Investing

Introduction

Investing has become more important than ever. A well-rounded investment strategy can open doors to financial growth and long-term stability for Canadians. However, navigating the investment world can be overwhelming.

This guide explores the basics of investing, such as understanding risk and return and your goals as an investor. In addition, we discuss the impact of taxes and tax-advantaged accounts like the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). We also offer practical advice on evaluating investment opportunities and the importance of diversification, risk tolerance, and long-term planning.

By the end of this article, you will have a solid foundation in investment principles, enabling you to make informed decisions and confidently navigate the investing world.

Importance of investing in personal finance

Investing plays a crucial role in personal finance management for Canadians. By spreading your funds across various investment vehicles and asset classes, you can grow wealth, generate passive income, and prepare for financial milestones such as homeownership or retirement (Malkiel & Ellis, 2020).

Investing helps you combat inflation and maintain your purchasing power over time (Horowitz, 2021). It also enables you to secure long-term well-being. Understanding essential investing knowledge and strategies specifically for Canada allows you to make informed decisions and optimize your financial future.

Overview of the Canadian investment landscape

Canada offers diverse opportunities for individuals looking to optimize their finances. The financial market comprises stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs). Canadians can build a well-rounded investment portfolio tailored to their unique financial goals and risk tolerance (Malkiel & Ellis, 2020).
The Canadian government also provides tax-advantaged accounts such as the TFSA, RRSP, Registered Education Savings Plan (RESP), and First Home Savings Account (FHSA), which encourage long-term savings and investment growth. Canadians can also leverage domestic resources like the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) for guidance and protection in the complex world of investing (Johnson, 2019).

These resources allow Canadians to take control of their finances, capitalize on investment opportunities, and pave the way for long-term financial success.

Understanding risk and return

Canada's tax system is progressive, meaning that as your income increases, so does your tax rate. Two levels of government collect income taxes: federal and provincial/territorial. Each level has its tax rates and brackets.

Defining the relationship between risk and return

Risk and return are two fundamental concepts that investors must understand to make better decisions. Risk refers to the uncertainty of investment outcomes, encompassing the potential for losses and the variability of returns (Swedroe & Kizer, 2014). Conversely, return is an investment's financial gain or loss, usually expressed as a percentage of the initial investment (Malkiel & Ellis, 2020).

Generally, a positive relationship exists between risk and return: investments with higher potential returns often come with higher stakes, and vice versa (Thaler, 2015). By carefully assessing and balancing risk and return, you can construct an investment portfolio that aligns with your objectives and risk tolerance.

Risk tolerance

Risk tolerance is your willingness and ability to accept potential losses in pursuit of higher returns (Swedroe & Kizer, 2014). Factors influencing risk tolerance include an investor's age, financial goals, investment horizon, and personal disposition (Malkiel & Ellis, 2020).

Investment Options in Canada

Canadians can access a wide range of investment products. Whether through a traditional financial institution, or a third-party investing app, setting up a trading account is fast and easy. The following are some common asset classes.

Stocks

Stocks represent a popular investment option for Canadians. Stocks are an equity investment. This means the investor is granted partial company ownership, allowing them to benefit from its growth and success (Malkiel & Ellis, 2020).

Investing in stocks can generate returns through capital appreciation, as the value of shares may increase over time. In some cases, investors become eligible for dividend income, a portion of the company's profits distributed to shareholders (Swedroe & Kizer, 2014).

Stocks are generally considered a higher-risk investment than other asset classes, such as bonds or cash equivalents, as their value can fluctuate significantly. But by incorporating stocks into a diversified portfolio, Canadians can capitalize on potentially higher returns while limiting their risk.

Bonds

Bonds are a type of fixed-income security. Bonds involve lending money to a borrower, usually a corporation or government entity. In exchange, investors receive periodic interest payments and the return of the principal upon maturity.

Bonds provide more predictable income streams and prioritize principal repayment to bondholders (Swedroe & Kizer, 2014). However, the trade-off for this lower risk is generally lower returns. Bonds can be essential in a balanced investment portfolio.

Mutual funds

Mutual funds are a versatile investment option for Canadians seeking diversification and professional management in their personal finance portfolios. A mutual fund pools money from multiple investors to purchase a diversified collection of assets, such as stocks, bonds, or other securities, under the guidance of a fund manager (Malkiel & Ellis, 2020).

Mutual funds allow individual investors to access various assets and strategies. These funds cater to multiple risk tolerances and financial objectives, providing options for conservative, moderate, and aggressive investors.

Exchange-traded funds (ETFs)

ETFs are a type of investment fund that holds a diversified collection of assets, such as stocks or bonds and are traded on stock exchanges like individual stocks (Malkiel & Ellis, 2020). In addition, they often track market indices, offering investors a low-cost way to access broad market exposure and diversification (Swedroe & Kizer, 2014).

Compared to mutual funds, ETFs generally have lower fees, more tax efficiency, and increased liquidity due to their ability to be bought and sold throughout the trading day.

Guaranteed Investment Certificates (GICs)

GICs are fixed-income investments in which an individual lends money to a financial institution for a predetermined term, ranging from a few months to several years, in exchange for a guaranteed rate of return upon maturity (Horowitz, 2021). As the principal and interest rates are guaranteed, GICs provide a stable and predictable income stream with minimal risk of loss (Malkiel & Ellis, 2020).

The trade-off for this security is typically lower potential returns compared to riskier investments like stocks or ETFs.

Real estate investments

Real estate investing involves purchasing residential or commercial properties directly or through Real Estate Investment Trusts (REITs). The aim is to generate rental income, property appreciation, or both.

Real estate investments can offer several advantages, including the potential for attractive returns, a hedge against inflation, and tax benefits (Swedroe & Kizer, 2014). However, real estate investments have risks like market fluctuations and potential property management challenges.

Alternative investments

Examples of alternative investments include commodities (e.g., gold, oil, agricultural products), private equity, cryptocurrencies (e.g., Bitcoin, Ethereum), hedge funds, collectibles (e.g., art, wine, stamps), and peer-to-peer lending (Swedroe & Kizer, 2014). However, alternative investments often have increased risks, such as illiquidity (less access to cash), market volatility, and limited regulation (Thaler, 2015).

Building an Investment Portfolio

A well-rounded investment portfolio is essential for optimizing personal finances and achieving long-term goals. The following step-by-step guide outlines the process for Canadians:

  1. Step 1

    Assess risk and financial objectives

    Begin by evaluating your risk tolerance, financial goals, and investment horizon. This will help you determine an appropriate asset allocation and investment strategy.

  2. Step 2

    Diversify and allocate assets

    Spread your investments across various asset classes, such as stocks, bonds, and alternative investments, to achieve an optimal balance between risk and reward.

  3. Step 3

    Active vs. passive investing

    Choose between active and passive investing strategies based on your preferences and resources. Active investing involves selecting individual securities or funds to outperform the market, while passive investing aims to match the market's performance through index funds or ETFs (Thaler, 2015).

  4. Step 4

    Select investment vehicles

    Based on your asset allocation and investment strategy, choose suitable investment vehicles, such as stocks, bonds, mutual funds, ETFs, GICs, etc.

  5. Step 5

    Monitor and rebalance

    Regularly review your portfolio to ensure it aligns with your financial objectives. Rebalance when needed.

  6. Step 6

    Stay disciplined and focused

    Avoid emotional decision-making and maintain a long-term perspective when managing your investments.

Registered Investment Accounts

Canada has done a great job developing financial investment accounts that allow you to prepare for your future and retirement. Whether an RRSP, TFSA or even the new FHSA, our financial system has accounts that enable you to thrive.

Registered Retirement Savings Plan (RRSP)

RRSPs allow you to contribute pre-tax income to the plan, which can grow tax-deferred until withdrawal during retirement. Contributions to an RRSP can also reduce your taxable income, potentially resulting in lower income taxes. RRSPs offer flexibility in investment options, allowing Canadians to hold various investments.

Tax-Free Savings Account (TFSA)

With a TFSA, you contribute after-tax income, with any investment earnings and withdrawals remaining tax-free. Unlike RRSPs, TFSAs do not have a specific retirement focus, making them suitable for various financial objectives, such as emergency funds, home purchases, or education expenses.

Registered Education Savings Plan (RESP)

RESP contributions are made using after-tax income, and investment earnings grow tax-deferred until withdrawn for educational purposes. When withdrawn, the earnings are taxed at the student's income tax rate.

In addition to the tax advantages, RESPs also benefit from the Canada Education Savings Grant (CESG), which provides a matching government grant of up to 20% of the annual contributions up to a specific limit (Swedroe & Kizer, 2014).

Comparing registered accounts

RRSPs, TFSAs, FHSAs, and RESPs are all registered investment account options designed to address specific financial objectives for Canadians. RRSPs focus on long-term retirement savings. TFSAs offer a more flexible approach, providing tax-free growth and withdrawals for various financial goals. An FHSA is specifically meant to enable faster saving for your first home. And RESPs are tailored to help Canadians save for their children's post-secondary education.

While these registered accounts have distinct purposes, they allow Canadians to hold various investments, such as stocks, bonds, mutual funds, ETFs, and GICs

With a TFSA, you contribute after-tax income, with any investment earnings and withdrawals remaining tax-free. Unlike RRSPs, TFSAs do not have a specific retirement focus, making them suitable for various financial objectives, such as emergency funds, home purchases, or education expenses.

Investing through Robo-Advisors and Online Platforms

Robo-advisors have emerged as a popular and cost-effective investment management solution for Canadians seeking a more hands-off approach to personal finance. These digital platforms use algorithms and advanced technology to create, manage, and rebalance diversified investment portfolios based on an individual's risk tolerance, financial goals, and investment horizon (Malkiel & Ellis, 2020).
Robo-advisors typically invest in low-cost, passive investment vehicles such as exchange-traded funds (ETFs). With lower fees, user-friendly interfaces, and automated processes, robo-advisors have gained popularity among novice and experienced investors, particularly those with smaller account sizes.

Robo-advisors and online platforms in Canada

There are several robo-advisor platforms in Canada. They offer Canadians cost-effective, professionally managed investment portfolios tailored to their financial goals and risk tolerance.
Top Canadian Robo-advisors
  • Wealthsimple: One of Canada's largest and most recognized robo-advisors, Wealthsimple offers diversified portfolios of low-cost ETFs that focus on simplicity and user experience. The platform provides features such as automatic rebalancing, tax-loss harvesting, and socially responsible investment options.
  • Questrade's Questwealth Portfolios: Questrade, a well-established discount brokerage in Canada, offers its robo-advisor solution in the form of Questwealth Portfolios. The platform provides investors with low-cost, diversified ETF portfolios.
  • BMO's SmartFolio: Backed by the Bank of Montreal, SmartFolio is a robo-advisor platform offering Canadians professionally managed portfolios of BMO's ETFs. The platform provides a user-friendly experience and the backing of a trusted financial institution (Swedroe & Kizer, 2014).
  • CI Direct Investing: CI Direct Investing is another popular robo-advisor in Canada, offering diversified ETF portfolios and private investment options for qualified clients.
  • RBC InvestEase: Offered by the Royal Bank of Canada, RBC InvestEase provides Canadians with professionally managed, low-cost, diversified ETF portfolios. The platform is known for seamlessly integrating with RBC's existing online banking services.

Robo-advisor platforms are an attractive option for those seeking a hands-off approach to investing.

Tax Implications of Investing in Canada

In Canada, investment income is subject to taxation and can be categorized into three main types: interest income, dividend income, and capital gains.

Interest income

Interest earned from investments such as bonds, GICs, and savings accounts is fully taxable at an individual's marginal tax rate. This makes it the least tax-efficient form of investment income.

Dividend income

Dividends received from Canadian corporations are subject to taxation but benefit from a dividend tax credit, which reduces the overall tax burden. The tax credit prevents double taxation, as dividends are paid from the corporation's after-tax profits.

Capital gains

Capital gains occur when an investment is sold for a higher price than its purchase cost. In Canada, only 50% of capital gains are subject to taxation at an individual's marginal tax rate, making capital gains more tax-efficient than interest income. Conversely, capital losses can be used to offset capital gains, reducing the overall tax liability.

Tax Implications of Investing in Canada

In Canada, investment income is subject to taxation and can be categorized into three main types: interest income, dividend income, and capital gains.
  • Interest income: Interest earned from investments such as bonds, GICs, and savings accounts is fully taxable at an individual's marginal tax rate. This makes it the least tax-efficient form of investment income.
  • Dividend income: Dividends received from Canadian corporations are subject to taxation but benefit from a dividend tax credit, which reduces the overall tax burden. The tax credit prevents double taxation, as dividends are paid from the corporation's after-tax profits.
  • Capital gains: Capital gains occur when an investment is sold for a higher price than its purchase cost. In Canada, only 50% of capital gains are subject to taxation at an individual's marginal tax rate, making capital gains more tax-efficient than interest income. Conversely, capital losses can be used to offset capital gains, reducing the overall tax liability.

Tax-efficient investing strategies

Tax-efficient investing is a crucial aspect of personal finance in Canada, as it allows investors to minimize their tax burden and maximize returns. Several strategies can be employed to enhance the tax efficiency of an investment portfolio (Chen, 2020).
  • Utilize tax-advantaged accounts: Contributing to these accounts allows investors to take advantage of tax-deferred growth, tax-free withdrawals, or tax-efficient withdrawals for specific purposes, such as retirement or education.
  • Asset allocation: Higher-yielding, interest-bearing investments, which are fully taxed, can be placed in tax-advantaged accounts, while tax-efficient investments, such as those with capital gains or eligible dividends, can be held in taxable accounts.
  • Tax-loss harvesting: Realizing capital losses to offset capital gains can minimize an investor's tax liability. By strategically selling underperforming assets at a loss and reinvesting the proceeds in a similar investment, investors can maintain their desired asset allocation while reducing their overall tax burden.
  • Dividend tax credit: Invest in Canadian dividend-paying stocks to take advantage of the tax credit, reducing the tax rate on eligible dividend income. This strategy can result in a lower overall tax burden than interest income.
  • Holding period: Consider holding investments longer to minimize taxable events. By adopting a long-term buy-and-hold strategy, investors can defer taxes on capital gains until they sell the asset, allowing for continued growth.

Tips for Successful Investing

Successful investing in Canada can be achieved by following these essential tips:

Every tax season, community volunteer tax clinics pop up around Canada. These tax clinics offer free tax preparation services that make it easy to file your taxes.

Tax clinics are available to Canadians with simple tax situations. And some clinics limit their usage to those earning a lower income.
  • Set clear financial goals: Establish short-term and long-term objectives to create a tailored investment plan (Malkiel & Ellis, 2020).
  • Diversify your portfolio: Allocate your investments across various asset classes, industries, and geographic locations to reduce risk (Swedroe & Kizer, 2014).
  • Understand your risk tolerance: Assess your risk profile to ensure your investments align with your comfort level and financial objectives (Thaler, 2015).
  • Use tax-advantaged accounts: Maximize the benefits of RRSPs, TFSAs, and RESPs to optimize your portfolio for tax efficiency (Chen, 2020).
  • Regularly review and rebalance: Periodically evaluate your portfolio and adjust your asset allocation to maintain your desired risk level and investment goals (Malkiel & Ellis, 2020).

Frequently Asked Questions about investing in Canada

  • What is the difference between mutual and exchange-traded funds?

    A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. On the other hand, an ETF is an investment fund that tracks an index or a basket of assets, such as stocks or bonds and trades on a stock exchange like a stock. While mutual funds are traded at the end of the day at their Net Asset Value (NAV), ETFs can be bought and sold throughout the trading day at their market price.

  • What is a robo-advisor, and how does it work?

    A robo-advisor is a digital investment platform that uses algorithms and computer algorithms to provide automated investment advice and portfolio management. After completing a risk assessment questionnaire, the robo-advisor creates a personalized investment portfolio and periodically rebalances it. Robo-advisors have become a popular investment option for many Canadians because of their low fees.

  • How much should I invest in stocks versus bonds?

    This depends on an individual’s risk tolerance and financial goals. Generally, younger investors with a longer investment horizon may be more willing to take on higher risk and invest a higher percentage in stocks. In comparison, older investors with a shorter investment horizon may prefer a more conservative approach and invest more in bonds.

  • What are the advantages of investing in tax-advantaged accounts like RRSPs and TFSAs?

    Registered accounts like RRSPs and TFSAs offer tax benefits that can enhance investment returns. Contributions to an RRSP are tax-deductible, and the investment growth is tax-deferred until withdrawals are made, which can be beneficial during retirement. TFSAs, on the other hand, allow tax-free investment growth and tax-free withdrawals, making them a flexible and powerful investment option for Canadians of all ages.

Conclusion

Recap of Key Points

Investing is vital in helping Canadians achieve their financial goals and secure their future. By understanding the investing landscape, exploring various investment options, and utilizing tax-efficient strategies, Canadians can create a well-diversified portfolio tailored to their risk tolerance and financial objectives (Malkiel & Ellis, 2020; Swedroe & Kizer, 2014).

Strategically employing registered investment accounts, such as RRSPs, TFSAs, and RESPs, and using robo-advisors, can further enhance investment outcomes (Horowitz, 2021; Thaler, 2015). With a solid grasp of these essential investing concepts and a commitment to ongoing learning, Canadians can confidently navigate the world of personal finance and build a prosperous financial future.

Take control of your finances and start investing

Taking control of your finances and jumping into the investing world is always possible. Further, what you earn doesn’t matter; you can start investing with as little as $100 with most robo-advisors. Investing is an integral part of an optimized financial management plan. It can also be the difference between your kids having student loan debt in the future. So take the time to read, learn, and employ proven and practical tips for investing in Canada.

Cite this article

Creditpicks. (2023). Investing. Creditpicks. https://www.creditpicks.com/explore/investing/

Sources

Horowitz, S. (2021). The Canadian investor’s guide to building a tax-efficient portfolio. Toronto, ON: ECW Press.

Johnson, K. (2019). Understanding the Canadian securities regulatory framework. Canadian Journal of Economics, 52(3), 929-955. https://doi.org/10.1111/caje.12384

Malkiel, B. G., & Ellis, C. D. (2020). The elements of investing: Easy lessons for every investor. Hoboken, NJ: John Wiley & Sons.

Swedroe, L. E., & Kizer, J. A. (2014). The only guide to alternative investments you’ll ever need: The good, the flawed, the bad, and the ugly. Hoboken, NJ: John Wiley & Sons.

Thaler, R. H. (2015). Misbehaving: The making of behavioral economics. New York, NY: W. W. Norton & Company.

Government of Canada (2023, April 6). First Home Savings Account (FHSA) – Canada.Ca. Canada.ca. Retrieved May 10, 2023, from https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html

Chen, J. (2020). Tax-efficient investing: A comprehensive guide. Toronto, ON: Canadian Financial Press.