How to Beat 80% of Canadian Investors in Three Easy Steps
Do you find yourself constantly feeling behind your friends when it comes to money? Scared of investing in the stock market but also missing out on reaching your financial targets? If so, don't worry, as with a few strategic changes, you can easily surpass 80% of Canadians. By following these three straightforward steps, you'll put yourself on the path to financial stability and security.
Step 1: Start Early and Stay Committed
Starting early is crucial when it comes to reaching your financial goals. The earlier you begin investing, the more time your investments have to grow through the power of compound interest. A study by the Financial Planning Standards Council found that the average age for first-time investors in Canada was 35 years old. So if you’re able to start before 30 you’re already ahead of the game and can start reaping the benefits.
Staying committed to your investment strategy is also essential. In a report by the Canadian Securities Administrators, it was revealed that approximately 50% of individual investors sell their stocks within one year of buying them. By holding onto your investments for the long term (20 years+), you can avoid the pitfalls of market timing and take advantage of the stock market's upward trajectory over time.
Step 2: Invest in Low-Cost Index Funds
Gambling on individual stocks may seem like a quick way to make a fortune, but it's also the quick way to lose money. Instead, consider investing in a low-cost index fund. This type of investment tracks a market index, such as the S&P 500, and provides broad exposure to the stock market. By investing in an index fund, you'll avoid the high fees that come with actively managed funds and have a greater chance of matching the market's return.
A study by Dalbar, Inc. found that the average annual return for individual investors in the US stock market was about 4.5% from 1986 to 2015, which was lower than the average annual return of the S&P 500 index, which was about 11.8% over the same period. This highlights the importance of diversifying your investments and avoiding the temptation to try and time the market by picking individual stocks.
Step 3: Invest Consistently and Automatically
Investing regularly, rather than waiting for a large sum of money to become available, can help you reach your financial goals faster. By contributing a fixed amount of money regularly, you'll benefit from dollar-cost averaging and reduce the risk of timing the market. Additionally, by automating your investments, you'll ensure that you never miss a contribution and stay on track towards your goals.
To be in the 90th percentile in Canada for the age group of 65-69, you need over $900,000 in savings. If you started when you turn 30, starting with nothing, investing $250 bi-weekly, you would have $975,571 by the time you turned 65 . This assumes a 7% rate of return which is conservative considering the S&P 500 averaged 10% from 1960 - 2020, with a average inflation rate of 2.5%. This demonstrates the power of consistent and automatic investing, as well as the importance of starting early. However if you aren’t starting as early as you wish, it’s not the end of the world, you will just have to invest more per month to compensate. For example if you start 5 years later, instead of investing $250/biweekly if you invested $370/biweekly you would end up with with $978,010.
The Power of Compound Interest
Albert Einstein once famously said that compound interest was the eighth wonder of the world. This statement holds true, as the power of compound interest can work wonders for your investments. The earlier you start investing and the longer your money is invested, the more time it has to grow. A study by the Royal Bank of Canada found that Canadians who started investing in their 20s had nearly three times the net worth of those who started in their 30s by the time they reached their 60s. By starting early, you're giving your investments more time to grow, which can lead to a significantly larger nest egg by the time you reach retirement.
Conclusion
By following these three simple steps, you can get ahead of 80% of Canadian investors and put yourself on the path to financial stability and security. Starting early, investing in low-cost index funds, and investing regularly and automatically are the keys to achieving your financial goals. Don't wait to take action, as the earlier you start, the more time your investments have to grow and compound. Start your journey towards financial freedom today.
