Financial Friday 173: Are you Scared of the Stock Market?
For those on the fence about investing some of your hard-earned cash in the financial markets, the biggest hurdle to get over is the risk. These days, you can invest your TFSA or RRSP funds in a completely risk-free Guaranteed Investment Certificate (GIC) and pocket over 5% annually. It’s a decent return and double what you would have got just a couple of years ago.
However, if you look at historical returns from financial markets you will see that they are often well above 5%. Two or three extra percentage points compounded over 15 or 20 years will make a massive difference in how much cash your RRSP or TFSA will be able to spit out come retirement.
The 5-year period from Sept. 2018 to Sept. 2023 shows the following returns from the four major North American stock indices: TSX up 25%, S&P 500 up 55%, DSJ up 33%, NASDAQ up 74%. Although their yearly returns varied greatly, you can see that investing in a combination of these markets 5 years ago would have yielded a significantly higher return than cash. Especially if you consider that a GIC would have paid under 3% for three of the last five years. Also keep in mind that you have to lock-in your GIC for a fixed period to get the best rates, so they are not as liquid as they seem.
Yes, financial markets are an attractive option, but we certainly don’t recommend that everyone should load up on stocks. Our goal is to help educate you about investing and highlight some of the available options. Regardless of whether you rely on a financial advisor or choose a DIY/self-directed investing approach, you must do your homework and understand the risk! Make sure to join Arian Beyzaei next week and learn some important facts and key considerations that can help you make a more informed decision.
For now, let’s look at a couple of key questions that first-time financial market investors often have.
How do I pick stocks?
The short answer is you don’t have to (and probably shouldn't) rely on picking stocks! Even if you had the time and knowledge to investigate and evaluate potential companies to invest in, your chances of picking winners with any sort of consistency is very low. Holding a limited number of individual stocks is also a risky strategy. A more sensible approach is to choose a diversified bundle of stocks to lower your overall risk.
The great news is that there are thousands of these stock bundles (they often include other financial assets as well) already pre-picked for you by teams of financial experts using all sorts of advanced analysis and inputs that an individual investor could never replicate. There are several ways to buy these bundles (ETFs or mutual funds for example) and lots of variations — some try to mimic the return of an entire market like the Toronto Stock Exchange, while others focus on a specific industry or geographic sector.
Do I need a financial advisor or stockbroker?
Nowadays, there are plenty of online brokerages that anyone can use to set up a trading account and easily purchase individual shares and many types of investment funds. Whether you need a stockbroker or some other kind of advisor (we recommend a financial coach) to help you depends on whether you want to take the time and effort to learn how to handle it yourself.
Plenty of Canadians successfully manage their own investments through online brokerages and save themselves a ton of money in fees and charges. Automated investment platforms (robo-advisors) and all-in-one ETFs are popular options because they don’t require much financial knowledge, allow for easy risk management, and are simple to use with relatively low fees.
When is a good time to buy stocks?
If you had nerves of steel and a crystal ball, jumping into the markets when the pandemic was raging in March of 2020 would have paid off handsomely — the TSX index is up around 70% from that time. The problem is that fluctuations like that don’t happen often, and choosing the right time is always going to be very hit and miss.
Rather than focus on trying to nail the timing of your entry (or exit) from the market, you should be looking at your investment horizon and also investing regularly to help smooth out the inevitable bumps. Trying to capitalize on short-term fluctuations by jumping in and out of the market is a difficult strategy at best. The longer you leave your money in the market, the better the chance that you will come out ahead of the game.
If this article piqued your interest, make sure to join next week's free webinar, Stock Market Investing Essentials. It will be a very informative session for those who already have mutual funds or other investments, or anyone else who wants to learn more about getting into the financial markets.
Resources:
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