Are you new to investing and need some motivation to start? Well this is a very exciting time for you because your contributions have the power to exponentially increase your investable assets when you start. On top of that you have the wonderful tool of dollar cost averaging to smooth out your ride. Let me show you!
Here is an example of what we call a $100 monthly PAC (pre-authorized contribution). Check out the percentage increase in your investable assets as you start, highlighted in yellow:
Along with increased investable assets from monthly contributions, if you have invested those assets into securities (i.e. stocks, mutual funds, ETFs, etc.) you will experience the fluctuations of those securities which, hopefully, will mostly go up over a reasonable time frame. Because we know securities don’t go straight up, we can take advantage of pull backs with “dollar cost averaging”. Dollar cost averaging is simply the term used to describe the strategy of making regular incremental investments over a period of time as opposed to a one-off lump sum investment. The attractiveness of dollar cost averaging to a new investor is that it can help smooth out the roller-coaster ride of investing. It also helps remove the fear of “when should I invest” as there could always be issues in the market with politics, natural disasters etc. that could make investing look scary. Here is an illustration of dollar cost averaging:
Do you need more motivation to start contributing? Check out this graph showing the monthly savings needed to achieve $1 million at retirement. It is never too late to start, and the earlier the better as illustrated by the left-hand side of the chart showing you only need to contribute $310 per month if you start at age 20, compared to $14,149 per month if you start at the age of 60. If this isn’t motivation, I don’t know what is!
Ready to start but not sure how? Your first decision will be what account type to invest in. Account types include government-related registered accounts like TFSAs, RRSPs, RESPs, RDSPs etc., or non-registered accounts. The difference between registered and non-registered accounts is simply that registered accounts have a tax advantage. TFSAs grow completely tax free, while RRSPs, RESPs and RDSPs grow tax- deferred. Non-registered accounts are fully taxable, and are taxed depending on the type of securities the investor is investing in.
Your next step will be to determine what to invest in. This section deserves a blog on its own, as this depends on a variety of factors including risk tolerance, age, income, amount of investable assets, etc.