6 Investing Strategies for Beginners
A how-to for those starting out on their investment journey - from the basics, to strategies, risks and how to avoid common pitfalls.
Updated 
9 min. read
The basics of investing
You’ve decided it’s time to be proactive about your financial future. It’s time to start investing. While the new adventure can be exciting, it’s easy to feel overwhelmed by all the choice. And the potential risks can feel paralyzing. It’s hard to know where – and how - to start. That’s where this article can help. With some information and guidance, the process of investing can hopefully feel a lot more empowering. Let’s start with the basics.
Investing is defined as the process of putting money into different assets to generate future wealth. When done right, investing can help defend against inflation, and meet long-term goals, like retirement or home buying.
As opposed to saving, a typically passive activity, investing is active and comes with a certain degree of risk. But with that risk comes the potential for greater reward, an essential component to your financial planning process. People invest through various vehicles, including stocks, bonds, mutual funds and ETFs, each representing different levels of risk and return.
An investment strategy is a set of principles that guides your portfolio decisions. We’ll explore some of the more popular investing strategies below. A better understanding of each strategy will help you make informed decisions as you take your first steps in your investment journey.
Setting your financial goals
Before you start investing, think about what you want to achieve with those investments. What are your short- and long-term goals? To find the answers, take a good look at your financial situation. Hopefully you’re not in debt and already have an emergency fund in place (otherwise your focus should be there). Now the question becomes: how much can you afford to invest?
Next look at your time horizon. Are you going to need that money you’re investing sooner, or can you keep it invested longer? Then examine your risk tolerance – the amount of risk you’re willing and able to tolerate when investing. Using those guideposts, you can now set clear, personalized investment objectives ensuring they’re aligned with your needs and limitations.
Some things to keep in mind:
- Short-term investing goals are typically defined as anything less than 5 years, such as saving for a down payment on a car or taking a vacation. These goals align most effectively with safe instruments such as high yield savings accounts, bonds, or money market funds.
- Long-term investing goals are defined by a timeline of 5 years or more, such as retirement or wealth creation. Those goals can be achieved by stocks and index funds.
- Conservative investors typically prefer bonds and dividend stocks, while aggressive investors are attracted to high-growth stocks and ETFs.
- A well-defined investment plan boasts a diversified portfolio to meet short-term liquidity requirements while providing long-term financial security. After all, risks are diminished when investments are spread across different asset classes. If one doesn’t perform well, the losses can be offset by gains in other investments. What’s more, a diversified portfolio has a better chance of achieving more consistent returns over the long run even in the face of a fluctuating market. And if a part of the portfolio is liquid assets (e.g., cash or short-term bonds) those funds can be used to meet immediate financial obligations.
Understanding investment accounts
Investors use investment accounts to buy and hold securities, such as stocks, bonds and index funds. There are various types of accounts, each offering different features and fulfilling different needs. Choosing the account type that suits your investment goals is key.
Let’s explore different account types, highlighting their features, benefits and most appropriate uses.
Registered Retirement Savings Plans (RRSPs)
An RRSP is a registered investment account that encourages you save for your retirement. RRSP contributions are deducted from your taxable income. You’re taxed on contributions, not on growth, with investments taxed only when you withdraw them. RRSPs are best suited for long-term retirement saving goals. After all, when you retire (and taxed on the contribution) you will likely be in a lower tax bracket.
Tax-Free Savings Accounts (TFSAs)
A TFSA is a registered tax-advantaged savings account that allows you to hold qualified investments like cash, stocks, bonds and mutual funds. You can withdraw contributions as well as interest, capital gains and dividends earned in the account, at any time, tax-free. What that means is the TFSA is a very versatile vehicle for both short- and long-term investments. Each year, the Government of Canada determines the maximum amount you can contribute to a TFSA in that year, known as the contribution limit, and any unused room can be carried forward.
Registered Education Savings Plans (RESPs)
RESPs is a long-term savings account that helps people save for a child's education after high school. It can also be used to save for the account holder's own education. An RESP features a government grant called the Canada Education Savings Grant (CESG) that can be used to boost contributions and which grows tax-free until the money is withdrawn to pay for education expenses.
Registered Disability Savings Plan (RDSP)
RDSPs are a long-term savings plan for people with disabilities. Contributions are not tax deductible. Withdrawals are not included in the beneficiary's income but grants, bonds, investment income and rollovers are included in the beneficiary's income for tax purposes.
Non-registered accounts
Non-registered accounts are not registered with the Canadian government and are subject to tax when income is earned on investments it holds. The disadvantages of a non-registered account are the lack of flexibility and that investors pay taxes on capital gains dividends. On the positive side, however, without a contribution (or withdrawal) limit you can save as much as you want without any penalty.
Brokerage accounts
A brokerage account is opened with a brokerage firm which will execute investment orders at your request. There are no contribution limits, but a brokerage account doesn’t offer any tax benefits in exchange for that flexibility.
Hybrid accounts
Hybrid accounts are a form of automated investment management for those who want to keep things simple and their hands off the wheel. For example, adviceDirect is an investing platform that combines online investing with personalized advice and support.
The top 6 investment strategies for beginners
The approach you use to build your investment portfolio is called an investment strategy. It’s the methodology you adopt to help determine what to invest in, how much to invest, and the timeframe of those investments. Your investment strategy will set you on the right course to pursue your investment goals.
There are various investment strategies from which to choose depending on your short- and long-term goals, risk appetite and how much you want to invest. The following are 6 of the more popular strategies. Be sure to find the one that most suits you. No matter which you choose, remember that a good investment strategy minimizes your risks while maximizing your potential returns.
Buy and hold
Buy and hold involves purchasing stocks or funds and holding them long-term to benefit from market growth. While other strategies may embrace regular trading in the hopes of capitalizing on market trends, buy and hold promotes riding the ups and downs of the market. A form of passive investing, the strategy is focused on long-term returns over short-term volatility. Of course, less trading translates into less fees so buy and hold can also be an affordable approach.
Dollar-cost averaging
Dollar-cost averaging (DCA) invests a fixed amount at regular intervals, regardless of market performance, reducing the impact of market fluctuations. In this way you’re avoiding the riskier approaches of “emotional investing” or “timing the market”. The goal of DCA is to buy a higher volume of shares when prices are low and fewer shares at higher prices. You’ll get an average purchase price over time while ensuring you’re not buying too high. The downside is you may lose out on investing big at the right time.
Value investing
Value investing focuses on finding undervalued stocks with strong fundamentals and long-term growth potential. Investors who follow this strategy choose “value stocks”, defined as stocks that are trading for less than their book value. Often, the companies are known for their strong and reliable returns over the years. The price of the company’s stock is not necessarily indicative of its long-tong capacity as a strong performer. Value investors who purchase the stock at its lower price, in fact, believe it will rise after market corrections.
Growth investing
Growth investing targets companies with strong potential for high revenue and earnings growth, often in tech or emerging industries, in coming years. Investors analyze a variety of metrics –type of industry, financial statements, board structure etc., --which are good indicators of that growth potential. Of course, growth investors must be ready to commit a lot of time to in-depth research, and to accept the possibility that their picks don’t meet their potential.
Diversification
Diversification is focused on spreading your investments across different asset types (e.g., stocks, bonds, mutual funds), geographies, and sectors. The purpose of the strategy is to limit risk. Diversification is a form of safety net, ensuring your portfolio remains stable, making it an especially key strategy when markets are volatile. Even in the face of volatility, a diversification strategy can enhance the potential for long-term returns.
Tax-efficient investing
As we saw above, how, and where, you invest your money can have important tax implications. The account type you choose can reduce the amount of taxes you owe each year. In other words, when it comes to taxes, not all investments are created equal. For example, registered savings products such as RRSPs and TFSAs offer a significant tax advantage over non-registered savings.
But here’s the thing: investors don’t have to choose just one strategy. They can combine multiple strategies to create a balanced approach that suits their risk tolerance and financial goals.
Managing investment risks
Every investments carries some degree of risk. Market risk, for example, is the possibility that the price of stocks, bonds and other investments will become volatile from one moment to the next. It’s an especially concerning risk if you need access to your investments in the short-term. For many, though, the risk is an acceptable one considering the potential return over time.
Interest rate risk often works in tandem with market risk since, as interest rates rise, yields on bonds will often rise too. It can also affect the price of stocks. Again, long-term investments won’t be impacted as severely by interest rate risks.
Inflation risk refers to the concern that your returns will not keep up with the rate of inflation, negatively impacting your purchasing power. Liquidity risk is focused on how easily you can convert your assets into cash at a fair price. Assets like real estate are seen as less liquid and, therefore, carry a higher liquidity risk since it’s not easily converted into cash. The general rule is to have enough liquid assets to cover urgent needs. That said, if you won’t need your money in the short-term, some liquidity risk can be worth it over time.
Just some examples of investment risks causing concern. Bottom line, the volatility in the marketplace is normal. Prices of stocks go up and down in response to the economy, interest rates and other factors. Even the attitude of investors can cause volatility and added risk.
Measures for mitigating risk
But while risk is normal and expected, there are proactive steps investors can take to limit the impact of those risks. Diversification, for one, is key. As we saw above, it involves investing in different types of assets and sectors. By spreading money across diverse investment types such as bonds, stocks and real estate, investors aren’t putting all their eggs in one investment basket. Meaning, if one asset is impacted, your assets will still be protected.
Another effective strategy for managing risk is the use of stop loss orders. These orders ensure that an asset is automatically sold when it reaches a predetermined price. Investors can then limit potential losses in volatile markets. Experts also promote the idea of investing in low-risk assets like bonds. This approach would minimize losses from market fluctuations in the short-term and provides an opportunity for the market to recover in the long run. Of course, while low-risk investing means there’s less to lose, there’s also less to gain.
Assessing your personal risk tolerance
Risk tolerance refers to the amount of risk an investor is willing to endure. Knowing your personal risk tolerance will help you determine the investment strategy and portfolio that would work best for you. Investors are typically classified as aggressive, moderate, and conservative.
Generally speaking, someone with greater risk tolerance (i.e., aggressive) may choose to invest in stocks, equity funds and exchange-traded funds (ETFs). If you lean toward lower risk tolerance, bonds may make you more comfortable.
Understandably, one’s risk tolerance is affected by things like your age, investment goals, and income level. If you have a longer time horizon, for example, riskier investments like stocks may be more tolerable than if you had a short-term investing goal.
Common mistakes to avoid when investing
When it comes to investing, external factors like market volatility are not in your control. But you do have control over your own actions. Understanding the pitfalls that investors fall into is essential to avoiding them and setting yourself up for success. Let’s take a look at some of the common mistakes.
Emotional decision-making
It’s understandable to feel fearful when the market turns downward and to get overly excited and greedy when it turns upward. Problem is fear can lead to panic selling, while greed can result in aggressive pursuits of overhyped stocks, neither of which bodes well for your portfolio. To avoid emotional decision-making, keep your eyes focused on the investment goals, stay informed, and remain patient.
Overtrading
If you’ve suffered a significant loss or losses with your investments, it’s normal to want to recoup capital by increasing the size and frequency of your trades. But overtrading increases transaction fees and taxes, all the while diluting your returns and exposing your portfolio to more risk than necessary.
Market timing
Market timing is when you make buying or selling decisions based on predictions of future market price movements. The goal is to capitalize on predicted market highs and lows. While market timing is technically possible, it’s extremely difficult for the untrained; few who try will succeed. Besides, trying to time the market will cause many to miss out on the strong recovery periods. You’ll be much better off simply contributing consistently to your portfolio.
Neglecting fees
Investment fees and expense ratios can greatly undermine your returns over time. From management fees to trading commissions, investors fail to evaluate the costs associated with their investment choices. Don’t forget to check the fee structures of your investment accounts so that you make informed decisions.
Failing to review and adjust
The markets never stay static; they are always changing. Which means that investments that look great today may lose their sheen tomorrow. What’s more, your needs and goals can evolve with time too. Checking in with your portfolio regularly and making periodic adjustments is important. Failing to review and adjust can result in the portfolio being misaligned with what you want to achieve in the first place as an investor.
Seek professional investment advice
Working with investment professionals comes with numerous benefits and considerations. Be sure to keep the following in mind when determining whether you want to seek some guidance as you venture out into the world of investments for the first time.
- Investments professionals can be an essential resource for devising a plan that maximizes your returns on investments and mitigates all the risks we discussed above.
- Advisors not only provide personalized investment strategies, including tax-efficient investing advice, but also offer guidance with estate planning. Every component of your financial future – and the future of your loved ones – can be impacted by the help you get today.
- Though everyone can benefit from working with a financial advisor, investors without any investment knowledge or those with more complicated financial needs will gain the most from professional guidance.
- It’s easy to find someone to work with. You can reach out to a professional directly or take advantage of a hybrid platform like BMO InvestorLine adviceDirect.
Ready to kickstart your investment journey? Calculate how much you want to invest and then start investing online with a self-directed account at BMO InvestorLine. Be sure to reach out to a BMO representative with any questions. We’re here to help!
