Episode #21: Stock Market Investing For Beginners in Canada (3 things you NEED to understand)
Does your plan for saving for your future involve investing? If not, then you’re probably not doing it right, and you’re actually taking a really big risk of not ever meeting the savings requirements you need if you don’t plan to start investing your money. I know I know, the idea of investing can sound daunting, and scary, and way out of your league (if, like most people you feel like you’re still just working on managing your at home finances), but it’s a really important piece of the puzzle if you’re hoping to ever retire. Investing is a topic that, while scary, we should be learning about when we’re young, because that’s the best time for each and every one of us to start investing.
Today’s episode is not going to get into specifics of how to invest or market tactics, nothing technical at all really. I just want to walk you through the three basic concepts of stock market investing that you should be aware of before you decide to start investing, or before you write off the idea of investing all together. This is going to be a really quick and straightforward episode because if you’re new to the idea of investing I absolutely don’t want to overwhelm you with information and financial jargon. So, buckle up, turn off any distractions just for the next few minutes, and let’s go over the three things you need to understand about investing.
1. You need to start investing in order to retire comfortably.
Lesson 1 that you need to understand about investing in the stock market, is that it’s actually an integral piece of the puzzle to planning for your future and making sure that retirement you is taken care of properly. The term ‘saving for your future’, should really be replaced with ‘investing for your future’ because the two really go hand in hand. If you want to be able to look forward to a comfortable future, you need to start wrapping your head around the fact that you’ll have to invest your savings. When you take into account factors like inflation, and the relatively limited amount of money that people end up tucking away over the course of their lives, it’s really the only way to make sure that you have a good nest egg to take care of yourself in your future.
I’m going to use my grandparents here as an example. My grandparents retired just before they turned 60. Let’s say they started their careers at age 20. This means they had 40 working years in their life. They retired just before 60, and they’re in their mid 90’s now, that’s almost another 40 years that they’ve been retired for. Without even taking inflation into account (which in real life you have to) do you think they were saving 50% of their income for the entire span of their 40 working years, to pay for their next 40 years of retirement? No! Absolutely not, almost nobody does that. Are you saving 50% of your income from the time you’re 20 until the time you retire? No, that just doesn’t happen, and even if it did, you’d still end up without enough because inflation IS real and does need to be factored into the equation. The only way they were able to retire comfortably was to save a percentage of their income each year, way less than 50%, invest it safely, and let those investments grow over time so that their 40 years of retirement were funded by a large nest egg that has kept them very comfortable for decades.
So, even if the idea of investing scares the poop out of you right now, when you apply some cold hard logic to the problem, you’ll realize that just saving cash unfortunately isn’t going to get you very far these days. So, rule number 1 you need to understand about investing? It’s a necessary practice that you need to start in order to plan for your future. It’s not gambling, it’s not only for bankers, it’s not only for old men or for wealthy people. Everyone should be learning about this, and instead of ‘saving for our futures’, we should all be taught how to start ‘investing for our futures’.
2. Time is your most valuable resource because of compound interest.
The second thing you need to understand about investing is that time is your best friend when it comes to investing, because it allows you to take full advantage of the magical powers of compound interest. I recently asked you all on the How To Adult School Instagram account, what financial questions do you currently have that you wish you had been taught in school or at home? A lot of you answered with questions about when you should start saving and investing for your futures. The cut and dry answer is: you should start saving and investing today. If you’re not already doing this you should start today. The idea behind this is that the younger you are when you start saving and investing, the more your money will be able to do the work for you, and grow and grow, without you having to contribute as much to your savings accounts over time.
Realistically though there does need to be a bit of nuance to this. In my opinion, you need to be on solid footing with your personal at-home finances first. Make sure you’ve got your basic expenses taken care of, make sure you’ve got a fully funded emergency fund, and make sure you’ve paid off any high interest consumer debt that you may have. There are types of debt that you can pay off at the same time as investing, it’s just good to get that high interest debt out of the way first. Also, if you have an employer match at work, you should do everything you can to take advantage of that employer match because otherwise it’s free money that you’re burning by not using the program that your employer has set up.
The idea with the ‘start today’ answer to when you should start investing is because of this magical concept called compound interest. Compound interest is when your principal amount (that means the amount of money that you contributed to start with) earns interest. That interest is then added to the principal, and then you earn more interest on that amount, and then that earns interest and so on and so forth. When you run models on compound interest over long periods of time, for example 40 years, that compound interest all starts to add up, and quickly. The magical ingredient to this equation is time. The more time you have for your interest to compound, the larger and larger your principal amount will grow, and THIS is how people end up with millions of dollars of retirement savings, even if they never earned millions of dollars in their working lives.
I’m going to walk you through an example of how compound interest works in a retirement investment account. We’re going to use imaginary Suzie as an example here. Let’s say Suzie is 30 years old. She’s been working since she was 23, and through contributing to her retirement account over the last few years she’s grown that account to contain $100,000.00. Now let’s say Suzie never contributes another dollar to that account. Life gets in the way, she forgets about it, and never saves into it again. 30 years later, Suzie remembers the account, logs in, and is blown away by seeing that her $100,000.00, over the last 30 years, has grown into just shy of 1.5 million dollars. (This example is assuming a 9% rate of return, which is just below the average rate of return from the last 30 years.) This is what a lot of the baby boomer population experienced, but to an even greater scale because of high growth in the market. That’s how there’s so much wealth saved in that generation. Now, the assumption that we make through running examples like this is in the rate of return achieved by the stock market during that time. I’m not an investment advisor, but it’s always better to be conservative when you’re running numbers like this for your own life, I use a lower percentage when I look at my own numbers. Now, let’s look at the same example, but let’s say that Suzie starts investing later, so by the time she’s 40 she has $100,000.00 in her retirement account before she forgets about it. It still earns a 9% rate of return, and she still remembers it when she’s 60, so this time it’s grown for 20 years unattended, not 30 years. In that model, her account would be worth just shy of $700,000.00, less than half of the 1.5 million she earned over 30 years. This is how compound interest is the most valuable tool you can use when planning for your future, and this is why it’s best to start not only saving for retirement, but investing for retirement when you’re young. That money will work for you over the years, and the more time you give it, the better the return will be.
3. Investing in the stock market is NOT gambling if you use it properly.
So, now that you’ve wrapped your head around the importance of investing for your future AND the concept of how compound interest works to your advantage, the third and final point you need to understand about investing for your future is that using the stock market is NOT gambling, unless you use it like a gambler. Let me explain.
There are multiple ways you can invest in the stock market, and unfortunately the way you hear about most often (because it makes the most interesting stories and headlines) is called ‘speculating’. This is when a person picks stocks based on their own assessments, and tries to predict what that company and the corresponding stock will do. They then try to time their buying and selling of those stocks to try and outsmart the system and make more money. This is not the type of investing that I’m talking about here. This is gambling. There are of course, lots of studies on this method of investing, and they’ve all found that people who try to speculate and time the market, perform worse than a computer algorithm that randomly generates a decision pattern to speculate in the stock market. The key takeaway here is don’t do this when you’re investing, and if you’ve always been of the opinion that investing in the stock market is just like gambling, then you’ve probably been imagining this, which IS gambling.
The type of investing I’m talking about here relies on a long term buy and hold strategy, where you buy diversified offerings like mutual funds. I’m trying to keep this simple here, I don’t want to scare you off by getting deep into any investment jargon or strategy theory. The idea is that you don’t try to time the market, and you don’t try to outsmart the system. You simply invest your money using whatever strategy you decide on, and then you sit back, let that interest compound, and let it do the work for you, for decades. When you’re young, that’s where you want to start off, and avoid the temptation of getting lured into purchasing stocks that are trendy, or that your buddy told you about to get in on the ground floor. Things like the gamestop trend, or investing in start up cannabis companies are how people get burned and lose money in the stock market. Even if sometimes you win money, decades worth of statistics show that as a whole, compared to a simple buy and hold strategy, you lose money, and you can’t beat statistics even if you think you’re smarter than the system.
And that’s it! The three concepts you need to understand about investing in the stock market before you decide either to invest, or to write off the idea as a whole.
You need to invest in order to retire comfortably.
Start young and allow compound interest to work for you.
Investing is NOT gambling, unless you act like a gambler.
If you want to learn more I will be creating future episodes on this topic, but if you don’t want to wait I recommend picking up a copy of this book, the simple path to wealth, and learning a bit more about the theory of growing wealth using investments. I talked about this book in episode #17: The top 5 personal finance books I recommend reading for beginners, and this book is a good basic intro to investing.
Next, if you want to start investing but you still have to work on getting your financial ducks in a row first, I recommend signing up for the free 7 day mini finance course that’s currently offered by the How to Adult School. This course will help you set yourself up financially, so you can start to feel confident about working on larger financial goals like planning for your future.
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