Where does a newbie start to invest?
Not everyone knows where to start.
I've been investing for a very long time. I am well versed in different investment vehicles. Stocks, Bonds, Strip bonds, Real estate, GIC, Time Deposits, Preferred Shares, Options, Calls, Puts, and more. Then when you add in Mutual Funds, ETF's, and other acronyms like RRSP, TFSA plus more and things can get confusing.
When I talk to people who are new they generally don't know where to start. They ask if they should get mutual funds, ETF's, or should they go to the bank or well, they usually just don't know. Here's the thing... everyone starts from somewhere and that is just fine.
Where do I usually tell people to start?
Honest answer:
Start simple
Just a basic savings account.
No fancy accounts, no fancy acronyms, just a savings account. Yes, its basic. Yes, its boring. No it won't make anyone rich. However, I still think it is an excellent starting point.
Let me state my case.
Start with what you know
The first rule of investing
If there is one thing I always tell people it is to never buy anything you don't understand. If you don't know what a covered call is: Don't invest in it. If you don't know what cryptocurrencies are: Don't invest in it.
Luckily a savings account is about as simple as it gets.
Put money into the bank, let it sit, and get interest every month.
If an investors can't wrap their head around that...they have a lot of work to do.
Then they just say "So, I go to my bank and open an account?" to which I reply. "Well, you could, but you should probably look for a better deal".
Not all savings accounts are created equal
Just tonight I was looking at my wife's three different savings accounts. One is with a major bank, one is with a discount bank and one is with a virtual bank. All of them are registered banks with the Canadian Government. All of them have their deposits fully insured. In that way they are equal. How about their return?
Not equal at all.
Scotia Bank: $1,000 invested. Yearly interest: $ 0.10
Simplii Financial: $1,000 invested. Yearly interest: $ 3.00
Neo Financial: $1,000 invested. Yearly interest $ 30.00
What if I show that to someone who is a new investor?
Keeping it simple
I like starting with that example because it makes things very simple.
I ask a question which is mostly rhetorical:
Would you rather get 10 cents or 30 bucks?
The answer is pretty simple. If the risk is the same, the item is the same, then take the one with the bigger return.
That is a super important lesson. Looking at different options can get you much better return. Even if things look the same at face value look harder. One bank may be excellent and another one terrible. One brokerage better than another. If you don't look at options you could be missing out on a much larger return.
No losses in the beginning
Now when someone is starting they rarely have a lot of money. Risking money when you have little isn't something I'm very interested in recommending. In addition starting with a losing trade leaves people with a bad feeling about investing. A basic savings account is boring but if enforces the idea that investments can make monthly income. That money can make money. That not touching something can lead to regular return.
Basic principles that I think are really important.
Then I mention the next rule of investing.
Pay yourself first
I'll then mention paying yourself first. Another HUGE thing. It is simple. Setup a regular deposit that goes in at the same time as a paycheque. In effect its the first expense taken out of the account when the money goes in. That means that when the money is there the investment goes out. It's important. If someone waits until the month is over there is never money left over. Expenses always expend to fill all available income. It's almost impossible to not spend what you see. However, if you never see it then you tend to budget around what you have left.
By paying your investment first? You guarantee that it grows bit by bit month by month and by the end of a year or two it is likely the amount will be much more than you originally thought.
By this time people have learned some important lessons:
- Invest in what you know
- Shop around for the best deal
- Invest regularly
- Money can make money
But there is one thing that the savings account sets people up for.
Capital for their next step
A savings account deposited into regularly allows people to build up a nest egg worthy of investing in different investments.
ETF's or Mutual Funds typically have minimum investment amounts. Even GIC's and time deposits have minimum amounts required. The savings account is one of the best way to hit that minimum
Now this isn't investing advice and I'm not saying to rush out and get a savings account as there are many other investments that can be much better suited for people. However, if you are brand new to investing? A savings account isn't a terrible thing to look into. It can be more beneficial than people think, even if it is really boring :)