How to Invest in Your 20s in Canada

As someone who is a financial educator, as well as someone who has been investing for about 13 or 14 years now, I want to share my top tips for how to invest in your 20s in Canada. But if you’re reading this and you’re in your 30s or 40s and are just getting started with investing, all this information can apply to you too.

Although I share some really helpful stuff in this blog post (and accompanying video), I do want to let you know (in case you don’t already know) that my Wealth Building Blueprint for Canadians course goes much more in-depth about almost everything you could possibly want to know about investing in Canada.

What Is Investing?

So you probably already know what investing means, right? It simply means buying an asset that will either increase in value, provide you with income, or both. You can do this by buying a number of different types of assets like real estate, gold or precious gems, art, wine, or baseball cards, but one of the most common ways of investing is through buying stocks and bonds (or stock and bond funds like mutual funds or ETFs), and that’s the type of investing we’re going to focus on.

How to Invest Like a Savvy Investor

Often when I get asked “How do I get started investing?” I know people are really just wanting me to tell them what stock or ETF to buy. And there are a ton of influencers out there that will do just that. Not me because honestly, it’s kind of irresponsible to do so when you don’t know any details about that person and their finances.

Since I’ve been a financial content creator for over a decade and have been training to become a CFP (and am very close to getting my QAFP soon), this is why I know that choosing stocks or ETFs to invest in is actually the last step you should be taking — not the first. If you want to be a savvy investor, here are the 4 steps you should be taking to get started with investing:

1. Create an investment plan
2. Choose an investment strategy
3. Decide how involved you want to be with your investments
4. Invest your money so it can grow

So let’s dive into what it means to build an investment plan.

1. Create an Investment Plan

An investment plan is your way of outlining what you want to happen with your money, accounting for some important criteria. A solid investment plan will include the following components:

• Setting investment goals
• Determining your time horizons for those goals
• Figuring the amount of money you need to save up to reach of those goals
• Assessing your risk tolerance
• Building a portfolio based on all of these factors

Here’s an example of what that could look like.

You have a goal of retiring one day. Retirement is your investment goal.

You are currently 25 but you want to retire by 65. 40 years is the length of time between now and your goal’s target date. 40 years is your time horizon.

You’ve tried out a few retirement calculators or worked with a financial planner and have determined that you need $2 million to retire comfortably by 65. $2 million is your goal’s amount.

You try out a few risk tolerance questionnaires to see what your comfort level is with taking on risk and experiencing volatility in your portfolio and you discover you have an aggressive risk tolerance. Aggressive is your current risk tolerance.

To recap, your goal is to retire in 40 years with $2 million and your risk tolerance is aggressive. Great! Now what?

Well, with all this information, and by using one of the many online investor questionnaires out there, you can then find out the optimal asset allocation for your portfolio (which means the proportion of stocks to bonds you should have in your portfolio) as well as how much you should invest each regularly to reach your goal by its target date.

For this example, based on this information, you’d likely want a portfolio that was 70/30 or 80/20 stocks and bonds. In terms of how much you should be contributing every month, assuming an 8% rate of return, you find that you need to invest $625/month for 40 years to reach your goal.

Now, just a note on this. If you’re in your 20s, $625/month to invest may seem impossible with all your other financial obligations. And honestly, most people don’t just invest the same amount every month for 40 years. Instead what they do is start with what they can afford and then as their income increases and they have more money to invest, they increase those contributions to play catch up.

When I first started investing, I could barely afford more than $200/month. Now that I’m in my late 30s, since my income has grown, I can now afford to increase my contributions to significantly more than that to make for all those years of lower contributions. So just remember, every time you get a raise or switch jobs for a higher salary, don’t forget to increase your investment contributions too.

2. Choose an Investment Strategy

Ok great, now you’ve got a plan, but it’s sort of useless if you don’t also choose an investment strategy. One big mistake I see people in their 20s make is they don’t have a strategy to follow and thus are all over the place with their investments. One day they are buying dividend stocks, the next they are selling them in favour of growth stocks, the next they are selling them to buy index funds.

This is not the way to go. You need a plan and a strategy to make things work. Now, when it comes to different investment strategies, they can be broken down into two main categories: passive investing and active investing. 

Active investing strategies are focused on actively buying and selling securities inside your portfolio to earn returns above what the overall stock and bond markets return, or to earn passive income, or both. There are a number of different sub-strategies within active investing as well, such as value investing, momentum investing, or dividend investing. So if this is the path you want to take, make sure to do your research first to see which is the best fit for you and what rules you need to follow.

Passive investing on the other hand is focused on matching market returns, not beating them, by way of investing in a portfolio of index funds (either index mutual funds or index ETFs). This strategy has been gaining steady popularity over the past decade, and the main reasons are that it’s really difficult to beat the market (just check out SPIVA for the data), passive investing takes hardly any management, and its fees are super low. This is why passive investing is often called couch potato investing or lazy investing. It’s easy to set up, automate, and will take you maybe only a few hours of your time each year.

And for these reasons, it’s been the investment strategy I’ve been following for years and teach inside my Wealth Building Blueprint for Canadians course. 

3. Decide How Involved You Want to Be with Your Investments

Ok, you’ve got a plan and a strategy, now let’s get to the how of investing, which ultimately comes down to how involved you want to be as an investor. 

I know most people would love nothing more to just hand over their investments for someone else to handle, but it’s important to remember a few things. First, going through an investment professional can come with some hefty fees and oftentimes wealth managers will only accept clients with a certain amount of money to invest like half a million dollars. I know you may be thinking “But what about advisors at the bank? They’re free aren’t they?” No, they aren’t. Although you don’t pay them a fee directly, their fees are embedded inside the often high-fee investment products they are selling you (like actively-managed mutual funds). These funds can often have fees as high as 2.5%, which may not seem like much, but over a lifetime of investing could even equal $1 million!

That’s why instead, if you’re just getting started in your 20s, two better routes you can take (in my opinion) are to either use a robo-advisor or to go self-directed by opening up an account with a discount brokerage and managing your investments on your own.

A robo-advisor is an online platform that helps you easily invest in a portfolio of index ETFs and allows you to pretty much automate everything. All you have to do is set up auto-contributions with your bank, and it handles the rest, such as investing your cash contributions and rebalancing your portfolio so it always stays at its target asset allocation. But of course, it’s not free either. To use a robo-advisor, you pay a management fee (typically 0.50%) plus the MERs of the ETFs inside the portfolio. In general, you’re looking at about 0.60-0.65% overall. Robo-advisors in Canada include Wealthsimple Invest, Justwealth, ModernAdvisor, Questwealth, BMO Smartfolio and RBC Investease just to name a few.

Alternatively, you can save that management fee and manage your portfolio yourself, but you will still have to pay the MERs of any ETFs you buy, and depending on what discount brokerage you use, you may also have to pay a fee every time you buy or sell a security. Still, this is one of the most cost-effective ways of investing. And if you did want to invest in ETFs, the main ETF providers in Canada include BMO ETFs, TD ETFs, Vanguard Canada, Blackrock Canada, and Global X Investments Canada (previously Horizons ETFs), 

Personally, I’ve been using Questrade for years and have had a great experience. Plus, they don’t charge commissions when you purchase ETFs, however they do charge a fee between $5-$10 if you want to sell. But since I rarely ever sell my ETFs, only when it’s necessary when rebalancing my portfolio, I haven’t found this to be an issue. But if you’d rather use one of the commission-free discount brokerages in Canada, you may want to consider Wealthsimple Trade, National Bank Direct, or Desjardins Online Brokerage.

4. Invest Your Money So It Can Grow

Well, we are at the final step. Start investing! Make your investment plan, choose an investment strategy, decide on how what route you want to take to invest (investment professional, robo-advisor, or self-directed), and then put a date in your calendar to get started.

But before you hit the go button, a few things to keep in mind:

• Before you start investing, make sure you have a fully funded emergency fund of at least 3 to 6 months of your living expenses first. You don’t want to be in a position where you have to liquidate your investments to pay for an emergency. You want to leave that money in there so it can actually grow.
• Along the same lines, if you have high-interest debt like credit card debt, pay that off first before investing. If you’re being charged 20% interest on your debt, tackle that first because it is highly unlikely you’ll be able to earn that type of return on your investments over the long term.
• Make a budget to find out how much you can afford to invest right now with all your other expenses. Even if it’s only $50/month, start with that! You can increase your contributions over time.
• If you’ve got a Group RRSP at work or a pension, make sure you’re participating in it. Your employers’ match is free money, so don’t leave it on the table!
• Build your investing confidence by continuing to educate yourself. Some of my favourite investing books by Canadians include Beat the Bank, Wealthing Like Rabbits, The Rule of 30, and Reboot Your Portfolio.
• And if you want more tools, resources, and a more in-depth guide on what to do to start investing as a Canadian, make sure to check out my Wealth Building Blueprint for Canadians course.