HOW DO I INVEST? THE FUNDAMENTALS OF FINANCIAL LITERACY

Financial literacy is not something we easily obtain like basic math, spelling or even how to tie a shoelace. Surprisingly it is something we stumble on either through word of mouth, the news or when the bank calls you to set up a savings account. Unless you grew up following the markets or took a course in finance, you likely do not know the difference between a stock, mutual fund or GIC.

For most individuals, they only start to invest and gain financial literacy when their bank calls them to discuss how to invest the money that is sitting in their chequing account. The individual will likely be offered the TFSA or RRSP investment accounts commonly available to Canadians and more than likely be put into GIC (Guaranteed Investment Certificate) investments. Most individuals will go with their bank’s recommendations if they do not have prior investment knowledge. Through time, they will follow their investments and understand the markets more but they may not have gone through the exercise of understanding their goals, building a budget and net worth statement or determining their investor profile.

While others who may have some knowledge may be quick to put their entire life savings into the stock market or a trendy investment such as cryptocurrency without fully understanding the risks involved. We all want to make a quick buck and the markets do provide some rate of return. However, many would-be investors try to become market-timers by continuously entering and leaving investments based on how they feel about the company or overall market trend. Many individuals miss out on long-term growth potential by being short-term focused and basing their investment strategies on the constant market volatility. Investment is then seen as a form of gambling.

What is the best approach? It is important to start with the basics first. For those who do not have much financial literacy, it is recommended you seek the advice of a professional financial advisor. Most advisors can offer you a free consult to understand your goals, create a plan and suggest how to invest. Investments should follow a hierarchy where you start with basic long-term savings put in a diversified portfolio of assets. You should also read books and articles on investing including personal finance textbooks. There is one popular book called “The Wealthy Barber”, which everyone should read.

If you have some financial knowledge, you should still start with basic investing, i.e. having your basic long-term savings in well-diversified portfolios, which may include mutual funds, segregated funds and ETF’s (exchange-traded funds). Once you have that taken care of, you can set aside play money to invest in riskier investments like individual stocks, currency, commodities, futures, etc.