Top 10 tips for first-time investors

Learning to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition is the same as learning anything — you may not do things right the first time. But there are some tips that will help you get off to a good start — or continue more confidently if you’ve already begun.

1. Make the most of extra income if you have it

Having investing and savings goals makes it easier to know what to do with extra income if you have it. Whether you get a raise at work, or want to make the most of your taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition refund, there are a few ways to direct additional money, such as:

  • Add to your emergency fund
  • Pay off debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition
  • Add to your retirement savings
  • Contribute a little more to your long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition investing goals

You could also divide additional money among more than one goal. Your choice might also be different one year to the next.

Learn more about managing cash flowCash flow The sums of cash a business gets in and spends out during a set period of time.+ read full definition and making a budget.

2. Let compounding work for you

You can make your money grow faster if you also invest the money you earn (your return) along with the money you started out with. This is called compoundingCompounding A way to grow your money faster. Instead of spending the money you make investing, you reinvest it so it can grow.+ read full definition. Compounding works for both guaranteed and non-guaranteedNon-guaranteed Investments that do not guarantee what you will make. You could lose some or all of your money. Examples include mutual funds, stocks, real estate, gold and income trusts.+ read full definition investments.

Reinvesting your returns helps grow your savings faster which can help you meet your financial goals.

Learn more about growing your savings with compound interest.

3. Have a financial plan

Having a financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition can sound complicated, but basically starts with a few simple questions:

  • What goals are you investing for?
  • How much will you need to put aside each month to reach your goals?
  • How much debt will you need to pay off, and when?
  • How much room do you have in your budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition for saving, investing and paying off debt?
  • What kind of advisor support will you need to reach your goals?

Creating a plan will help you reach your financial goals. Set a regular time to review it. And if your financial goals (the reasons you are investing) change, your plan can change too. Having a plan will also help you choose your assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition allocation for short- and long-term goals.

Your plan should be specific and realistic. It should include your risk tolerance, investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition strategy, asset allocation, and when and how your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition should be rebalanced. Learn more about creating an investment plan.

Learn more about creating an investment plan.

4. Invest within your means

As an investor, it’s always good to have a long time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition on your side. This means that the earlier you start investing or saving, the more you can benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition from compounding. This means that anything you can put aside at the beginning will build that much more towards your returns.

The flip side of this is that it can be tempting to start out too aggressively. Consider if you contribute large amounts to your investment accounts or RRSPRRSP See Registered Retirement Savings Plan.+ read full definition, for example, but haven’t left enough of your cash flow to put towards your day-to-day spending or short-term savings. In this case, you’ll end up having to dig back into your savings to cover expenses or rely on credit cards or loans which you’ll have to pay back later.

Keep your investing goals in sight while also investing within your means.

5. Be reasonable about your investing skills

Many investors overestimate their ability to “beat the market” by trading frequently. This can leave them with lower returns than if they just held onto a broad set of investments.

Overconfidence can include looking at information in a way that confirms our prior beliefs and assuming we know more than we do. For example, during a bull marketBull market A strong market where stock prices rise and investor confidence grows. Often tied to economic recovery or an economic boom, as well as investor optimism.+ read full definition when investments generally perform well, we might decide that it’s actually our trading decisions that are getting us higher returns. And during a bear marketBear market A weak market where stock prices fall and investor confidence fades. Often happens when an economy is in recession and unemployment is high, with rising prices.+ read full definition when investments perform poorly, we might blame the market, and hold onto our belief that we’re still good traders.

Learn more about overconfidence and how it can affect your ability to reach your financial goals.

6. Shop around for an advisor

New investors often use the same advisor as their parent, partner, friend or relative. But the advisor that’s right for someone else, may not be right for you.

Before you choose an advisor, consider your needs and how involved you want to be in your investing decisions. It’s also useful to know the types of clients a potential advisor normally works with. For example, some advisors only deal with clients with a particular net worthNet worth The value of all your assets, less what you owe.+ read full definition. And if you find out later that your advisor it not working out, you can change advisors.

Learn more about working with an advisor.

7. A diversified portfolio can help you manage risk

DiversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition means holding investments from a variety of different asset categories, industries, and geographies. It can help reduce the overall risk in your portfolio. Diversification is important because:

  • Not all types of investments perform well at the same time.
  • Different types of investments are affected differently by world events and changes in economic factors such as interest rates, exchange rates and inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition rates.

If your portfolio is not diversified, it will be unnecessarily risky. You will not earn a higher average return for accepting the unnecessary risk.

Learn more about diversification.

8. Think twice before choosing a trendy investment

Some investments become popular through the media, celebrity endorsements, or just because they are new. You may have started investing because you saw something popular or because of a tipTip The sharing of important information about a company not known to the public.+ read full definition from friends.

While it might be tempting, and comforting, to go along with decisions of a larger group, be cautious about following the herd. Just because an investment opportunity is trendy, doesn’t mean it’s the right one for you.

Learn more about herd behaviour and how to avoid it.

9. Remember to check the fees and read account statements

Understanding the fees you pay when you invest is important because they reduce your return. Ask questions before you invest and consider your optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition. For example, two investments may carry similar risk and expected returnExpected return Estimated value of your investment in the future. Tells you the overall profit you might expect – either as income (interest or dividends), or as capital gains (or losses). Often expressed as a percentage.+ read full definition, but one may have higher fees — all else equal, the fees would affect your returns.

You should receive monthly or quarterly accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition statements. They show the activity in your account and provide an update on your investments. You might receive statements in the mail, email or view them online. When you receive your account statements:

  • Check that the investments bought and sold are correct.
  • Check that the fees and commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition charged are correct.
  • See how much your investments have gained or lost.

Contact your financial representative if anything in your account statements is unclear or seems incorrect.

Learn more about reviewing your account information.

10. Be guided by your long-term plan rather than emotions

Although it may be easier said than done, try to let your investing decisions be guided by your goals and your budget, rather than your emotions.

When markets tumble, it’s easy to let fear start taking over and be tempted to sell. Likewise, when markets are strong, feelings of overconfidence can lead you to take more risks than you might otherwise.

If you’re feeling stressed about your investments, that’s often a sign to:

  • Check in with an advisor
  • Consider your level of risk tolerance
  • Check your long-term plan

Learn more about how volatility affects your investments.

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