5 Simple Rules for Getting Started as a New Investor

From the outside looking in, the investing world can seem intimidating. It’s full of jargon and a traditional view that you need an advisor or manager to invest for you, building your portfolio and collecting handsome fees in the process. But times have changed. 

Like other financial products and institutions, the internet has democratized and decentralized the traditional power structures of investing to an extent and placed investing power into the hands of the people. Now you can do it all yourself – make trades, build a portfolio, buy bonds, etc. 

But before you start screaming “buy low, sell high” into your phone like the Wolf of Wall Street, you should get to know some basic principles of investing. We’re going to lay down 5 simple rules for getting started as a new investor.

For the really new investors, we built a quick glossary of the most important terms you need to know. Jump to the glossary at the bottom of the page to learn more.

1. Evaluate your comfort zone for risk 

At the core of any investment is a risk factor. There’s simply no escaping it. Before you get started investing, ask yourself what level of risk you’re able to stomach. Questions like: “will I need my investment principle in the near term, or further down the road?” This will help you gauge how much risk you’re comfortable with.

The market will have ups and downs and those committed for the long term can withstand more risk, while those looking for a quick exit might consider a moderate amount of risk.

Of course, there are those who can jump into the stock market, make a strong investment, ride the potential gains and get out. But it’s easier said than done. Timing the perfect entry and exit from the stock market is a challenge to the most seasoned investors. It’s better to show “paytience,” as they say.

2. Maintain a diversified portfolio of investments

The old cliché of “don’t put all your eggs in one basket” rings especially true when it comes to investing. By creating a diversified investment portfolio, you are partially mitigating any potential downside that might come your way.

Now if the entire market goes south, as it did in 2008, there’s usually no hiding from that. But by mixing enough sectors into your stock portfolio, like green energy, technology, and financial services, for example, you are protecting yourself from stormy weather in at least one sector. This is a way to control risk and set yourself up for long-term profits because even if one sector suffers it will likely bounce back eventually. 

A common mistake for new investors is to go all in on one hot sector. Consider the so-called FAANG stocks. That stands for Facebook, Apple, Amazon, Netflix and Google. It’s tempting to invest exclusively in that red-hot sector, as they have been on a tear this year, but that would be exposing yourself to risk associated with any potential downturn for big tech. Not to mention they are very expensive stocks to own.

3. Understand the fees associated with investing 

The game has changed a lot when it comes to investment management fees. Commissions are being squeezed as “robo-advisors” and no-fee online trading platforms like WealthSimple have exploded in popularity. Robo-advisors are algorithm-based investing products that manage your money using ETFs. Index funds, also known as Exchange Traded Funds (ETFs), are affordable ways to invest in a broad swath of a sector versus buying shares in a singular company. 

WealthSimple and Questrade – the two leading providers of robo-advisors in Canada – also offer DIY online equity trading for either no-fees or smaller fees than the big banks and brokers. This has led to a surge in what’s called “retail investing,” a name for small player investors. It’s good to know how involved you want to be in your portfolio, or whether you want someone, or something, to manage it for you. This will determine what level of fees, if any, you are comfortable with.

4. Pick companies, not stocks 

If you walk into your bank and say you want to start investing, they will likely point you towards mutual funds. That sort of investment vehicle is very popular in Canada, especially when it comes to RRSPs because your money is being managed by experts for a fee. It’s very low-maintenance and tends to pay off many years down the road.

However, good luck trying to uncover where your money is being invested. It’s likely a mix of equities and bonds, but there might be some companies you don’t necessarily want to align with (fossil fuels, for example). You generally don’t have any say or power over where your money is being invested. You just have to trust the fund manager.

The great part of investing in stocks yourself is you can pick companies you believe in and that align with your values. This has become increasingly important to investors, knowing a company is ethical, cares about the environment, and recognizes social justice issues. It’s a great feeling when a company you believe in succeeds, and as a shareholder, you succeed along with it.

5. Stay strong - it doesn’t pay to panic

Everyone will tell you that investing, especially in the stock market, means buckling in for a bumpy ride. Think of it like a rollercoaster climbing up that first drop. The ascension (as stock prices rise) is filled with excitement and euphoria, while the quick drop can be truly nauseating (stock prices freefall!).

The point is: after experiencing multiple freefalls you will become resilient and realize the ride always goes back up eventually (even higher than before). Panicking when prices drop usually means you have no opportunity to recover losses or participate in future profits. Trying to time the market has made the most seasoned investors go grey. Here’s a Warren Buffet quote on the topic: 

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

Take 2020 for example. The market had a massive pandemic-related crash in mid-March, wiping out billions of dollars in equity. What happened next? The market quickly recovered and has reached all times high on indexes like S&P 500 and NASDAQ. Those who panic sold at the crash didn’t get to participate in the record profits that came after.

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