Investing Basics: How to Grow Your Wealth

Why Investing Is Not Optional

If you have been following this course, you have learned to budget, save, and manage debt. These skills protect and organize the money you earn. But protecting money is not enough — you need to grow it.

Here is why: inflation. As you learned in the first lesson, the Bank of Canada targets 2% annual inflation. At 2% inflation, $100,000 in a savings account loses roughly $2,000 in purchasing power every year. Over 30 years, that $100,000 buys what $55,000 buys today — a 45% loss in real value, despite the account balance never declining.

Investing is the antidote. By putting your money to work in assets that grow faster than inflation, you preserve and increase your purchasing power over time. The difference between saving and investing is the difference between treading water and swimming forward.

The Power of Compound Interest

Compound interest is the single most important concept in personal finance. It is what makes investing transformative rather than merely incremental.

Simple interest earns returns only on your original investment. If you invest $10,000 at 7% simple interest, you earn $700 per year — $21,000 in total over 30 years.

Compound interest earns returns on your returns. The same $10,000 at 7% compounded annually becomes:

Your $10,000 grew to $76,123 — more than three times what simple interest would have produced. And you did nothing except leave it alone. Time is the essential ingredient: the same investment over 20 years produces $38,697, but giving it 10 more years nearly doubles the result to $76,123. This is why starting early, even with small amounts, matters more than starting with a large sum later.

Risk and Return: The Fundamental Trade-Off

Every investment involves a trade-off between risk and expected return:

Lower risk, lower expected return:

• Savings accounts (2-4%)
• GICs (3-5%)
• Government bonds (3-5%)

Moderate risk, moderate expected return:

• Corporate bonds (4-6%)
• Balanced portfolios (5-7%)
• Dividend stocks (5-8%)

Higher risk, higher expected return:

• Canadian stocks — TSX (7-10% historical average)
• US stocks — S&P 500 (9-11% historical average)
• International and emerging market stocks (7-11% historical average)

These are long-term averages. In any single year, stocks can lose 30% or more. The S&P 500 fell 34% in March 2020 before recovering. The TSX dropped over 40% during the 2008 financial crisis. Accepting this short-term volatility is the price of long-term growth.

Your Risk Tolerance

Your ideal asset allocation depends on two factors:

Risk capacity: Can you afford to lose money? If you need funds within 1-3 years (down payment, emergency), you cannot afford stock market risk. If your timeline is 20+ years (retirement), you can absorb temporary declines.

Risk tolerance: How do you feel about losses? Some people can watch their portfolio drop 30% and calmly continue investing. Others lose sleep at a 10% decline and sell in panic. Be honest with yourself — selling during a downturn is the single most destructive action an investor can take.

A practical starting allocation for a young Canadian with a 30-year horizon: 80-100% equities (stocks/ETFs), 0-20% bonds. As retirement approaches, gradually shift toward more bonds for stability.

Asset Classes Explained

Stocks (Equities)

When you buy a stock, you buy a tiny piece of a company. If the company grows and profits increase, your share becomes more valuable. Many companies also pay dividends — regular cash payments to shareholders. Canadian bank stocks, for example, have paid dividends for over 100 years.

Canadian investors can access stocks on the Toronto Stock Exchange (TSX) for Canadian companies and US exchanges (NYSE, NASDAQ) for American companies.

Bonds (Fixed Income)

When you buy a bond, you are lending money to a government or corporation. They promise to pay you interest (the coupon) and return your principal at maturity. Bonds are generally less volatile than stocks but offer lower returns.

Government of Canada bonds are among the safest investments in the world. Corporate bonds offer higher yields but carry the risk that the company may default.

Exchange-Traded Funds (ETFs)

ETFs are the most important investment innovation for individual investors. An ETF bundles hundreds or thousands of stocks or bonds into a single product that trades on the stock exchange like a regular stock.

Instead of buying shares of 500 individual companies, you buy one ETF that holds all of them. This provides instant diversification at extremely low cost. Canadian-listed ETFs can hold Canadian, US, and international investments.

Real Estate

You can invest in real estate directly (buying property) or indirectly through Real Estate Investment Trusts (REITs) that trade like stocks. Canadian REITs own and manage portfolios of properties — apartments, offices, malls, warehouses — and distribute rental income to investors.

How to Start Investing in Canada

Step 1: Choose an Account Type

Use registered accounts first for tax advantages:

• TFSA: All growth is tax-free. Best for most Canadians as a first investment account.
• RRSP: Contributions are tax-deductible, growth is tax-deferred. Best for higher earners.
• FHSA: Tax-deductible contributions with tax-free withdrawal for a home. Best for future homebuyers.

You will explore these in depth in the next lesson on investment options.

Step 2: Choose a Platform

Canadian online brokerages offer low-cost access to markets:

• Wealthsimple: No commissions on Canadian stocks and ETFs, sleek app, fractional shares. Best for beginners.
• Questrade: No commissions to buy ETFs, low cost for options and US stocks. Popular with self-directed investors.
• National Bank Direct Brokerage: No commissions on stocks and ETFs, backed by a Big Five bank.
• Interactive Brokers: Lowest margin rates, best for active and advanced investors.

For most beginners, Wealthsimple’s zero-commission platform is the easiest way to start.

Step 3: Choose Your Investments

For beginners, one all-in-one ETF is the simplest and most effective approach:

• XEQT (iShares Core Equity ETF Portfolio): 100% global equities — Canadian, US, international, and emerging markets in a single fund. Management fee: 0.20%.
• VEQT (Vanguard All-Equity ETF Portfolio): Very similar to XEQT with slightly different geographic weights. Management fee: 0.24%.
• XBAL (iShares Core Balanced ETF Portfolio): 60% equities, 40% bonds. For investors wanting less volatility.
• VBAL (Vanguard Balanced ETF Portfolio): Similar to XBAL.

Buying one of these ETFs inside a TFSA at Wealthsimple takes about 15 minutes and gives you instant exposure to thousands of companies across the globe.

Step 4: Invest Regularly

Set up automatic deposits (weekly, biweekly, or monthly) and buy your chosen ETF consistently. This practice — called dollar-cost averaging — means you buy more shares when prices are low and fewer when prices are high, smoothing out the impact of market volatility.

Investing from Canada in US Markets

Canadian investors can (and should) hold US investments for diversification. The US stock market is the largest in the world and includes companies like Apple, Microsoft, Amazon, and Google that dominate the global economy.

Withholding Tax

US dividends paid to Canadian investors are subject to a 15% withholding tax. The impact depends on your account type:

• RRSP: Exempt from US withholding tax under the Canada-US tax treaty. Ideal for US dividend-paying investments.
• TFSA: Subject to 15% withholding tax on US dividends (not recoverable). Less ideal for US dividend stocks but still good for growth-oriented US investments.
• Non-registered: Subject to 15% withholding tax, but you can claim a foreign tax credit on your Canadian return.

This tax consideration matters for account placement — hold US dividend stocks in your RRSP and growth-focused ETFs in your TFSA. You will explore this strategy in the investment options lesson, and for deeper cross-border considerations, see the cross-border investing guide.

Common Investing Mistakes to Avoid

Trying to time the market. Nobody consistently predicts market movements. Missing just the 10 best trading days over a 20-year period cuts your returns roughly in half. Stay invested.

Chasing past performance. Last year’s top-performing fund is rarely this year’s top performer. Invest in broad market indices, not yesterday’s winners.

Paying high fees. A mutual fund charging 2% per year may seem small, but over 30 years it consumes 40% of your potential returns compared to an ETF charging 0.2%. Canada has some of the highest mutual fund fees in the developed world — avoid bank-sold mutual funds and choose low-cost ETFs.

Checking too frequently. Watching your portfolio daily amplifies the emotional impact of normal fluctuations. Check monthly or quarterly, not daily.

Panic selling during downturns. Markets decline regularly — it is the expected behavior, not an emergency. Selling during a crash locks in losses. Investors who stayed invested through the 2020 crash saw full recovery within months.

Key Takeaways

• Investing is essential because inflation erodes the value of cash savings over time — even a 2% rate cuts purchasing power by 45% over 30 years.
• Compound interest turns small, consistent investments into large sums — $10,000 at 7% becomes $76,123 in 30 years with no additional contributions.
• Risk and return are directly linked. Longer time horizons allow you to accept more risk (equities) for higher expected returns.
• All-in-one ETFs (XEQT, VEQT) provide instant global diversification in a single purchase, with fees under 0.25%.
• Start with a TFSA at a zero-commission brokerage like Wealthsimple, buy one ETF, and invest regularly.
• US dividends in an RRSP are exempt from withholding tax — use account placement to minimize taxes.
• Avoid high-fee bank mutual funds, market timing, and panic selling during downturns.

In the next lesson, you will explore every major investment option available to Canadians in depth — TFSA, RRSP, RESP, FHSA, non-registered accounts, and specific ETF strategies.