounts, a reasonable return rate might be the current rate of inflation minus two per cent," says Sinclair. "For GICs, it would be the cost of inflation, depending on the term. For bonds and mortgages, it would be inflation plus one per cent and for Canadian stocks it would be inflation plus three to five per cent. For international and emerging market stocks, it would be inflation plus five to seven per cent."

Diversification is also important. "You really shouldn't have more than five per cent of your portfolio in any single security," advises Francis. "You don't have to be invested in hundreds of stocks, but you should be in 25 or more to be properly diversified."

It's also a good idea to have a financial advisor. "Most people don't have the knowledge, time or interest to repair their own cars, so they rely on a mechanic," Sinclair says. "Investing is far more complicated, so it makes sense to have an expert working on your behalf."


The type of advisor you select depends on your needs. "Ask your Chartered Accountant, lawyer or friends for recommendations," says Francis. "Make sure the person has appropriate credentials and interview at least three advisors before choosing one you are comfortable with."

You can start investing with any amount of money. "Even if it's $25 a month, the earlier you start, the better off you'll be, due to the value of compounding," says Francis. If you decide to use the services of a licensed investment advisor, you may need to have a minimum amount to invest.

The biggest mistake made by first-time investors – and by some experienced ones – is to let their emotions rule their decision-making. "Too many investors buy when the price is high and sell when the price is low, which is a recipe for failure," says Sinclair. "First-time investors also don't always ask enough questions of their advisors, such as what their fees are, what they are buying and how often their advisor will be in touch with them."

There are many ways you can educate yourself about investing. "Read a daily newspaper, take a college or university course, visit Web sites on investing and financial planning, attend seminars put on by investment advisors or request a meeting with an advisor," says Sinclair.

A Chartered Accountant can also help. "CAs have the background and financial understanding when it comes to investments and related tax and estate-planning issues," says Francis.

For more information contact a Chartered Accountant.



Brought to you by the Institute of Chartered Accountants of Ontario.