How Young Investors Can Get Started
Investing can be intimidating for young investors who are starting out. The wealth of information available online is a two-edged sword. You can learn just about anything you want, but with so much information available how do you tell the difference between good information and bad?
Related: Where Do You Get Your Financial Information?
And understanding investing can be complex enough. On top of that, there are many different investment styles and products to choose from.
This post will explore some of the basics that young investors need to understand in order to invest successfully.
Save Capital & Avoid Debt
Lack of funds is big issue for many young people. Many are forced to bridge the gap by borrowing from parents and taking out student loans or running up credit card debt.
Think long and hard about whether going into debt is a good idea. Some may champion the idea of taking out loans to pay for education, but be careful. Excessive student debt will seriously hamper your ability to save capital and take the steps needed to build wealth.
Once you have your debt under control, your next step is raising capital. Pay yourself every week by automatically funding your savings and retirement accounts – the rule of thumb is to put 10% away.
If you have a RRSP or equivalent plan, make sure you are funding it with every paycheque (note that with the TFSA and your saving ability, there may be other beneficial tax strategies). Take advantage of any company matching contributions if it’s present.
Save as much money as you can in your 20s and going into your 30s. That way you can build a substantial capital position and start to make larger investments as time goes on.
Education
Educate yourself on investment topics and learn as much as you can. Read books and expand your knowledge. Here is a list of investment and personal finance books that I have found useful.
- The Millionaire Teacher – Andrew Hallam
- The Lazy Investor – Derek Foster
- The Intelligent Investor – Benjamin Graham
- One Up On Wall Street – Peter Lynch
- How To Make Money In Stocks – William J. O’Neil
Virtual stock trading accounts and games can be a good way to test the waters and get your feet wet before committing any actual capital. However, be very conscious that once it’s your money, the psychology is different but it’s a good way to make mistakes early.
Open Accounts
Once you have your finances in order and you are ready to make your money work for you, open a discount broker account and setup all the accounts necessary.
Related: Questrade Tutorial – How To Use The Trading Platform
Don’t forget that saving money is going to be your best portfolio grower. See my dividend income reports for the past 4 years as an indication that my investing income is mostly fueled by my savings and some dividend increase.
- RRSP
- TFSA
- RESP
- Cash Account
Investing Strategies
Once you have your account opened and funded, you will need to decide on an investing strategy or combine more than one. There are many different styles to choose from or combine together.
There are many investing strategies that you can study first and read on.
- Dividend Investing (that’s my strategy)
- Index Investing
- Value Investing
- Momentum Trading
- Options Trading
There are also multiple type of investments such as
- Stocks
- REITs (A type of stock)
- Preferred Shares (Also a type of stock)
- Mutual Funds
- ETFs
- Bonds
You want to understand the tax advantages of your different accounts available along with the tax advantages on the investment types.
Keep Learning And Experimenting
Investing is a lifelong process. Keep learning as much as you can and experiment with different styles. Just be sure to never commit more than you can afford to lose.
Keep risky investments to a minimum, at least until you fully understand how they work. Start with small positions and gradually work your way up as you gain knowledge.
About the Author: Eric @ The Passive Income Earner is a DIY investor and software engineer by trade. He has a passion for building a retirement portfolio to retire from the income it generates. Subscribe to my newsletter for more unique content on investing.
You are right, we can only have control of our finances if pay off our debt. There is a great potential to save more money if you are not paying to your debt or mortgage. More savings means more resources to use for investing and more chances to get more returns.
I started to automate $50 per week to go in my Questrade account. It slowly builds up and its not so intimidating. Since buying ETFs are free I’m taking advantage of that until I need to look at balancing my portfolio. Once my other(minor) savings goals are achieved I’ll increase the amount each week.
Education is key and that’s the point I’m stuck at right now. I’m reading quite a bit and will be adding the books from your list to my next batch.
Young investors often take suboptimal risk when investing. People in their 20’s should take on much more risk than older folks, since their time horizon plays in their favor. However, they are often set in a “savers” mindset. While their thrifty ways are necessary to build capital (if they can’t save, they cannot invest!), they are often associated with outsized risk-aversion.
For example, they will often focus on paying down their mortgage, or will keep a lot of capital in high-interest saving accounts. They should instead take a large, although somewhat leveraged, position in a well diversified portfolio. And decrease that leverage as they grow older.
Can’t disagree with anything here, but I REALLY agree with the last paragraph: Never stop learning!
Tip: If you’re buying fixed income, do it in a tax-sheltered account, unless you’re buying preferred shares that are eligible for the dividend tax credit.
Solid overview for younger investors.
I recall I started to invest about $25 per week in my early 20s. I haven’t stopped investing. Every little bit helps.
Thanks Eric for sharing this as I always enjoy reading your blog. I’m trying to educate myself more about investing so I can make informed decisions. I invested in real estate from the age of 21 when I bought my first home and put money into my works pension scheme in the UK. When I moved to Canada I was introduced to RRSP and TFSA and all the rest. I am investing in both under an advisor but would like to learn more about investing on my own. Now that the mortgage will be paid we will work hard to fully invest in our retirement funds. I have plenty of room to catch up but I’m working on it. Like anything, it’s all risk and not risking more than one can afford is important. Cheers Mr.CBB
Good introduction for young investors. I think it’s important to first learn the principles of solid personal finance. No bad debt, live within your means, build up an emergency fund and then start investing.
I started out investing while in high school and things didn’t go so well. The key as you state is to be sure to learn and understand what you are doing before taking on the risk. Learn all about an investment strategy and then execute. It wasn’t until I found dividend growth investing that I really began seeing success.
For the young, a good way to save money is to join 401(k) if their employers offer it. Most do. If not, then invest to the fullest in IRA.
Your article reminds of those I read when starting out as a young investor, keen to know about financial planning and creating a secure future.