Why buy stocks now?
Let me be clear that I don’t have a crystal ball. I cannot predict what the market will do tomorrow, and neither can anyone else. There are just too many variables — especially today.
I have much more confidence in predicting the future five or ten years from now. I’m nearly 100% confident that the average stock will be much higher a decade from now than it is today. What exactly makes me so confident, anyway?
Firstly, we can look at history. When stocks fall sharply – as they’ve done in the last month – it’s almost always a good time to buy. The last time we had such a quick decline was back in 1987, and it turned out to be a glorious buying opportunity. The S&P 500 fell from 745 to 516 in just a month. Twenty years later, the same index had risen all the way to 1,800. If we include reinvested dividends, that works out to an 11.8% annual return.
The only thing that would hold back the stock market from a relatively quick recovery is if the coronavirus kept the world economy on its knees for an extended period. We’re talking years here, not weeks or months. So far, no expert is predicting this, which is an opinion I agree with.
This line of thinking can be extended to individual companies. Sure, plenty of businesses are going to be impacted by COVID-19. Hotels will close, restaurants will be hurt, and airlines could very well go bankrupt. But other parts of the economy won’t feel much impact at all. You’ll still pay your power bill. Social media will still be up and running. Heck, grocery stores are even seeing a big rush of business (especially when it comes to toilet paper – yeesh!). This chaos is great for certain parts of the economy.
And remember, it’s only a matter of time until governments start introducing massive stimulus packages designed to kick-start business growth again.
Don’t try timing the arket
Finally, timing the market is not an effective investing strategy. Even Warren Buffett, the greatest investor of all time, can’t even predict the day-to-day moves of the stock market (and he advises not to do this). Knowing that, what chance does a regular investor have? You’ll want to stick to a solid investing strategy of dollar-cost averaging, putting cash to work on a regular basis.
I’m a big believer that actions speak much louder than words, which is why I’m not just telling people to buy cheap stocks today. I’m also buying them for my own account.
My personal strategy is to focus on dividend growth stocks that have solid competitive advantages, good balance sheets, and that trade at an attractive valuation. In other words, I try to buy excellent businesses at cheap prices. There are a lot of those available today, so I’m buying them.
Some of the Canadian blue-chip stocks I’ve added to my account in the last few weeks include Royal Bank, National Bank, Manulife, Telus, RioCan REIT, and Enbridge.
I should note that each of these stocks is currently 5-10% lower than my purchase price and could easily go even lower still. I’m the first to admit I can’t time the market. Besides, these short-term moves aren’t really important. I’m more concerned with what these stocks are going to do over the next few years, and I remain confident these companies will not only survive but thrive. They represent the backbone of the Canadian economy.
How much money should you invest?
Now that we’ve established why today is a good day to invest, how much should you invest? And where should the money come from?
You might be tempted to drain your emergency fund so that you can put that extra cash to work. Some might may even borrow money to invest.
There’s just one problem with both approaches. The market is volatile, especially right now with the coronavirus crisis. There’s always the possibility that shares will plummet at exactly the wrong time. It feels terrible losing money on investments. It’s even worse when it’s cash you can’t really afford.
The key is to achieve balance. You don’t want to deplete your emergency fund – you may need to unexpectedly tap into that money. But with plummeting interest rates, you also want to ensure that you’re not losing money to inflation. So how much money should you save or invest? In general, most experts recommend saving 3-6 months of expenses in cash. So, if your monthly expenses total $4,000, save roughly $12,000 in a high-interest savings account.
Experts recommend that you save and invest 15%-20% of your income for retirement. So if you’re earning $50,000/year, that would be $7,500/year.
You’ll also want to consider your own risk tolerance. If you can handle seeing your accounts plunge even further, then perhaps today is a good time to be aggressive. But if losing money makes you sick to your stomach, then it’s best to stick to your original investing plan. Also, remember that younger investors have more time to recover from market crashes. You don’t have that luxury if you’re close to retirement.
What should you invest in?
There’s really only one way for a regular Joe investor to take advantage of this investment opportunity with the COVID-19 economic crisis. Start investing as much as you can afford today, and then keep the contributions steady as long as possible. Every dollar you put aside now will grow into more dollars in the future, and you’ll lock in an even better return if stocks continue to fall.
But the stock market is a complicated place and it can be daunting for a first-time investor. It takes a lot of studying to become even a half-competent stock investor. You’ll need a solid understanding of securities analysis, accounting, management, incentives, and the economics of various industries. It takes a true genius to master the craft, and most so-called professionals aren’t even close. So, what should you invest in?
Fortunately, there’s an easy solution. Rather than try to analyze individual companies and pick the best one out of thousands of choices, investors can buy a fund that owns a little bit of many different stocks.
There are two methods of doing this. The first is to buy something called a mutual fund – an investment where a smart manager picks the best stocks. But these funds charge 1-2% of your total assets every year for this active management, and those fees take a big bite out of long-term returns. In fact, the average mutual fund tends to underperform similar investments, and it’s mostly because of these fees.
In contrast, exchange-traded funds (ETFs) are a lot like mutual funds. They offer diversification among hundreds of different stocks, but they just copy an index. This allows fees to be much lower (some are as low as 0.05%, although most end up charging between 0.1% and 0.5%) than comparable mutual funds – and that’s cash that goes directly into investors’ pockets.
The difference in fees between an exchange-traded fund and a comparable mutual fund can be as much as 1.5% or 2% per year, although it’s usually closer to 1% in the real world. Still, if you have a lot of cash invested, that can make a huge difference.
Say you manage to earn 8% annually on a $100,000 investment in ETFs and you hold the investment for 20 years. That’ll end up being worth $466,095. A 7% annual return in a comparable mutual fund for the same amount of time will only be worth $386,968. That’s right: a 1% difference in returns will add up to nearly $80,000 you’ll lose to the mutual fund company. It gets worse if you have more invested, too.
How to start investing
For new investors, there are two main ways you can start to invest online today. There’s an easy way and a slightly more difficult way.
The easy way to invest: robo-advisor
One issue with exchange-traded funds is you’re usually on your own when it comes to buying and selling. There’s nobody to guide you. That’s changed recently with the rise of robo-advisors – a revolutionary new digital investing platform that has turned the financial advisory industry upside down.
A robo-advisor uses software to help you choose a basket of ETFs and index funds. After filling out a questionnaire, it recommends a proper asset allocation suited to your risk tolerance and goals. Since the software does all the work, robo-advisors are much cheaper than working with a traditional financial advisor. But if you have questions, you can call in and talk to an actual person about your account.
There are many excellent robo-advisors in Canada, but our favourite is Wealthsimple. We like Wealthsimple because of its low management fee (0.40-0.50%), smart technology that automatically rebalances your portfolio and reinvests dividends, and state-of-the-art technology that keeps your money and your privacy safe. Read our comprehensive Wealthsimple review for all the reasons why we’ve ranked it the best robo-advisor in Canada.
DIY investing: online brokerage
Some investors don’t want to work with a financial advisor, opting to put those extra fees back in their own pockets. After reading up on the subject, they realize it’s not difficult to build their own portfolio using Canada’s best ETFs.
For instance, if your ideal risk tolerance is 80% stocks and 20% bonds, that can easily be accomplished: just put 80% of your portfolio in an ETF like the iShares World Index ETF (ticker symbol XFW on the Toronto Stock Exchange) that owns a basket of worldwide stocks and another that owns bonds. Easy!
Some ETF providers have made it even easier. Many ETFs now exist that allow investors to get access to both stocks and bonds in the same account. One example is Vanguard’s Balanced Fund, an ETF that owns 60% stocks and 40% bonds with a management fee of just 0.22%. It trades on the Toronto Stock Exchange under the symbol VBAL.
To get started, just set up an account with one of the best online brokers in Canada, set up automatic deposits, and buy VBAL (or a different ETF if your risk tolerance is different). It’s an easy solution that costs about half as much as a robo-advisor.
If you’re looking to build your own ETF portfolio, a great choice is Questrade. It offers commission-free ETF purchases, meaning you won’t have to pay the normal $4.95 fee every time you buy into an ETF. Questrade also offers terrific customer service and great resources, plus it specializes in low fees.
Are individual stocks worth it?
With seemingly every stock selling off amid coronavirus-induced nervousness, new investors might be enticed to choose individual stocks. While we wouldn’t necessarily recommend this strategy for new investors, it can be a worthwhile strategy. You’ll certainly learn a lot trying to analyze individual companies.
Questrade is an excellent choice for new investors who want to choose their own stocks or who want to own a combination of ETFs and individual securities. That gives you some wiggle room to experiment with buying stocks without paying mega fees. At $4.95 minimum per trade – some will cost up to $9.95 – it can translate into some serious savings.
Another great choice if you’re looking to DIY invest for the first time is Wealthsimple Trade, the company’s new trading platform for do-it-yourself investors. The best part about using Wealthsimple Trade is the company doesn’t charge any commissions, whether you’re buying individual stocks or ETFs. That’s a huge advantage for an investor just starting out without a whole lot of cash to invest.
The bottom line
Today is an excellent time to begin your investing journey. Stock markets are on sale, a phenomenon that usually leads to nice long-term returns. In fact, you’ll likely look back on today and lament not putting more money to work.
Yes, there’s likely to be more bad news over the coming days and weeks. Some governments appear to be doing the right thing to get COVID-19 under control, but there will be times when it looks like we’re not doing enough. Volatile markets will continue to be the main theme for weeks and possibly months down the road.
If you do try to pick individual stocks among the carnage, read our article on value investing and stick to companies that have excellent balance sheets and good long-term prospects. The last thing a new investor needs is to have one of their first stock picks go bankrupt. You might not get as much upside when stocks do move higher, but it’s okay. Giving up a little profit to help protect your money is a good thing.
The bottom line is this: investing steadily over the years is a great way to get wealthy. Putting as much cash to work as you can afford during periods of market weakness is one of the easiest ways to accelerate the process, putting financial independence in reach earlier than you ever thought possible.