Investing for Beginners Cheatsheet

This cheatsheet summarizes advice from licensed financial advisors, helping you get started on the right foot quickly. The content is primarily geared towards people looking to buy and hold long-term.

It’s important to note that there are common misconceptions in the investing that seem intuitive. You might need to clear your head of any pre-conceived ideas before grasping the best way to invest according to academic theory and studies.

To get more comprehensive information, I’ve included resources to check out at the end of this post.

My YouTube channel can be seen as a case study of someone putting academic theory and studies into practice.

Getting Started: Understanding Investing and Opening Your Account

Why Should I Invest and Is Investing Risky?

The Growth of the Global Economy

Investing? It’s about getting in on the global economy’s growth. Technological leaps, more people, and inflation make the economy grow. That growth? It’s been going on for years.

Take a peek at the graph below. It’s showing the Vanguard Total World Stock Index Fund ETF. Those ups and downs on the graph? They’re part of the journey. But the direction is clear — we’re going up.

And that’s where you want to be — going up with the economy.

Understanding Positive Expected Return

That ‘positive expected return’ you hear about? It’s like being the casino, not the gambler. You don’t win every hand, but you’re playing for the wins that count over time.

Now, let’s address a common concern.

“What if the stock market drops the day I buy? I’m going to regret it so bad!”

Navigating Market Volatility

Nobody’s throwing a party when their investment dips as soon as they buy. Totally get that. But here’s the thing:

A tough break on day one doesn’t spell disaster. It’s all about the odds. Say you’ve got a bet that’s 90% likely to win. You take it, right? But if that sneaky 10% comes through and you lose, was betting a mistake? Nope.

If you had a do-over, you’d take that bet again. Because playing those odds? That’s how you win in the long run. It’s the same with investing.

The market dipped on your first day? That’s just today’s news. What matters is the big picture. It’s those odds, tilted in your favor over time, that we’re after.

So when it comes to investing, think of it as a marathon, not a sprint. Short sprints can be wild, but it’s the marathon that’ll get you across the finish line.

What do I need to get started?

One key component is a brokerage account. Each of them has their own pros and cons (in fact I use 3!), but here are the most popular ones:

Questrade (create an account with this link to get $50):
https://questrade.com/?refid=615710143447880

Wealthsimple (create an account with this link to get $5 to $3000):
https://my.wealthsimple.com/app/public/trade-referral-signup?code=ZJE11W

Which type of account should I open first?

This question is going to require way more nuance than a short answer as the answer is going to differ depending on the individual.

However, for most people starting out, the answer is the TFSA because it is the most flexible (you can withdraw your money at anytime without triggering any tax events).

The main advantage of an RRSP is the deferral of taxes. You pay more taxes when you have a higher income, so if you assume you will make more money in the future, deferring taxes is more valuable to you later on.

Check out Ben Felix’s video How the Tax Free Savings Account Really Works to learn why you should lean towards being safer in a TFSA.

Buying My First Stock or ETF

Simple Start: Your First Investment Action Plan

The ideal investment strategy for beginning investors no longer a mystery, thanks to academic research. It revolves around two well-established principles:

  1. Market Efficiency: Generally, the market operates efficiently, suggesting that it’s prudent to behave as though accurately predicting stock performance is not feasible. Beginners, in particular, should be wary of seeking specific stock recommendations from public forums.
  2. Positive Market Returns: The expectation of positive returns from the global stock market holds true at any moment, underscoring that the most opportune time to invest is always now. Investing today is marginally better than waiting until tomorrow.

Consequently, the most effective approach for the majority is to cultivate a globally diversified portfolio and contribute to it on a regular basis.

This rationale informs my preference for XEQT, a globally diversified ETF. I make investments whenever feasible to harness the power of compounding growth.

In contrast, when considering individual stocks or narrowly focused investments, the clarity of positive market returns becomes murkier. Unlike the broad market, which tends to move upward over time, individual assets can be far more volatile and unpredictable. This uncertainty reinforces the value of a diversified approach, as it mitigates the risk of trying to pinpoint the ‘right’ time to invest in a single stock or sector, where the expected return isn’t as well-defined.

Should I invest in stocks or ETFs?

In the 2023 paper Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks (Bessembinder, Chen, Choi, Wei), the authors found that the wealth created by stock market investing is largely attributable to large positive outcomes for a relatively small number of stocks.

For the time period between January 1990 and December 2020, the best performing 0.25% of companies accounted for half of global net wealth creation, while the best performing 2.39% of companies accounted for all net global wealth creation.

It’s been shown that it is even hard for experts to identify these companies ahead of time which is why global diversification (having exposure to a lot of the market) is recommended for most people (non-beginners too!).

The worst scenario is when a lot of beginners copy individual stocks recommended by social media influencers. TTCF is one of those stocks.

Start with a solid ETF and expand further if you wish. Too many beginners make the mistake of doing it the other way. They often mimic 15-20 stocks they’ve heard about from various sources, leading to a situation where they hold assets they lack a comprehensive understanding of.

Which ETF should I start with?

Asset Allocation ETFs otherwise known as All-in-Ones are one-stop solutions recommended by licensed financial advisors.

If you’re looking to invest money for your retirement and beyond, then new research would suggest being 100% stocks. That would make VEQT, XEQT and ZEQT the All-in-Ones you would target.

Please remember that the difference between similar ETFs from different brokers will perform about the same, so do not obsess about the differences. Flipping a coin and investing earlier is likely the better move.

Now for money that might need to be preserved (for example, a down payment for a future home), then the ideal All-in-One will depend on the time frame.

Justin Bender has an excellent resource for you to figure out which specific ETF is right for a specific time frame: How to Choose Your Asset Allocation ETF.

I’ve put together the key info below.

As a rule of thumb, you shouldn’t invest in any asset allocation ETF if you require the cash in less than 5 years.

If you need the cash in 5 to 9 years, VCIP and VCNS should be the only asset allocation ETFs on your radar.

If you won’t need the cash for 10 to 11 years, VBAL could be an appropriate choice.

If you don’t need the cash for 12 to 14 years, you could look at a more aggressive ETF, like VGRO.

And if you’re investing for 15 years or more (and you’re comfortable dialing up your portfolio risk to eleven out of ten), VEQT might be right up your alley.

I have a video that can serve as a starting point: The Best Start for Beginning Investors in 2023.

What about VFV, HYLD, XEG, HMAX and TEC?

If you are starting out and asking others for ETF suggestions, you will often be given a lot to choose from. Many of these will be recommended because of their strong recent performance. However, it’s important to remember that market conditions change constantly, and how an ETF performed in the last 2-3 years might not be a reliable indicator of its future performance.

In my video, “Why I Don’t Have VFV | XEQT vs. VFV”, I dive into this topic, particularly focusing on the comparison between VFV and XEQT. I discuss why, despite VFV’s strong performance in the U.S. market, a diversified approach like that offered by XEQT might be more advantageous in the long run. This video will help clarify why broader diversification, as opposed to focusing on a few high-performing ETFs, is crucial for a balanced portfolio.

That’s why starting out with an All-in-One ETF that covers all the bases is such a great idea. These ETFs are globally diversified and have exposure to many sectors, making them a robust choice for beginners. For example, XEQT holds close to 9,700 stocks from around the world, while VFV focuses on around 500 U.S. companies.

I’ve seen beginners have over 20 ETFs, including an All-in-One, because they are scared they are missing out on a key part of their portfolio. However, an All-in-One ETF can often be a comprehensive solution, simplifying your investment strategy while still ensuring wide exposure to the market.

Remember, investment strategies can vary greatly, and it’s important to reflect on your decisions and adapt as you gain more experience. Different approaches can coexist, much like different strategies in games like chess and poker.

Should I invest in dividend or growth stocks?

The division of dividend and growth stocks is an exercise that people commonly like to do, but for a long-term investor, it is recommended to be a total return investor.

Investors shouldn’t restrict themselves to one type of stock. I see no reason to classify yourself as a dividend or growth investor.

I did some research in this video: ChatGPT & Me On Dividends Vs. Growth.

When is the right time to buy?

In the Why Should I Invest and Is Investing Risky? section, we discussed the positive expected returns of a globally diversified strategy at any given time. This idea supports the wisdom of two investment adages:

“Time in the market is better than timing the market.”

“The best time to invest was yesterday, the next best time is now.”

Research suggests that to maximize returns on average, investing as soon as possible in a diversified strategy is ideal. But if optimizing for the best average return isn’t your sole objective, consider the two common approaches for deploying funds discussed next.

What is lump sum and DCA (Dollar-Cost-Averaging)?

Lump Sum: This approach involves investing a significant amount of money in one transaction. It is ideal for large sums, such as inheritances, aiming for immediate market exposure and long-term growth.

Dollar-Cost Averaging (DCA): This strategy involves investing fixed amounts regularly, regardless of the market price. It helps reduce the impact of market volatility and is particularly suitable for regular income investments, like portions of a paycheck.

Should I lump sum or DCA?

This decision is crucial when you have a significant amount of money that hasn’t been invested yet, often due to a windfall or a break from investing.

For investments from regular paychecks, the choice between investing it all at once or spreading it out over a few days usually doesn’t make a significant difference.

It’s important for investments where you anticipate a positive return. Beginners are advised to be cautious with individual stocks due to their unpredictability.

Research from Vanguard and PWL Capital indicates that for diversified portfolios, lump sum investment tends to outperform DCA over the long term.

Lump sum investing is generally preferable for long-term investment goals. DCA might be better suited for those who prefer lower volatility and a more gradual investment approach.

Frequently Asked Questions

Should I avoid withholding tax completely? I keep hearing about VFV and VOO.

Most beginners hear about 15% withholding tax and greatly overestimate its impact especially when they are starting out.

The 15% only applies to dividends, so if you have a Canadian-listed ETF that gives out 2% in dividends, you are paying 15% * 2 = 0.30% in tax.

To try to eliminate this cost, you would have to hold a US-listed ETF in your RRSP instead. The common example is holding VOO instead of VFV in your RRSP.

However, there are currency costs and delay costs that do not make it clear if it is even worth the retail investor to do. You might also end up with a poorly allocated portfolio because you are basing your stock/ETF selection on one metric.

That’s why in his video on Asset Location, Ben Felix thinks just having the same asset mix across all accounts is going to be more than fine.

This explains why I have 100% XEQT in my TFSA, RRSP, RESP and FHSA.

Everyone is saying how the market is going to go down. Should I wait or keep investing regularly?

“Time in the market beats timing the market” is an often cited phrase because research indicates that over time, maintaining a consistent investment strategy has, on average, yielded better results than holding cash on the sidelines.

This is because of how unpredictable it is to figure out the next big crash. By sitting on the sidelines, you might miss out on the best days of the market.

It is important to stress that the phrase applies to the market as a whole and not individual stocks.

The reason that you can confidently invest in a globally diversified ETF on a regular basis is because there is reason to believe that the global market has a positive expected return.

Put simply, odds are strong that the $25 you invest today will be worth more in the future regardless of any scary news from the media.

The common mistake is applying this logic to individual stocks. You cannot be as confident that investing $25 in a company will yield long-term results. Many companies go bankrupt.

Other Resources

What are resources that you recommend?

Licensed professionals on YouTube:

Content creators on YouTube with an evidence-based approach:

Glossary of Investment Terms

  1. Asset: Anything of value or a resource of value that can be converted into cash.
  2. Bonds: A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
  3. Capital Gain: The profit from the sale of an asset or investment.
  4. Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
  5. Dividends: A portion of a company’s earnings, decided by the board of directors, paid to shareholders.
  6. ETF (Exchange-Traded Fund): A type of security that tracks an index, sector, commodity, or other asset, but can be bought and sold on a stock exchange the same as a regular stock.
  7. Index Fund: A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index.
  8. Liquidity: The ability to quickly convert an asset into cash without a significant loss in value.
  9. Mutual Fund: An investment program funded by shareholders that trades in diversified holdings and is professionally managed.
  10. Portfolio: A range of investments held by an individual or institution.
  11. Risk Tolerance: An investor’s ability or willingness to endure decline in the value of their investments.
  12. Stocks: A type of security that signifies proportionate ownership in the issuing corporation.
  13. Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.
  14. Market Volatility: The rate at which the price of a security increases or decreases for a given set of returns.
  15. Bear Market: A market condition where prices are falling or are expected to fall.
  16. Bull Market: A market condition where prices are rising or are expected to rise.
  17. Financial Advisor: A professional who suggests and renders financial services to clients based on their financial situation.
  18. Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
  19. Asset Allocation: An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.
  20. REIT (Real Estate Investment Trust): A company that owns, operates, or finances income-generating real estate.