Create a balanced portfolio
A critical approach to ensuring great returns over the long term is to have a well-diversified combination of stocks and bonds in your portfolio. By putting your money into a wide array of assets and different industry sectors, you’ll ensure that at least some of your holdings will earn good returns at any given time, even if some of your other holdings aren’t performing well.
Think about it this way: if you put all your money into real estate in one neighbourhood and something unexpected happens that pushes home prices down in that area — say, a sharp increase in local crime — you’ll lose your shirt. If you had invested in real estate in many different districts, you’d surely lose some money in the affected area, but you’d likely still have gains in other neighbourhoods. The same applies to all investments, so you want to diversify by region, size, type and sector.
The good news: Becoming an online investor is easy. Most Canadian robo-advisors, such as Wealthsimple, will automatically create a diversified, balanced portfolio for you. Plus, they offer lower fees than a bank or brokerage. All you have to do is sign up for a free account. When you do, you'll be asked questions designed to help assess your investment goals and risk tolerance. Based on the results, you'll be given one of three classic portfolios: growth, balanced and conservative. After that, you can sit back and watch your money grow as the Wealthsimple investing algorithm does the rest. You never have to worry about redistributing and rebalancing your portfolio.
Our top pick for robo-advisors is Wealthsimple. Read our full review to find out why we love it.
On the other hand, if you're comfortable with DIY investing, open an account with an online brokerage, build your portfolio and make trades on your own. Read our full Questrade review to find out why we've rated Questrade as the best online brokerage in Canada.
If you're uncomfortable with DIY investing but want a diversified portfolio that does the work for you, look at Moka.
Moka is a Canadian fintech micro-investing app designed to simplify investing by automatically rounding up your purchases and investing the spare change into a diversified portfolio of low-cost ETFs. There's even a feature that allows you to contribute one-time deposits to boost your investment. Moka is especially ideal for new investors or those who want to take a hands-off approach to growing their money. The app offers a variety of features, including socially responsible investing, the ability to set multiple savings goals and a referral feature. Moka's portfolios are managed by a team of registered Canadian portfolio managers and aim to provide long-term growth while minimizing risk through diversification.
RRSP, TFSA & RESP – Pick the right account
Registered accounts – such as a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP) – are all excellent choices for long-term investments because you don’t pay annual income tax on investment earnings, and those earnings compound over time. But you need to choose the right registered account for your situation.
When considering your investment options, a TFSA can be the best choice if you intend to access your investment savings before retirement or anticipate your income will be more than you currently earn. That’s because TFSA contributions are taxed in the year you earn the income, and you can withdraw funds from the account at any time without paying taxes on the interest you earn (unlike with an RRSP). If you still can’t decide on an RRSP or TFSA, read our detailed article on TFSA vs. RRSP.
If, however, you won't be withdrawing your investment funds before you retire and you expect your total retirement income will be less than what you currently earn, RRSPs are a wise choice. When your income tax rate is high, you'll get the tax savings now and pay the taxes later in retirement when you'll be in a lower tax bracket. However, if you withdraw before retirement, you'll have to pay withholding taxes.
Finally, Registered Education Savings Plans (RESPs) are an excellent choice for long-term investments to fund a child's education, mainly because the government provides matching contributions. However, many Canadian families facing financial hardship often find it challenging to save for their retirement and their child's post-secondary education simultaneously. If you're debating which to choose, read our head-to-head comparison of RESP vs. RRSP.
It’s worth noting that a registered savings account could be a better choice for shorter-term savings - say, funds for emergencies or that you hope to use for a down payment on a home purchase in the next year or two. After all, if the markets are down when you are ready to cash out your investments, you’d have to sell at a loss. You can take out as much as you want from a TFSA account at any time, tax-free, and up to $35,000 from an RRSP account to buy your first home under the Home Buyers’ Plan.
Minimize fees
Many Canadians don’t realize that when they invest, their fees are often “baked-in” to the investment, meaning a percentage comes off the top of their earnings to pay the financial institution, fund manager and/or advisor handling their accounts. Minimizing your investment fees is a simple yet effective way to boost their returns.
So, how do you lower fees? Choose the right kind of funds. Index funds and exchange-traded funds (ETFs) have much lower fees than traditional mutual funds because they don’t require a manager to pick assets for the fund actively. Instead, these types of funds hold all the stocks or bonds in a particular market index and match the performance of the market as a whole.
Passive investing in index funds and ETFs, often called a “couch potato” approach, is a low-effort strategy that consistently delivers better returns than most actively managed funds. This reassures us of the difficulty of beating the market, even with minimal effort.
Anyone can purchase index funds or ETFs independently (the latter requires a brokerage account). Still, if you’re looking for no-brainer ease and convenience, an online brokerage or a robo-advisor can create and maintain a portfolio of these low-cost funds.
Start early
The key to successful investing? Start as soon as possible. Why make this a priority when all the costs of adulting — housing, food, student loan repayments, etc. — may already stretch you thin? Because of math.
The magic of compounding means that a single investment of $1,000 today could be worth more than $4,100 by 2055 (assuming a modest annual rate of return of 4%). But if you wait 10 years to invest that $1,000 with the same rate of return, you’d have less than $2,775 by 2055. If you wait 15 years, your total drops to $2,275.
In other words, if you start investing immediately, you’ll have nearly 50% more money by 2055 in our example than if you waited 10 years and a whopping 80% more than if you waited 15 years.
Put simply, there is no investment guru or strategy that can beat the gains achieved by compounding earnings over time. Still not convinced? See for yourself using this compound interest calculator.
Automate your contributions
Waiting until you have "extra" money to invest could leave you waiting a lifetime. After all, spending money the minute we see it land in our bank account can be very tempting because most of us have a long "wish list" of things to buy. A better approach is to commit to an amount you can afford and set up monthly transfers to your investment accounts. That way, you avoid temptation entirely and don't have to rely on discipline to invest.
Automating your contributions is a secure way to ensure you don't 'accidentally' spend the money you meant to invest. It also removes the temptation to micro-manage the timing of your investment purchases based on market conditions, which is a losing strategy (more on this later). This strategy will give you confidence in your investment decisions.
And be sure to increase your contributions accordingly when your income goes up. Even the smartest long-term investment decisions can only go so far if you aren't socking away enough of your income.
Keep calm investing for the long run
Buy low and sell high is the golden rule of investing, yet even the most experienced investors seem to forget it during market volatility. When the market plummets, panicked investors start selling off holdings when they're low in value, not high, locking in their losses.
When investing for the long term, it's crucial to keep in mind that short-term market fluctuations shouldn't be a cause for panic. Instead, view market dips as an opportunity to purchase investments at a discount, taking advantage of a "sale" on your desired assets.
By the way, the couch potato approach builds in the buy low/sell high rule through periodic rebalancing of your portfolio. Say your portfolio has an asset allocation of 60% stocks and 40% bonds, based on your risk tolerance. If the stock market dips, the value of your stock and bond holdings might wind up being 50%-50%. To rebalance and achieve your preferred 60/40 split, you'll have to buy some stocks (now priced lower) and/or sell some bonds (now priced higher). Neat, right?
Most robo-advisors will automatically rebalance your portfolio once a year or at other predetermined intervals, ensuring your emotions stay out of your long-run investment decisions.
That’s my plan and I’m sticking to it
Stay the course once you've decided on a diversified investment portfolio that works for you. Tune out any buzz about a hot stock tip. Ignore your neighbour who recommends their "money guy" with promises of outrageous returns. If you shoot for unrealistic performance by trying to outperform or "time" the market, chances are you'll end up with a below-average rate of return.
That being said, if you experience a major life change that affects your risk tolerance and investment goals, it's crucial to revise your investment strategy. For instance, as your child approaches university age, the time to stay invested in an RESP or other education fund has almost run its course. It's a good idea for parents to transition to a more conservative portfolio of fixed-income assets, such as short-term bonds, to minimize risk. If you don't change your investment plans, you could end up losing a significant amount of money if the market dips right before you need to sell those investments to pay for your child's tuition and other education-related expenses. The same goes for workers as they approach retirement age. Being cautious and attentive to these potential risks is key to your financial strategy.
Choose a robo-advisor
While you can't control market fluctuations, you can manage your investing behaviour and the fees you pay. When you elect to invest passively by going with a robo-advisor, you're more likely to automate your investment contributions and create a balanced portfolio, since that's what robo-advisors are designed for. One of the most appealing aspects of this automatic investing strategy is that it takes the emotion out of the process, improving the chances you'll stick to your plan regardless of whether markets are up or down. Finally, since robo-advisors use algorithms to manage your money, they offer much lower fees, which maximizes your returns.
When it comes to robo-advisors, Wealthsimple is our top choice. Their fees are highly competitive, and their online platform is attractive and user-friendly. But what seals the deal is their solid customer service. With Wealthsimple, you can invest confidently, knowing you have reliable support when needed.
But if you’re curious to do a head-to-head comparison, check out our Guide to Robo-Advisors in Canada.
The bottom line
Learning how to invest long-term can seem overwhelming when you start. But if you follow these easy long-term investment strategies, you’ll soon be on your way to being a successful investor. Starting early, contributing regularly, using a robo-advisor to lower fees and minimize your involvement, and staying the course during tumultuous times are all fundamental investment strategies that are certain to help build your nest egg. Before you know it, you’ll have an impressive portfolio to support your golden years.
With files from Sandra MacGregor
