How to Start Online Investing in Canada
For many Canadians the thought of do it yourself (DIY) online investing is intimidating and often raises several questions. If opening an online investment account isn’t difficult enough, what about picking the right investments? What kind of time and education is needed to dedicate to it in our already busy lives? And what about the security, is it even safe?
No serious investor wants to operate blindly, and potentially lose their hard earned money. So more often than not investment decisions are ‘left to the pros’, who can help to make things a breeze, and add a warmer human element to the sometimes cold, calculating investment realities. Although there is some good merit to these types of thoughts and feelings, this guide will teach you that taking things into your own hands and online investing is easier than you might think.
For about an hour of your time each year, you can achieve some pretty amazing results that beat most professional money managers. Accordingly, this guide will teach you:
- The pros and cons of investing online, and offline.
- How online investing works step by step.
- What the best online investment accounts are.
Online Investing Vs. Using an Investment Advisor Offline
Pros of Using an Advisor:
- Help you make informed asset allocation based investment decisions.
- Add a sober second thought if sudden investment based emotions threaten your long term prosperity.
- Help you work through changes in your life that may require adjusting and rebalancing of your investments.
- Help you to stay the course and achieve the big goals you set out for.
Cons of Using an Advisor:
- COST: Costs of using an advisor usually happen out of sight, in stealth mode.
- COST: The management costs when compounded can erode upwards of 25% – 50% of your portfolio returns when compounded over many years.
- COST: In many cases, an advisor will not help you beat the market – but help you manage through the different markets, and associated emotions (this is only a ‘Con’ if you see this not worth the cost).
Top tip for finding an investment advisor: Look for a fee only financial planner or fee based investment advisor. These advisors will usually carry much lower costs, while providing all the advisor benefits noted above.
Pros of Investing Online:
- It can be very straight forward to set up and simple to manage over time.
- Because you are saving a large chunk in advisor fees, this is added back into your returns. You are essentially paying yourself. With the right investment strategy, you will perform well without having to constantly search for what to buy.
- For those who are interested in learning about investments and enjoy planning things out, it can be a very empowering and rewarding hobby to invest on your own.
Cons of Investing Online:
- Emotions: Thousands of Canadian investors have lost out big because fear sets in when markets trend lower. When investments are sold low and bought high on emotion, this is a recipe for long term disaster. For many DIY investors, they are their own worst enemy.
- Emotions: For those who might lose focus, and switch money priorities easily – good intentions for retirement (or other big goals like education savings) may become a distorted figment of the imagination if money is allocated away from the investment account, without a reminder.
- Emotions: There are a plethora of human tendencies biases that can occur with even the most sophisticated investors, that can inevitably lead to poor gains or even losses.
Top Advice for Online Investing: Online investing takes self-discipline and a simple strategy that can be adhered to over the long term, through the ups and downs. The stock market and other investment markets are indifferent to what you feel or think. So it can really pay to approach the market in a cool calculated way, by removing your emotions.
This doesn’t mean that investment experimentation or exploration can’t take place with relatively smaller amounts of money. But the majority of your portfolio generally should be set, and forgotten about until a pre-scheduled, review or withdraw date approaches.
Online investing is not for everyone! If by the end of this guide, you are still not sure if online investing is right for you – consider a balanced approach with half your investment money allocated to online use, and half with a good advisor. You’ll learn more over time, and may grow more comfortable with a particular approach. You’ll also be able to compare the performance in some healthy competition. Can you beat the advisor?
How Online Investing Works: Step by Step
Learning how to walk, ride a bike or bake your favourite recipe all took some sort of small effort and maybe a bit of help. Investing online is no different. In fact, in all likelihood it is easier than any of the above said, and there is no shortage of personal assistance available.
The following step by step process will give you a very good idea of what to expect as you dive in to opening an online investment account, and begin to grow your empire.
- Compare a few different account options. The next (and final) part of this guide recommends some accounts and what to look for to make your online experience successful. So stay tuned for more on this.
- Opening an account. Once you’ve found an online Brokerage or ‘Robo Invetor’, opening an account is usually a breeze. You’ll want to open an Individual investment account to start, and this can eventually be expanded to RRSP and other registered accounts. For now we are just getting our feet wet. You’ll need to provide the online brokerage with IDs, and quite a bit of information on yourself. However this is not much more detailed than opening a bank account or applying for a loan. There is always help just a call away if you have a question or a few.
- Poking around in the account. It may take a few days for the brokerage to process your account to begin investing, however usually you will be granted some level of access to the account immediately. Take a few minutes and familiarise yourself with how it is set up. To help, there may be a guided tutorial and education centre. There also may be simulators where you can practice using the account with play money.
- Funding the Account. Some accounts will require a minimum funding amount such as $1000, while others require nothing to open. Ultimately if you want to start investing though you would have to commit some sort of monthly amount. Money can usually be wired in from any major banking institution. There are two important caveats here:
- Creating a retirement or education plan. Will help you determine what would be a good amount to start saving month over month. A good rule of thumb is 10% of your take home earnings. But if you are already contributing to a pension or work related benefits plan this amount may be lower, or may be a lump sum amount.
- Determining what to invest in. We recommend pre-built, low fee ETF (Exchange Traded Fund) portfolios for the beginner, AND advanced investors. Choose the asset allocation that is right for you – conservative, balanced, or aggressive growth. Each of our online account recommendations below offers such portfolio options.
- Set it and forget it. To fund your account, automatic withdrawals from your main banking account are highly recommended. When markets are tracked closely, emotions can get the best of even the most experienced investors, and can lead to poor logical decision making. Out of sight, out of mind is best – atleast to some extent. Check out your investments once or twice per year, and make risk adjustments based on your income and your age as you near your main savings goals (where reducing investment portfolio risk is necessary).
- Core and Explore. For those who want to try picking stocks or mutual funds, try investing 75% – 80% of available funds with a pre-built ETF based portfolio, and then using the rest to explore with. See over time if you can beat the pre-built portfolio. But it is dangerous to leave all investment decisions to even the most well educated stock picking expert.
- Invest for yourself, not by yourself. Ultimately you are not alone. The online investment brokerage you chosewants to see you succeed online and can be relied on heavily if needed – just a call or click away. They will also provide detailed investment information updates as time goes by. It’s also a good idea to consider a fee only financial planner if you are investing online. The financial planner will charge an hourly fee like an accountant would, and will never try to ‘sell’ you on a financial product. For the relatively small cost, they will simply help guide and educate you over time on important goals such as taxation, estate planning, retirement, education and insurance protection.
The Best Canadian Online Investment Accounts
The recommendations below all have two critical things in common:
(1) They are incredibly easy to use (not much harder to operate than an email account).
(2) They deliver exceptional investment results.
The common reason behind these two strengths is how these services make investing in low cost, pre-set ETF based portfolios a breeze. Therefore all you need to decide how risky you’d like to be, and then start an automatic contribution. That’s it – well besides the odd review, and withdrawing your money when you need it. There’s no need to make it complicated, unless you want to try and expariment with the core and explore approach.
Below we describe how the investing accounts differ among other benefits.
Questrade is a great online investing platform that gives access to both low cost, pre-packaged, ETF based, automatically rebalancing portfolios AND the ability to trade individual stocks or mutual funds. It’s a great selection if you think you might turn investing into a hobby and grow into more advanced individual stock picking. Trading fees beat those of all the Big Bank platforms, and you can start with as little as $0.
The rapidly growing trend of ‘Robo Investors’, is has little to do with its name. When you open an account, you’re working with a human. When you call in for help, you deal with a human. And when you need some light advice, you’re dealing with a human. The term ‘Robo’ comes from the fact that the portfolio you invest in rebalances automatically or ‘robotically’. Monthly withdrawals for investing also happen automatically. So it is a real ‘set and forget’ way to go with your best interest in mind.
Nest Wealth is the best of the Canadian Robo Advisors because its costs and fees are the lowest, its pre-packaged portfolios are top notch and its service is great. Everything that any investor at any level would need to grow and succeed.
The old ING ‘Save Your Money!’ tagline that morphed into Tangerine may be a bit more familiar. Aside from an excellent no fee banking package, Tangerine offers one of the best investing services in Canada. It doesn’t even involve opening an online investment account as their low cost, index based portfolios are actually structured as mutual funds. The investment can be set up easily with a phone call, online or both.
For just over 1% in fees per year, you invest in a well balanced portfolio (conservative, balanced, or aggressive). This is compared with most mutual funds that charge around 2.5% and offer no automatic portfolio re-balancing or asset allocation (stocks, bonds). The Tangerine account route almost seems a little too easy, but the math doesn’t lie. By investing with one of these low cost wonder funds you’ll more than likely be far ahead of the returns that most investors are able to achieve over the long term.