Investing 101: a 5-point ‘beginner’s guide’ to getting started
As an education member, you should already have a ‘vested interest’ in investing your money.
We’re talking about your pension of course.
Without investing those pension contributions, the savings bucket that OTPP and OMERS has wouldn’t go very far come retirement (as that money would decline in value over the years, thanks to inflation).
Investing, on the other hand, offers the power to stay ahead of the rising curve of inflation.
While investing your pension contributions is a job that’s left to professional fund managers (employed by OTPP/OMERS), the act of ‘investing’ is something all education members could and should be doing to save for all financial goals big and small.
If you’re finally ready to take the leap into the world of investing (and start growing your money)—here is your 5-point guide to getting started:
Point # 1: You actually don’t need a lot of money to start out with.
Contrary to popular belief, investing doesn’t require a ‘top of the pay grid’ kind of income level. In fact, it’s something you can do very early on in your career—starting with as little as $2 a day.
Not convinced? Keep reading.
For example, many Canadians buy two cups of coffee a day at $2 each ($4 a day in total). While you may spend more than that, for the sake of this example, we’ll assume this is your absolute ‘bare bones’ cup of java.
Now, take half that spend— and put the $2 in daily savings into an investment account.
Considering the average annual rate of return of the stock market over the last 10 years has been around 6% (after inflation), you will have saved/earned approximately:
- $745 after just one year of investing $2 in daily coffee savings
- $45,470 over the course of your education career (which is approximately 26 years according to OTPP)
All of that to say—don’t let money (or a seeming lack thereof) detract you from investing. Because where there is a will (to cut back on your daily coffee spend), there is a way.
Above numbers calculated using a compound interest calculator (with interest compounded monthly); assuming regular contributions of $14 a week ($2 x 7) and that the stock market maintains an average annual rate of return of 6% per year after inflation, compounded after the end of each month.
Point #2: Define your investment goals.
Thanks to your pension contributions, the bulk of your retirement income is covered. Now what about all other life events and goals between now and then?
- Getting married
- Buying/renovating a home
- Having kids; sending them to college/university
- March/summer break vacation savings
- Emergency fund (something you’ll be glad to have if suddenly faced with job action)
Of course, you can never predict how your life with play out from one school year to the next (let alone 5 to 10 years down the road). However, setting a few goals to begin with will at least reaffirm your own specific reasons for investing in the first place.
Point #3: Automate your investments.
Life as an education member is busy enough without having to add ‘remember to contribute to my investment account’ to your to-do list. That’s where pre-authorized contributions (PACs) enable you to take a ‘set it and forget it’ approach to investing (as contributions will automatically come out of your bank account).
With a PAC you can:
- Choose how much money you invest and how often (i.e. weekly, bi-weekly, monthly)
- Instantly modify contribution amounts or pause/stop contributions anytime
- Take advantage of an investment technique called Dollar Cost Averaging
Plus automating your investments will ensure that your contributions remain consistent—which is key for achieving your financial goals within your set timeline.
Educators Monitored Portfolios offer you genuine peace of mind when it comes to automating the investment process. Click here to learn more.
Point #4: Diversify your investments.
What this basically means is, don’t put all of your investment eggs in one basket.
Although it doesn’t guarantee against loss, diversifying minimizes overall risk by investing in different areas that would each react differently to the same market event (see ‘diverse sectors’ below for an example).
Here are a few things to consider when it comes to the diversification of your portfolio:
- Diverse asset types:You’ll want a mix of assets like stocks, corporate bonds, government bonds, real estate, and more. While some of these assets (such as government bonds) are considered low-risk, ‘low-risk’ also typically means lower returns. Stocks, on the other hand, are generally higher-risk, but have a tendency to produce larger returns.
- Diverse sectors:Not only should you have different types of assets, but they should also relate to different sectors of the economy. For example, loading up only on energy stocks means that you could be setting yourself up to take a big hit, should energy prices take a plunge.
- Diverse geography:As much as a diverse mix of asset types and sectors are essential for your portfolio, so is location, location, location. Because if those assets are all based in Canada, it won’t matter how diverse they are—when the Canadian economy experiences a downturn, your investments will be hit hard (hence why you should own a mix of assets from all over the world).
Point #5: Set your investments up for success by seeking out professional, educator-specific advice.
When it comes to investing, a good rule of thumb is to resist taking the ‘beginner’s luck’ approach (i.e. crossing your fingers and hoping for the best). Instead, reach out to one of our financial specialists—and one that happens to have a unique understanding of your world.
Since 1975, we’ve been helping education members achieve their investment goals.
Regardless of where you are on the pay grid or what your pension income is (or will be) in retirement—let us put all of that educator-specific experience to work for you and your investment portfolio.