Investing 101
Investing 101: Stock Market Style
So I think it's about time for time for me to break down all of the financial jargon and explain the world of investing as to-the-point as I can.
I LOVE investing. I was fortunate to have parents who taught me how to invest from a very young age, which I am so grateful for. From real estate to the stock market, I feel like I have a pretty decent education surrounding building passive income, especially in the stock market.
Having a stock market investment portfolio that is currently valued at over $450,000 gave me the confidence to leave my stable job where I was making over $100,000/year to start Broad Money. Knowing that my investments were making me $45,000+/year (on average) in passive income is a very comforting feeling when you're leaving stability for the unknown.
With starting a new business (Broad Money) I have NO idea where my income is coming from each month, so it's nice to know I have something that's making me money while I'm sleeping.
So in this post, I'm going to pretend like I'm your momma bear and teach you the fundamentals just like my momma bear did for me when I was 18.
Registered vs Non-Registered Accounts
Registered Accounts:
Government regulated accounts such as TFSA, RRSP, FHSA, RRIF, RESP, RDSP, LIRA, LIF etc. These accounts have rules surrounding how much you can contribute, withdraw, and what the tax benefits are. You can sign into your CRA My Account for your TFSA, RRSP, and FHSA contribution limits.
Non-registered Accounts:
A type of account that can be used for short or long-term growth such as a chequing, savings, or cash trading account. There is no contribution or withdrawal limits, but any gains/losses that are made within these accounts are taxable at the end of the year.
The Most Common Types of Investment Accounts (or Vehicles)
Within all of the following investment accounts, you can hold stocks, bonds, ETFs, mutual funds, real estate, currency, commodities, Cryptocurrency, and GICs. Remember that the following investment accounts (vehicles) are only as good as the investments within them, so please don't just have your contributions sitting in cash if you don't need to! You're missing out on investment gains and dividends!
Tax Free Savings Account (TFSA)
For Canadians aged 18+, the TFSA is my favourite investment account that can be used for short or long term financial goals. Any money that is earned inside this account can be withdrawn tax-free for N-E-THING! Every January 1, the government provides us with more contribution room, and any unused room from previous years will roll over to the present year.
I like to use my TFSA for more aggressive investments because I'd rather make 8-10% tax-free rather than 2-3% tax-free. Anyone else?
Example: Contribute $10,000 into a TFSA, and it makes 10% (or $1000) in the first year. You can withdraw that $1,000 and not pay a penny of tax on it! Wouldn't it be nicer to have $1,000 tax free over $200 tax free? Yah - I thought so...
Registered Retirement Savings Plan (RRSP)
A self-funded pension that allows us to save and invest towards retirement. For those of us who don't have a pension through work or are self-employed, this may be a great account to have, but consult with a financial professional or your accountant as to whether or not this makes sense with the tax bracket you're in.
So long as you file taxes, you can open an RRSP. I've actually helped coaching clients open an RRSP for their 13 year old kiddos because they have summer jobs and file their taxes! Start em young folks and they'll thank you later:)
You have 60 days after the end of the previous year to contribute into your RRSP. Your contribution limit is based on 18% of your previous years income, and unused room rolls over which can be used in future years.
Here are the benefits of the RRSP:
Contributions made into your RRSP can be used as an immediate tax deduction in the year that the contributions are made OR you can carry forward the contribution to a future year when you're making a higher income.
Contributions grow tax-deferred until you withdraw the funds for your retirement (see RIF down below as this is the sequel to your RRSP). But yes - you will eventually have to pay tax on the money that you're investing in your RRSP. The idea is that you're in a lower tax bracket in your retirement years when you withdraw funds.
Your RRSP can be used under the Home Buyers Plan, where you can borrow up to $60,000 towards your first home, or under the Life Long Learning Plan where you can borrow up to $20,000 ($10,000/year over 2 years) if you want to go back to school.
Example: You make $80,000/year and contribute $10,000 into your RRSP. When you go to file your taxes, the $10,000 can be used as an immediate tax deduction making it look as if you only made $70,000/year, which could potentially bump you into a lower tax bracket. You can also carry forward that $10,000 contribution and use it in a year when you're making more than $80,000/year!
First Time home Savings Account (FHSA)
Imagine that the TFSA and RRSP had sexy time and made a baby? This would be it. Contributions into this spiffy new registered account are not only tax deductible (like the RRSP), but the withdrawals are tax-free (like the TFSA). This account allows Canadians 18 or 19 (see the rules depending on the province you're in) to save and invest towards a downpayment for their first home. There's a lot of confusion around this account since it only launched on April 1, 2023. Here are the characteristics of the FHSA:
You receive $8,000 in annual contribution limits each year.
Unused room from a previous year can be carried forward and added to your annual contribution limit for the next year. However, only an additional $8,000 per calendar year can be carried forward. This means that you'd only ever have a maximum of $16,000 in room available to contribute into your FHSA if you're carrying forward unused contributions.
Example for year 1 (2024): let's say you opened a FHSA in December 2024 and contributed $100 into it (just to get your feet wet). You have $7,900 ($8,000-$100) of unused room that will carry-forward for 2025 (where you'll receive another $8,000 in room available). On Jan 1, 2025, you now have $7,900 + $8,000 = $15,900 of room available to contribute for the 2025 year.
Example year 2 (2025): You work your little tushy off and contribute $3,000 into your FHSA throughout the year. From the $15,900 of unused room you have, you can only carry forward up to $8,000 of it for the next year.
It has a lifetime maximum contribution limit of $40,000. Since it started in 2023, we have to wait until 2028 to have the maximum room available ($40,000/$8,000 = 5 years).
If you don't end up purchasing a home, you can transfer the funds into your RRSP.
If you're thinking about buying your first home in the near future, or haven't owned a home in the previous 4 years, then open up a FHSA and start investing in it.
Registered Retirement Income Fund (RRIF)
The sequel to your RRSP. At the end of the year of your 71st birthday, it's mandatory for you to convert your RRSP into a RRIF (but you can do this before 71), so that you can start to receive retirement income. Here are the characteristics of the RRIF:
Money that you withdraw from your RRIF is added to your taxable income for that year.
Money that stays in your RRIF continues to grow tax-deferred.
There's a minimum amount that needs to be withdrawn from your RRIF each year, because the government doesn't want all of these old farts hoarding money in a investment portfolios and not contributing back into the economy. So you have to withdraw the minimum amount each year.
You can't contribute more money into your RRIF - that's what your RRSP is for.
Registered Education Savings Plan (RESP)
Got little kiddies running around at home, niblings (nieces and nephews), or friends that have bebe's that may want to pursue post-secondary education one day? This is the account for you. Contributions into this account receive up to a 20% government match through grants and bonds. Here are some characteristics of the RESP:
There is a lifetime maximum contribution limit of $50,000/child.
To get the best bang for your buck, you want to contribute $2500/year for 14.4 years or $208.33/month per child to receive $500/year in grants/bonds from the government. The maximum amount in government grants and bonds is $7,200/child.
When your child goes off to school, they will have to claim the RESP income as their own, but with the tax credits that they receive from school, the taxes owing will likely be minimal.
You can open an individual plan (1 beneficiary) or a family plan (multiple beneficiaries). Keep in mind that there's a little bit more thoughtful planning needed with a family plan because you don't want to drain all of the funds for that first kiddo and have nothing left for the other ones.
If your kiddies don't go off to school, there are a number of options available to you but each option is dependent on your current situation.
Cash Trading Account:
After you've maxed out all of the other applicable accounts above or if you're in a funky situation where you can't open a registered account, this would be your go-to account to build wealth. Your cash trading account has no contribution limits, but all gains or dividends made need to be claimed on your taxes. Losses can also be claimed against capital gains. Remember that losses and gains only happen when you actually click that "sell" button and turn your unrealized gains/losses into realized gains/losses.
The Most Important Thing To Understand When You Start Investing
Your Asset Allocation:
Before you start to invest, the most important thing that you need to understand is your overall portfolio asset allocation. Determining and understanding your asset allocation is a crucial step to go through before you even put a dollar into your investment accounts. I have seen too many coaching clients not understand this and miss out on incredible years of returns in the stock market.
If you're working with a financial advisor, they will determine this for you when you meet with them for the first time. They take their clients through a "Know-Your-Client" questionnaire where they'll ask you a bunch of different questions, plug all of those answers into their computer, and out will spit what your asset allocation should be based on your time horizon and risk tolerance.
Your asset allocation is how you divide your assets among different categories such as Equities (stocks), and Fixed Income securities (bonds, GIC’s, cash alternatives), real estate, cash, crypto, commodities, etc.
What we DON'T want to do is put all of our eggs into one basket, so it's best to incorporate a diverse asset allocation of US, Canadian, and International Equity funds, along with a percentage of your portfolio in Fixed Income securities (depending on your risk level and time trajectory).
Here's an example of the different portfolio types.
Example of an Growth Portfolio Asset Allocation:
80% in Equities / 20% Fixed Income
30% in US Equity Index ETF
25% in Canadian Equity Index ETF
20% in International Equity Index ETF
5% in Emerging Markets Equity Index ETF
20% in Bond Index ETF
Don't forget that your portfolio should be rebalanced at least once per year to return to its original asset allocation. This is very important.
And remember, if the markets crash, do not panic! This is actually a great buying opportunity in most cases. Remember what Warren Buffet said? "Be fearful when others are greedy, and greedy when others are fearful." Try to not get emotional when the markets correct themselves, and just stick to your plan. The holdings in your account are unrealized gains and losses until you hit that buy/sell button.
Types of Investments You Can Hold In Your Account
Stocks (Equity):
A stock is type of investment that an individual can buy where they become part owner of that company. Companies will issue shares to raise money so they can grow their business.
Stocks are traded (bought and sold) on a stock exchange (Toronto Stock Exchange, New York Stock Exchange, etc) and their price fluctuates based on many variables such as news, economic factors, the companies finances, and sometimes just based on the hype (think the GameStop meme stock!).
You can make money from stocks when the price goes up from what you bought it at, and/or through dividends (which is a form of profit sharing).
Example: I buy 1 share of Apple stock in January and it costs $100. On December 31, that share of Apple is now worth $120, so I decide to sell it. I have made $20 off of my 1 stock in Apple.
On the flip side, stocks can also decrease in value where you can lose money.
Example: I buy 1 share of Apple stock in January and it costs $100. On December 31, that share of Apple is now worth $80, and I need that money for something else so I end up selling it. I have lost $20 off of my 1 stock in Apple.
I always say that if you're going to invest in individual stocks that you make sure you're ok with losing all of your money because companies can go bankrupt where you'll lose it all. Also, if you are buying individual stocks, I suggest having no more than 10% of your overall portfolio in stocks. The rest should be diversified into Index ETFs.
Mutual Funds
If you're investing with a financial advisor, chances are you hold mutual funds in your portfolio. But do you even know what a mutual fund is and how it works?
Mutual funds are a collection of investments where your money is pooled with other investors. They are diversified among different investments such as stocks, bonds, ETFs, cash, REITs, or other mutual funds etc, and are actively managed by professionals who decide when to buy/sell investments depending on the funds objectives.
But here's are my two biggest problems with mutual funds:
1️⃣ How do these fund managers know how to time the markets? How do they know what investments are going to do well, and when the best time to buy and sell is?
2️⃣ Mutual funds come with high fees because the fund managers need to get paid somehow. Those fees come in the form of a Management Expense Ratio (MER) which eats away at your returns every year.
Example: let's say you've got a US Equity Fund in your portfolio that's being managed by a guy named Brad. And let's say the US Equity markets returned a 10% return in 1 year. Since Brad is managing this fund, he takes 1.94% as an MER, leaving you with an 8.6% net return. That 1.94% every year is a lot of money that's not staying in your pocket, and Brad can't seem to time the markets so he's also losing out on the human error element.
Most of the clients that I work with often have mutual funds in their portfolios before coming to work with me. But that changes very quickly as we go through coaching together. I've only seen around 5% of my clients who have had mutual funds that have actually outperformed ETFs with a similar asset allocation and investment makeup, which is why I'm not a huge fan of them.
Exchange Traded Funds (ETFs)
An ETF is a collection of securities that is traded on a stock exchange and bought/sold like a stock. They are liquid AF (you can quickly buy/sell them), diversified like a mutual fund, but passively managed, so come with hella low fees.
The coolest thing about ETFs is that they just track and mirror the investments within the ETF.
There are 1000's of ETFs that you can purchase on an exchange, and they're great because you don't have to pick and choose your individual companies to invest in.
- Want to invest in the top Canadian companies? There's an ETF for that.
- Want to invest in the biggest companies in the world?! There's an ETF for that.
- Want to invest in the top Healthcare companies in North America? There's an ETF for that.
- Want to invest in Psychedelics? Marijuana? AI? Self-driving transportation? There's an ETF for that.
ETF Index investing is my all time favourite form of investing. It's low fee, diversified, and I get exposure to the global economy.
So if one part of the world shits the bed, I don't really care because I have exposure to other sectors and parts of the world to offset it by building a diversified portfolio made up of Index ETFs that track and mirror the biggest companies in the world.
Real Estate Investment Trusts (REITs)
If you don't own a physical piece of real estate, REITs are a great addition to your portfolio so that you have exposure to real estate!
A REIT is a company that owns and manages income-producing real estate such as offices, retail stores, apartments, condos, hotels, etc. Investors receive a proportional share of profits and losses, based on the performance of the REIT itself.
There are REITs you can purchase that own Apartments, Hospital buildings, Malls, Government buildings, etc. You're basically investing in the landlord and company that operates the physical property.
AND there are REIT ETFs that you can hold in your portfolio, so you can have diversification among lots of different REITs!
Real estate as an asset should be something that you own as part of a healthy and diversified portfolio.
Bonds - Fixed Income
Want to become the bank? Governments and companies issue these investments, so they can raise money for different projects they need to fund. Bonds are relatively safe, but there have been instances where the issuer defaults on the loan. You lend them your money, and they will pay you back your principal and interest when the term is up.
Example: The government of Canada wants to build out a new portion of the TransCanada Highway but they ain't got no money in the bank. They issue 5-year bonds at 4% interest/year. You buy $10,000 worth of bonds. At the end of 5 years, you’ll get back your $10,000, PLUS you’ll have made $2000 in interest ($400/year in interest x 5 years)
Guaranteed Investment Certificates (GICs) - Fixed Income
Low risk investments offered by banks and other financial institutions, which lock in your money/investment for a fixed period of time. During this period, you receive guaranteed interest payment, which are normally lower than stocks, bonds & mutual funds. This is the safest way to stack your cash for a set time with a guaranteed interest payout at the end.
Example: You need $10,000 cash for a big purchase that’s coming up in 12 months. You purchase a 1 year GIC through your bank at 3.15% interest. At the end of your 12 months, you receive your $10,000 back, plus the $315 you made in interest. GIC's are the safest way to generate income, but they'll never REALLY make you that wealthy.
That's why I get so pissed off when I see GICs in my clients portfolios when they have a long time to invest. A GIC does great for the financial institution, but barely does anything for your wallet if you've got time on your side.
How Can I Start to Invest?
You've got 3 options if you want to start investing.
1. Managed Portfolio with a Financial Advisor
This is where you invest with a financial advisor at a financial institution where they manage your portfolio. Portfolios are tailored to the specific needs of the client depending on a number of factors such as your age, risk tolerance, and short and/or long-term goals. You give your money to the advisor, and they decide what securities to hold within that account.
You pay your financial advisor to manage your account through what is known as a trailing commission (that comes out of the MER fees of the mutual funds), or you may be charged a percentage on Assets Under Management (AUM).
When you have a managed account, just make sure that your advisor is not getting lazy and not connecting with you at least 1x year. Your financial goals can change within a year, and your advisor needs to adapt to those changes and reflect that in your portfolio.
2. Managed Portfolio with a Robo-Advisor
A new class of financial advisor that uses algorithms to provide investment management and advice with little human supervision. Using a certain type of software, a Robo-Advisor is able to automatically buy, sell, and rebalance assets in your portfolio. Don’t know the first thing about investing but want to invest in ETF’s? Don’t you worry. Robo-advisors will do it all for you. So, if you’re new to investing, and want to reduce the fees you’re paying, then a Robo-Advisor may be a perfect fit for you.
3. Self-Directed / Do-It-Yourself
This is what I've been doing since I was 18 years old, and it's really not that difficult to set up if you know how to do it! It's one of the things that I take my coaching clients through if they're wanting to have more control over their portfolio. When you're managing your own account, you have full control over setting up contributions, building a portfolio based on your asset allocation, reivest dividends, rebalance, and everything else that a financial or Robo-advisor would do.
This is the cheapest way to invest in the stock market because you're only paying the fees that are on the investments themselves.
The one thing I will say is that if you're managing your own portfolio, you HAVE to have control over your emotions when the markets are volatile (and they will be volatile!). With you having full control over your account, it's very easy to let your emotions get in the way and you make a mistake and sell investments if you see the markets going down.
PHEW. OK. That post took WAY longer than what I thought it would because I don't use AI to write out my blog posts as I actually really love writing and breaking this all down for you.
Anywhoodles, if you feel like you need some extra help with understanding your investments, or want to start looking into other options outside of the financial advisor world, sign up for a free assessment call with me and I can explain how I can put more money back in your pocket through financial coaching.
K thanks bye.
