In this post, you are going to learn the 7 simple things that are within your control when it comes to building wealth through investing.
Do you worry about the next market crash, whether your portfolio will outperform the broad market or if a company will pay dividends?
Unfortunately, all of these are out of your control and not worth losing sleep over.
But by focusing on the 7 points below, you’ll be better off than many other investors.
And the good part is: they are not complicated.
So if you’re ready, let’s get started.
7 Things Within Your Control in Investing
1. How Soon You Start Investing
The first thing within your control is: when you start investing. The earlier you start, the quicker it’ll be to achieve your financial goals.
There are two reasons why starting to invest early is important.
- The regular amount you need to invest will be lower
- Your savings will have more time to compound
These two are closely related. And when combined, it means you’ll need a lower principal contribution to get to your target amount.
Here’s an illustration:
Suppose you have a financial goal of retiring at age 65 with $2 million and assuming a 7% annual rate of return.
Let’s see how your monthly savings amount is affected by when you started.
By starting at 20, you’ll only need to save $527 every month compared to $1,110 if you started 10 years later.
And more interestingly, the accumulated returns represent 86% of the ending balance if you started at 20. That is, you’ll only have to contribute about $285,000 (14%) to end up with a nest egg of $2 million at retirement.
Such is the power and magic of compound interest!
You’ll be able to get to a point where your investment income will exceed any new contributions you make.
You may be tempted to delay investing because you have more pressing financial goals, like getting out of debt or saving for a house down payment. Or your income is too low.
But if you’re waiting for the perfect time, it may never come. Any time is a good time to start investing.
Here are some few tips to help you start investing immediately:
- Start small: Investing is now very accessible.
- Use a robo-advisor: You can start investing without the need for a large minimum opening balance, with zero opening balance in many instances. Also, you can contribute small amounts periodically
- Re-evaluate your finances: Check your expenses for areas where you can save some money and reallocate to investing
- Make extra money from a side gig: A few hundred dollars every month will go a long way and can quickly add up
- Set direct deposit: Reduce friction and take out the emotions. Even better, let your employer deduct it from your pay.
Related Post: 10 Ways To Start Investing With Little Money
2. Your Savings Rate
The actual dollar amount you save is important. But the savings rate, that is how much of your income you save, is more important.
As an illustration, consider 2 friends: John and Jake.
On the surface, John that saves and invests $2,500 monthly is doing better, investing-wise, than Jake that only invests $1,000. But that is if they have the same income to start with.
Suppose the $2,500 represents just 20% of John’s monthly income – that is still quite impressive by many people’s standard- but then, Jake is saving 50% of his monthly income.
Ignoring inflation and return on their investment, Jake can potentially retire earlier than John.
For each year Jake works, he’s putting aside enough money to cover another year’s expenses. That is, he can work one year, and take the next year off. John will need to work for 4 years to take a year off.
So how do you increase your savings rate?
- Re-assess your finances: Comb through your monthly expenses for opportunities to cut back. Track your expenses for a few months or review your spending for past months.
- Focus on the major expenses and explore means to cut back: For many households, this means housing, transportation, and food. These 3 represents over 60 percent of household expenditure in Canada. Any savings in these areas can potentially add up to a few thousands every year
- Increase your income and allocate the money to investing
3. Type of Investment
Where you choose to invest your money is another decision that is within your control if you want to build wealth through investing.
Some people prefer Dividend Investing because the investment returns are more predictable. With dividend investing, the investor invests in a number of dividend-paying companies with a track record of not just paying, but also increasing, dividends.
Others prefer growth investing (capital appreciation) or total returns (dividend plus capital appreciation).
The right investment approach for each investor may vary depending on several factors: financial goals, investment horizon, risk appetite, investment stage (accumulation or spending) and so on.
For example, a retiree may prefer the predictable and regular payment of dividends to cover her expenses while a younger investor may choose to invest in only growth stocks.
- What Is Asset Allocation And Why Is It Important In Investing?
- Tangerine Dividend Portfolio Review
- VEQT Review: Vanguard All-Equity ETF Portfolio
- Best Investments in Canada
4. Investing Regularly
Your ability to stick to your plan, irrespective of what is going on in the market or economy, is often under-appreciated.
When you invest regularly, you’re building a disciplined savings habit that will benefit you all through your investing journey and help you build wealth quickly.
It also means you won’t be trying to time your entry into the market. Timing the market is extremely hard, and no one can do it consistently. Not even the experts!
So focus on what is within your control. Invest monthly or at any other regular time you choose. You’ll buy at varying prices over time and potentially reduce volatility. This is called dollar-cost averaging.
Here are some smart tips to help you stick to your plan to invest regularly
- Set up pre-authorized deposits: You may forget or simply allow your emotions to get the better of you. By setting up a direct deposit that aligns with when you receive your pay, you have one less decision to make and will be more likely to invest.
- Enroll in your employer’s group plan: This is a great way to pay yourself first. In some cases, your employer may even have a plan to match your savings up to a particular percentage.
5. Staying Invested
There is the saying that time in the market beats timing the market.
When markets start to fall, our natural reaction is to start selling and move to cash. But in many cases, the best approach is to do nothing or simply stick to your investment plan.
Your decision to be disciplined and stay invested is entirely within your control in investing.
In fact, if you’re still in the accumulation stage, a falling market is a great opportunity to buy stocks at bargain prices.
Continue to invest at regular intervals. You’ll buy when prices are high and low, and average out over time.
In the short term, stock market can be volatile. But historically, they have always recovered.
If you feel the urge to sell during a stock market decline, it could be an indication that your investment portfolio does not reflect your risk appetite or time horizon.
Follow these tips to help you stay invested for the long-term:
- Align your investment to your financial goals. For example, an over-weight position to stocks may make sense when investing for retirement, but not for a goal that’s 6 months away.
- Diversify your investments
- Rebalance periodically to stay within your target allocation
- Monitor your investments but avoid the temptation to check your portfolio performance every day, or worse change your plan based on short term price volatility
- Choose an investment strategy that aligns with your goals and stick to it. It’s okay to make changes, but never out of fear.
- Rebalancing 101: A Beginner’s Guide To Keeping Portfolio Risk In Check
- What Is Diversification And Why Is It Important?
6. Keeping Investment Cost Low
Investment costs matter and it is one of the few things within your control when investing.
The same way investment income compounds gradually over a long period of time, so does the fees you pay.
The true impact of high investment cost is not just the fees you pay but also the compounded income those fees would have generated. Unfortunately, this isn’t very obvious in the earlier years.
Investment costs include:
- Expense Ratio
- Front-end and back-end Loads
- Brokerage fees
- Account maintenance fees
How much you invest can also affect your investment cost.
For example: consider 2 investors that use a brokerage that caps its commission at $5. If one invests $500 monthly, while the other invests $2,000. Their fees work out to 1% and 0.25% respectively.
So if you’ll be investing small amounts periodically, choose a brokerage that lets you buy stocks commission-free.
Wealthsimple Trade is a great option for Canadians. Get two free stock trades through this link. Questrade also lets you buy ETFs for free – and you can receive a $50 trade rebate using the Questrade promo code “WALLETBLISS”.
Some tips to keep your investment cost low include:
- Invest through index funds or ETFs. Not only do they generally have lower expenses, you may also be able to buy them commission free. For example, Questrade mentioned above. Better still, invest through asset allocation ETFs.
- Avoid actively managed funds wherever possible. Many of them don’t outperform the market, even before including their higher fees.
- Reduce investment turnovers. Plan to buy and hold for the long-term. The fees you pay for constantly selling and buying new stocks will add up over time.
- Invest through a low-cost or zero-cost brokerage, or use a robo-advisor.
7. Investing with Taxes in Mind
Finally, investing in a tax-efficient manner is largely within your control.
It would be unwise to invest diligently and earn decent returns over the years, but lose a substantial part of it to taxes.
The tax consequence of your investments should never be an after-thought. It should be a key consideration in your investment plan.
In general, there are two simple ways to invest in a tax-efficiently.
- Maximize the benefit of tax-advantaged investment accounts: All thing being equal, you should start investing through a qualified or registered investment account. This means a Registered Retirement Saving Plan (RRSP), TFSA or RESP in Canada, or 401(k) or IRA in the US. These accounts let your money grow on a tax-deferred or tax-free basis.
- Understand the tax impact of different investment types: At some point, you may run out of contribution room in your tax-advantaged accounts and need to invest in a non-registered account. You need to choose the investment type that’ll result in the highest after-tax returns. For example, only half of capital gains are taxed in Canada, compared to the full amount if you earn interest on bonds.
To get started, consider the following options:
- Invest some time in understanding the different investment accounts and their tax advantages.
- Educate yourself on the various investment types and their returns (dividends, interest or capital gains)
- Depending on how complicated your situation is, consider working with a professional – a tax professional or investment advisor
- Adjust your investment portfolio to be more tax efficient. But consider the cost of making the changes against the tax savings. If you’re not sure it’s worth it, speak to a professional.
- Registered Retirement Savings Plan FAQs
- Beginner’s Guide to TFSA (How To Start Investing With TFSA)
- Best Investments For Non-Registered Accounts In Canada
Investing can be tough and filled with many unknowns.
But by focusing on the few things within your control, you’re more likely to stick to your plans and build wealth quicker, while sleeping soundly at night.
Did I miss anything you would like to add? Let me know in the comments section below.
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