What are the best ways to invest your money in Canada?
Top 7 Ways To Invest Your Money
Investing your money in Canada has never been easier.
With such a wide range of investment options available, it can also be tough to know where to even begin!
Fortunately, investing your money doesn’t have to be an overly complicated experience. We’ve gathered this curated list of best ways to invest your money to help you navigate the Canadian investing landscape.
Before exploring these options in further detail, there’s an important caveat to remember: there is no such thing as a one-size-fits-all investment that is the best choice for every single Canadian.
In reality, every person comes from a unique set of circumstances, each with their own individual preferences and financial goals. These factors play an essential role in determining the best investment choice for your specific situation.
This means that the best way to invest your money is actually a customized answer rather than a single generic statement. Clearly, a retired 70 year old seeking to preserve their wealth will not want to invest in the same way as a 25 year old willing to take on additional risk to aggressively grow their savings.
Therefore, the first step is to understand your “investor profile” to determine the best way to invest for your specific needs.
Your Investor Profile
The first step is to determine your Investor Profile – where you stand on important questions that will help you figure out how to best invest your money.
By now, you should know that the best way to invest your money depends on your individual circumstances.
There are several key considerations that will shape how you should invest your money. The most important factors that make up your investor profile include the following:
- Your purpose
- Investment horizon
- Risk tolerance
- Time commitment
- Amount to invest
- Tax considerations
- High interest debt
Let’s explore each of these elements in greater detail.
Key Question: What are you looking to accomplish from investing?
The very first thing you should be clear about is your “why” to invest. What financial goals are you trying to reach? Are you saving up for retirement, a vacation, a car, a house, or other milestone?
Clearly identifying your why will go a long way in helping you determine the investment option that best aligns with your goals.
Key Question: How long are you planning to keep your money invested?
One of the most important investing considerations is the length of time you will be investing before requiring to withdraw from your investments.
The answer can range anywhere from “I need to be able to withdraw at any time” to “indefinitely”. Your answer here will follow as a direct result of your why.
Generally speaking, the longer your investment horizon, the more risk you can take in exchange for higher expected returns since you’ll have more time to weather short-term market downturns as a result of poor market timing.
Key Question: How much of your investment are you comfortable losing?
If you saw your investment lose 20% of its total value in any given year, how would that make you feel? What if it continued to drop to a loss of 30%? 40%? 50%?
Would you have the grit to stick it out, not panic sell, and hold the course for the long-term?
It’s crucial to understand the role that emotions play in investing. In fact, behavioral psychology is often one of the biggest potential obstacles that leads investors to deviate from their predetermined investing strategy.
If you feel constantly stressed and can’t sleep at night because your investments are performing poorly, that’s probably not the right investment for you! That’s why it’s essential to understand your level of risk aversion, and invest within your limits.
Unfortunately, it’s pretty difficult to get a true sense of your risk tolerance until you’ve been through a recession yourself. However, there are risk tolerance assessments that you can take to get a good estimate of where you stand.
Key Question: How much time do you have to dedicate to investing?
How much time and effort you’re willing to put into investing will impact the best way to invest your money.
If you’re someone with a very busy schedule, you might want to consider managed or automated investing options.
On the flip side, a do-it-yourself (DIY) approach might suit those who have the time and interest to control their own investment portfolio.
Amount to Invest
Key Question: How much money do you have to invest?
Your choice of investment can also depend on the amount of money you have available to invest.
For example, if you’re looking to invest in real estate, you could purchase a rental property and perhaps even put some renovations into it. If however you have limited funds to work with and want a more hands-off approach, perhaps a Real Estate Investment Trust (REIT) would be a better choice.
Key Question: What account types and investments minimize my tax liability?
A commonly overlooked consideration when deciding the best way to invest in Canada is how to minimize federal and provincial taxes.
This is especially important the higher your marginal tax rate is.
As Canadians, it’s important to take advantage of the tax-advantaged registered accounts that we have at our disposal, such as TFSAs and RRSPs, to minimize our tax burden from investments.
High Interest Debt
Key Question: Do you have high interest debt, such as outstanding credit card balances?
Paying off high interest debt is not what you might traditionally consider an “investment”, but it may in fact be the best thing you can do with your savings.
By paying down high interest debt, you are effectively securing a guaranteed rate of return, since you would have needed to pay that interest rate if it had not been paid off. This means that paying off credit cards can typically net you a ~20% return!
Generally speaking, I consider high interest debt to be anything over expected market returns (~8% annually). However, some people have higher or lower tolerances to the interest rates they pay. Most borrowing rates also fluctuate with the prime rate and Bank of Canada overnight rate.
The answer to these key questions form your investor profile. With that out of the way, we can now take a look at the best ways to invest your money in Canada.
Best Way to Invest Your Money in Canada
Now that you have a good sense of your investor profile, let’s explore each investment strategy in greater detail, when to consider the strategy, as well as the benefits and drawbacks of each investment option.
1. DIY Stock Investing
When people talk about investing, they are usually referring to investing in the stock market. Indeed, stocks and exchange-traded funds (ETFs) are among the most popular ways to invest your money.
Throughout history, the stock market has delivered an average annual return ranging from 7-9%. This is much higher than a savings account and other fixed-income options, at the cost of higher volatility and incurring market risk.
There are many different strategies you can choose when investing in the stock market. But before getting started with investing in stocks, you will need to choose an account type and an investment brokerage to invest with.
Choose your investment account type
Generally speaking, you will want to max out the contribution room in your registered accounts for tax benefits before contributing to a non-registered account.
Here is the recommended investment account type to choose in order of priority:
- Tax-Free First Home Savings Account (FHSA, if applicable) – the FHSA, which will be available later in 2023, combines both the benefits of the TFSA and RRSP. If you’re a first time home buyer and saving for a down payment on a house, you should prepare to max your FHSA first.
- Tax-Free Savings Account (TFSA) – TFSAs aren’t just meant for savings, and are one of the best places to park your investments. Generally speaking, max out your TFSA before your RRSP, especially if you expect your income to increase as you progress in your working career.
- Registered Retirement Savings Plan (RRSP) – Lastly, max out your RRSP contribution room. Note that because you don’t have to deduct your RRSP contributions in the same tax year that you contribute, it’s generally always better to contribute to an RRSP rather than a non-registered account if you can.
- Non-Registered Account – Finally, once you have maxed out all your registered accounts, you’re left with the non-registered option. Even with non-registered accounts, capital gains and dividend income from stocks are taxed much more favourably than regular income (such as employment income). For example, capital gains have a 50% inclusion rate (that is, only 50% of your investment profits are taxed at your marginal tax rate).
Choose your investment brokerage
Now that you have figured out what kind of account to open, the next step is to pick a brokerage platform to invest with.
You can always go with your bank’s investment brokerage, but there are cheaper online alternatives that charge much less in commissions and trading fees.
Some of the most popular online brokerages include Questrade, QTrade Direct Investing, and Wealthsimple. These online brokerages have excellent trading platforms, and are especially suitable for those with minimal funds and don’t want to break the bank from high commission and trading fees.
PLAN - PRICE
$0.01/share (min $4.95, max $9.95)
Free ETF purchases
$50 in free trades
QTRADE DIRECT INVESTING
$8.75 per trade
Up to $2,000 cashback + $50 bonus
Commission-free stock and ETF trades
Simple user interface
Ability to purchase fractional shares
Choose your stock investment strategy
Once you have set up an account at your investment brokerage of choice, it’s time to decide on the stock investing strategy that best fits with your investor profile.
Here are the best DIY stock investing strategies to consider when investing in the stock market:
1a. Index Investing
Index investing is a passive stock investing strategy where a portfolio of stocks is constructed to mimic the performance of the stock market as a whole. It is a tried and true investing strategy and is arguably one of the best ways to invest money for a majority of Canadians.
In practice, index investing involves purchasing exchange-traded funds (ETFs) that track the performance of a particular index or market sector. These ETFs have low management fees and expense ratios since they are not being actively managed like mutual funds. It also provides exposure to a broad range of stocks, which can help to reduce risk.
The great thing about index investing is that it is extremely practical to implement with all-in-one asset allocation ETFs, which allows you to efficiently perform this strategy with just a single ETF.
All-in-One ETFs provide global and diversified exposure with just a single fund. They are some of the most popular ETFs in Canada that strike a great balance between simplicity, cost, and returns. There are different options available based on your risk tolerance.
Crowd favourites include Vanguard’s All-Equity and Growth ETF Portfolios (VEQT and VGRO), as well as iShares’ Core Equity and Growth Portfolios (XEQT and XGRO).
To learn more about the all-in-one ETFs available for Canadians, see our Best All-in-One ETFs in Canada article.
Not only is index investing less time consuming and less complex than strategies like stock picking and market timing, but studies show that index investing frequently outperforms almost all other stock market strategies, such as picking individual stocks and buying mutual funds.
For the average Canadian with a busy schedule and limited time in the day, index investing offers perhaps the most ideal blend of simplicity, risk, and return.
Consider index investing when: Investing for the medium to long-term (e.g. retirement or saving up for a distant goal), you want a simple and effective way to invest your money, you want to take advantage of tax-sheltered accounts.
Avoid index investing if: You need the money soon and can’t afford to lose any portion of your savings, you are extremely risk averse, you want an even more automated approach to investing.
1b. Factor Investing
Factor investing is an alternative to index investing. It is an investment strategy that seeks to capture the returns associated with specific risk factors, such as market, value, size, investment, and profitability. This is done by constructing a portfolio of stocks that focus on these certain characteristics.
These risk factors have been shown to provide persistent excess risk-adjusted returns over time, beyond what can be explained by traditional asset pricing models. If you’re willing to spend some time reading the research and understanding the fundamentals, factor investing could be the investment option for you.
Without getting into the technical details here, you should understand that factor investing is quite similar to index investing, except that a factor investment portfolio has a tilt towards value stocks, small cap stocks, firms with conservative asset growth, and firms with higher operating profits.
While it sounds fancy, implementing factor investing for the DIY investor has lately become a lot more accessible, largely thanks to the research and work of Canadian portfolio manager Ben Felix.
The Ben Felix Model Portfolio is a practical factor investing portfolio created by Ben Felix, portfolio manager of PWL Capital. It was specifically designed for Canadians and offers a relatively simple approach for DIY investors to implement a factor portfolio.
Learn more about factor investing and how to beat market returns here.
Consider factor investing when: Investing for the medium to long-term (e.g. retirement or saving up for a distant goal), you want to take advantage of cutting edge research and earn higher risk-adjusted returns, you can manage an investment portfolio with numerous ETF holdings.
Avoid factor investing if: You don’t have the time, energy, or discipline to contribute and rebalance multiple ETFs, you have a small portfolio size (focus on increasing savings instead of adding complexity).
1c. Individual Stocks
Individual stock picking involves selecting and purchasing stocks of specific companies based on research and analysis. Two popular approaches to stock picking include fundamental analysis and technical analysis.
Fundamental analysis involves evaluating a company’s financial performance using key metrics and financial statements like the balance sheet, income statement, and cash flow statement. It can also involve calculating the company’s valuation using various valuation metrics to determine whether their stock is undervalued or overvalued.
Technical analysis is a method of evaluating stock charts to predict future price movements. The basic premise is that market trends usually repeat themselves because investors collectively tend to act in predictable ways. It is more of a short-term trading strategy compared to fundamental analysis. Therefore, technical analysis can be used in conjunction with fundamental analysis to make informed stock purchases.
It’s important to keep in mind that individual stock picking can be risky and can lead to large losses. You could invest in the next Apple… or the next Enron. If you’re making speculative investments, it’s advised to allocate only a small portion of your total investment that you are willing to lose.
Consider individual stock picking when: You’re willing to take on lots of added risk for higher potential returns, you have the time and commitment to research individual stocks, you have “fun money” that you can use for speculative investments.
Avoid individual stock picking if: You want a diversified portfolio and don’t want to take on uncompensated risk, you are new to investing, you don’t have the time or desire to manage a portfolio of individual stocks.
A robo-advisor is an investment platform that uses computer algorithms and technology, rather than human advisors, to manage your investment portfolio. The goal of a robo-advisor is to provide low-cost, automated investment management services to individuals who may not have the resources, knowledge, or desire to oversee their own portfolios.
The algorithms are coded into the software, which automatically invests and manages your money based on individual preferences. To understand your investor profile, robo-advisors typically ask a series of demographical and behavioural questions.
By far the greatest advantage of using robo-advisors is that you can automate the entire process with preauthorized contributions, meaning you spend next to no time maintaining the portfolio. This convenience comes at the cost of slightly higher management fees than DIY investing (but definitively lower than mutual fund fees).
As long as you have sufficient income and savings to maintain your contributions to the robo-advisor, you can leave it alone indefinitely and end up with a very healthy portfolio when you come back to it many years down the road.
Questwealth Portfolios are one of the best robo-advisor options available for Canadians. The management fees are on the lowest end of the spectrum (0.2-0.25%) and an account only requires a $1,000 deposit to get started.
Get $10,000 managed for free when you sign up with promo code wealthsavvy.
Consider robo-advisors when: You want a completely hands-off investment option with cheaper fees than mutual funds, you believe in the robo-advisor algorithms’ ability to intelligently invest your savings.
Avoid robo-advisors when: You want more customization and control over your investment portfolio, you want to pay the lowest fees possible.
3. Mutual Funds
Mutual funds are investment funds that are professionally managed by portfolio managers. Deposits into a mutual fund are pooled together with other investors, where the investment advisors in turn invest the funds into a mix of stocks, bonds, and money market investments.
You’ve probably heard of mutual funds, as they are one of the most popular investment options available for Canadians. The allure of mutual funds is simple – you leverage the skills of a professional portfolio manger to actively manage your money. However – and this is a big however – you pay for the cost of active management at a relatively high fee of ~1-2%.
Perhaps the biggest benefit of mutual funds, similar to robo-advisors, is that you can completely automate the investing process with automated contributions.
Furthermore, many employer savings and pension plans allow for automated contributions to an investment account – a common example being regular RRSP or pension contributions into a employer-sponsored retirement portfolio. These employer plans usually consist of a selection of mutual funds to choose from, and a fixed percentage out of every paycheque is invested.
If you have little time or desire to oversee your investments, perhaps the trade off of higher fees for peace of mind is worth it.
Consider mutual funds when: You want a completely hands-off investment option, you’re unfamiliar with investing and uncomfortable with the thought of managing your own investments, you have no time to oversee your investment portfolio yourself.
Avoid mutual funds when: You want to pay less in management fees, you believe that most mutual funds underperform a passive index investing approach.
4. Real Estate
One of the hot button topics in the personal finance space since the turn of this decade has been the Canadian housing market.
Indeed, since the pandemic in 2020, real estate prices have seen an unprecedented level of growth, followed by a cooling period for most of 2022 following the Bank of Canada’s interest rate hikes to combat inflation.
Regardless, with the Bank of Canada hitting pause on interest rate hikes, 2023 could be a great opportunity to explore real estate investing.
If your desire is to invest in rental properties, it is important to understand that such an endeavour is as much a business as it is an investment. You will have to manage tenants (or property managers), and work with a whole team of accountants, lawyers, mortgage agents/brokers, contractors… the list goes on.
There are a lot of barriers to physical real estate investing, including a decent learning curve, a large capital requirement, and a lot of time and dedication. However, a few can make it work very well, especially if they buy strategically. Examples include buying properties that cash flow, buying properties from motivated sellers, and buying properties that need cosmetic renovations.
A solid alternative for those who want exposure to the real estate asset class without having to invest in an entire property is to purchase a Real Estate Investment Trust (REIT).
Like traditional stocks, REITs are publicly traded companies that you can purchase in an investment account. These companies own and oversee the operations of income-producing real estate. REITs can focus on specific sectors, such as offices, stores, or apartments. It is a much more passive way to invest in the real estate asset class – all you have to do is buy shares of the REIT and let it sit in your investment portfolio.
Consider physical real estate investing when: You have time to treat real estate investing as a business, you have sufficient funds for a down payment, closing costs and renovations, you believe in the long-term appreciation of the Canadian housing market, you believe that real estate will outperform stocks.
Consider investing in REITs when: You don’t want the hassle of landlording and maintaining a property, you don’t want to put your eggs into one basket and want more diversification but still want exposure to the real estate asset class.
5. Guaranteed Investment Certificates (GICs)
Guaranteed Investment Certificates, or GICs, are some of the safest ways that you can invest your money in Canada.
GICs are a safe and secure way to grow your savings, as you are guaranteed a predetermined interest on your money invested. Your principal investment is also protected. They are issued by banks and financial institutions, and are insured by the Canadian Deposit Insurance Corporation (CDIC) for up to $100,000.
In exchange, you must hold the money for a fixed term, which typically ranges from as low as 30 days to 5 years. If you need to withdraw before the full duration, you may be required to pay penalty fees.
One of the nuances of GICs that many overlook is that the interest earned is taxed like regular income, rather than as capital gains. However, you can hold them in tax-advantaged accounts like TFSAs and RRSPs for tax savings.
GICs are a great way to make virtually risk free interest, which is a great choice when you need to preserve your money. Naturally, the trade off of GICs being guaranteed is that their rates of returns are lower than the expected return of more volatile investing strategies like investing in stocks.
A good scenario to use GICs is when saving up for bigger purchases in the short to medium term that you know you’ll be making. For example, if you are saving up to buy a car in 2 years and currently have $10,000 to save, then instead of simply putting the cash in your savings account, you can instead purchase a 2 year GIC to reap more interest.
Consider GICs when: Saving up for a purchase to be made in the near to medium term future, you want a fixed and guaranteed return on savings, you want to take advantage of high interest rate environment.
Avoid GICs for: Long-term savings, money that you know you will need to use soon, savings such as an emergency fund that you may need to liquidate in case of unexpected expenses.
6. High Interest Savings Account (HISA)
A High Interest Savings Account (HISA) is a simple and convenient way of earning interest on your savings.
While not often considered as investing in the traditional sense, the interest earned can be used to calculate a return on investment.
Unlike a GIC, the funds in a HISA can typically be withdrawn at any time without penalty. However, HISA interest rates can fluctuate, so the return on investment may not be as stable as that of a GIC.
Savings accounts are some of the most flexible investment vehicles. There is always a need to hold money that is easily accessible, whether it’s to pay for everyday expenses, save for an upcoming purchase, or to park your emergency fund. That’s why it lands on our list of best ways to invest your money in Canada.
Consider a HISA when: Saving up for the short-term, you need a place to hold your emergency fund, you need flexibility with the money.
Avoid HISA for: Long-term savings (inflation typically beats HISA interest rates).
Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions. They operate independently of a central bank or government through the use of decentralized systems like a blockchain.
You can buy cryptocurrencies directly or invest in a cryptocurrency ETF, which tracks the price of the underlying cryptocurrency. Two of the most popular cryptocurrencies that have ETFs are Bitcoin and Ethereum. That means that you can trade Bitcoin ETFs and Ethereum ETFs in your investment brokerage account rather than with a cryptocurrency exchange.
It is important to understand that cryptocurrencies are a highly speculative investment strategy, with frequent volatile swings in prices. As with any speculative investment, you can make astronomical returns or incur massive losses.
As such, these investments should be reserved for the least risk-averse investors, or for that small portion of your overall portfolio that you are willing to lose (your “fun” money).
Consider cryptocurrencies when: You have a high risk tolerance, you have “fun money” that you can use for speculative investments, you believe in the underlying technology behind cryptocurrencies.
Avoid cryptocurrencies if: You are risk averse, you don’t want to speculate, you don’t believe in the long-term viability of cryptocurrencies.
You Now Know The Best Ways To Invest Money in Canada
In this comprehensive guide, I have discussed quite a wide variety of investment strategies – all of which offer a different balance of risk, return, and time commitment.
All that’s left for you now is to make the best choice from the various investment strategies discussed based on your individual preferences and financial circumstances.
Hopefully, you now have a much better idea of some of the best ways to invest your money in Canada, and are equipped to make an informed decision that meets your own goals.