Welcome to the Investing for Beginners Cheatsheet!
This guide summarizes advice from licensed financial advisors, helping you understand and implement academically-backed investment approaches. Whether you’re new to investing, have bought some stocks or ETFs, or are looking to refine your strategy, you’ll find valuable insights here.
Key sections for different investors:
- New to investing? Start from the beginning and read through each section.
- Already bought some stocks? Check out Why It’s Hard to Beat the Market and Should I invest in stocks or ETFs?
- Invested in various ETFs? See Which ETF should I start with? to learn about portfolio construction.
- Looking to expand your portfolio? Read Simple Start: Your First Investment Action Plan for guidance.
This guide aims to provide you with a solid understanding of academic research on effective investing. Armed with this knowledge, you’ll be better equipped to develop an investment strategy that aligns with your personal goals and risk tolerance, whether that involves a simple, diversified approach or a more active strategy.
For more comprehensive information, check out the resources at the end of this post. My YouTube channel demonstrates how to put these theories into practice.
Now let’s begin!
Table of Contents
Getting Started: Understanding Investing and Opening Your Account
Why Should I Invest and Is Investing Risky?
The Growth of the Global Economy
Investing is about getting in on the global economy’s growth. Technological leaps, increasing population, and inflation contribute to economic growth, which has been ongoing for decades.
Take a look at the graph below of the Vanguard Total World Stock Index Fund ETF. The ups and downs on the graph are part of the journey, but the overall direction is clear — upward.
And that’s where you want to be — growing with the economy.
Navigating Market Volatility
Investing in the stock market can feel risky, especially during market dips. Think of it like being the house in a casino. You don’t win every hand, but over time, you end up ahead.
A common concern is:
“What if the stock market drops the day I buy? I’m going to regret it so bad!”
This initial dip can feel discouraging, but 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 10% chance happens and you lose, was betting a mistake? No. Given a do-over, you’d take that bet again because playing those odds is how you win in the long run.
The market dipping on your first day is just today’s news. What matters is the big picture. It’s about the odds being tilted in your favor over time. Investing is a marathon, not a sprint. Short sprints can be wild, but it’s the marathon that gets you across the finish line.
To illustrate this, check out my video How I Handle Red Days: Investing in XEQT and VFV. In it, I discuss:
- How index investors view red days and stay invested during market downtrends.
- The blackjack analogy: Understanding that the stock market, over time, can work in your favor much like the house edge in a casino.
- Why focusing on the long-term growth of the global economy can help you stay calm during market volatility.
- How making good decisions doesn’t always reflect immediate positive results, but it’s the long-term process that matters.
Why It’s Hard to Beat the Market
When you’re new to investing, it might seem like you need to work hard studying companies and watching market trends to make good investments. But here’s a surprising truth: for most people, trying to beat the market is incredibly difficult and often counterproductive.
Here’s why:
- The Market is Like a Superhuman: Imagine the stock market as a super-smart robot that instantly knows and processes all publicly available information about every company. This ‘robot’ adjusts stock prices faster than any individual could.
- Collective Wisdom: The market price of a stock reflects the combined knowledge and expectations of millions of investors, including professionals who do this full-time.
- It’s Not Like Chess or Boxing: In sports or games, practice and study usually lead to better performance. But in investing, you’re not competing against other beginners – you’re up against the entire market, which is like starting a chess match against a grandmaster.
- Index Funds: The Good News: Instead of trying to outsmart the market, you can join it. Index funds and ETFs allow you to own a piece of the entire market, giving you instant diversification and market-level returns without needing to become an expert.
This is why many financial experts recommend index investing for beginners (and even for most experienced investors). It’s a way to harness the power of the entire market rather than trying to beat it.
Remember: Even most professional fund managers, with all their resources and expertise, struggle to consistently outperform the market over the long term.
Understanding Compounding in Investing
What is Compounding?
Compounding vs. Compound Interest
The Power of Early and Consistent Investing
Compounding in Different Investment Types
The Dividend Yield Misconception
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
Already have a Wealthsimple account? You might still be eligible for the referral bonus! Here’s what you need to know:
- If you signed up for a Wealthsimple Self-directed Investing, Crypto, Managed Investing, or Cash account within the last 30 days, you can still apply a referral code.
- To add the referral code:
- Sign into the Wealthsimple app on your mobile device
- Tap the gift icon at the top of the screen
- Tap “Invite friends”
- Enter the referral code: ZJE11W
- If you don’t see an ‘Enter referral code’ option, your account may have been open for longer than 30 days.
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:
- 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.
- 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.
For those who have already invested in individual stocks: While stock picking can be exciting, research shows that even professional fund managers struggle to consistently outperform the market. Consider gradually transitioning to a more diversified approach using ETFs, particularly all-in-one ETFs, which offer instant diversification and professional management.
Which ETF should I start with?
Asset Allocation ETFs, also known as All-in-Ones, are often recommended as one-stop solutions for many investors. However, the right choice depends on your specific situation:
- For long-term investing (like retirement savings for younger investors):
- A more aggressive allocation of 100% stocks (e.g., VEQT, XEQT, ZEQT) could be appropriate, regardless of time horizon.
- The focus here is on maximizing long-term growth rather than preserving a specific amount.
- For specific short to medium-term goals (like a house down payment):
- If you’re far from your goal: Consider being more aggressive (e.g., 100% stocks) to maximize growth. You don’t have a specific amount to preserve yet, so focus on the highest expected value strategy.
- As you get closer to your goal and have accumulated a significant portion of your target amount: Gradually shift to more conservative allocations to preserve your progress.
- Only when you’re very close to needing the money (within 5 years or so) should you consider more conservative options like VCIP or VCNS.
- General advice:
- The appropriate ETF depends more on your personal risk tolerance, financial goals, and how close you are to reaching those goals rather than arbitrary time frames.
- Regular reassessment of your portfolio allocation is important as your situation changes.
Important Note: For those who are close to retirement or already retired, your situation is more complex and beyond the scope of this beginner’s cheatsheet. We strongly recommend seeking advice from a qualified financial advisor to develop a strategy tailored to your specific needs and circumstances.
Remember, the difference between similar ETFs from different providers (like Vanguard’s VEQT vs iShares’ XEQT) is usually minimal. Don’t obsess over small differences – choosing any of them and starting to invest earlier is often more beneficial than delaying while trying to pick the ‘perfect’ fund.”
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.
How should I analyze an ETF?
When analyzing an ETF, it’s crucial to:
- Examine the underlying holdings: This helps you understand the level of diversification you’re getting.
- Be cautious of past performance: While it’s important to ensure the ETF tracks its stated indices, remember that past performance generally has minimal predictive value.
The main reason to invest in an ETF is to understand its holdings and how they align with your investment goals.
The following two videos are examples of how I approach ETF analysis:
Should I invest in dividend or growth stocks?
The division between dividend and growth stocks is a common topic among investors, but it’s important to understand this in the context of a total return approach, which is recommended for long-term investors.
Key points to consider:
- Diversification: As discussed earlier in this cheatsheet, diversification is crucial. A well-diversified portfolio will naturally include both dividend and growth stocks, as certain sectors of the market are typically dividend-payers.
- Sector Exposure: Dividend-paying stocks are often found in sectors such as Utilities, Consumer Staples, Financials, and Real Estate Investment Trusts (REITs). By diversifying across all sectors, you’ll inevitably have exposure to dividend stocks.
- Total Return Focus: Instead of focusing solely on dividends or growth, consider the total return of your investments. This includes both price appreciation and dividend income.
- Age and Investment Stage Myths: There’s a common misconception that younger investors should focus on growth stocks while older investors should prefer dividend stocks. This oversimplification can lead to investing mistakes. Your investment strategy should be based on your overall financial goals, risk tolerance, and total portfolio composition rather than age alone.
- Tax Considerations: Remember that dividends may be taxed differently than capital gains, which can affect your after-tax returns. This is another reason to consider total return rather than dividends in isolation.
- Reinvestment: Whether a company pays dividends or reinvests its profits for growth, what matters is how efficiently it uses its capital to generate returns for shareholders.
- Market Efficiency: Recall our discussion on market efficiency. In an efficient market, a company’s dividend policy shouldn’t affect its total return in the long run, assuming equal profitability.
Investors shouldn’t restrict themselves to one type of stock. Instead, focus on building a diversified portfolio aligned with your investment goals and risk tolerance. The choice between dividend and growth stocks should be part of a broader, well-thought-out investment strategy based on academic principles.
For a deeper dive into this topic, check out my 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?
This is a common concern, but it’s important to remember the principles we discussed earlier about market efficiency and positive expected returns.
These concepts explain why consistently investing in a globally diversified portfolio is generally more effective than trying to time the market. Remember, this applies to broad market investments, not individual stocks.”
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
- Asset: Anything of value or a resource of value that can be converted into cash.
- Bonds: A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
- Capital Gain: The profit from the sale of an asset or investment.
- Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
- Dividends: A portion of a company’s earnings, decided by the board of directors, paid to shareholders.
- 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.
- Index Fund: A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index.
- Liquidity: The ability to quickly convert an asset into cash without a significant loss in value.
- Mutual Fund: An investment program funded by shareholders that trades in diversified holdings and is professionally managed.
- Portfolio: A range of investments held by an individual or institution.
- Risk Tolerance: An investor’s ability or willingness to endure decline in the value of their investments.
- Stocks: A type of security that signifies proportionate ownership in the issuing corporation.
- Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.
- Market Volatility: The rate at which the price of a security increases or decreases for a given set of returns.
- Bear Market: A market condition where prices are falling or are expected to fall.
- Bull Market: A market condition where prices are rising or are expected to rise.
- Financial Advisor: A professional who suggests and renders financial services to clients based on their financial situation.
- Inflation: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
- 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.
- REIT (Real Estate Investment Trust): A company that owns, operates, or finances income-generating real estate.