I love talking about money with the kids, now young adults, I used to babysit who are in their 20s. I look at them and I see so many possibilities. If I knew at their ages what I know now, I would have started investing with my first job out of university. Mind you, investing in the early 2000s wasn’t nearly as easy as it is today. Now people have their choice of apps and financial institutions to choose from. Yet without guidance, investing can feel overwhelming when you’re starting out.
Here’s the thing: investing is one of the most effective ways to build long-term financial stability, and the earlier you start, the more time your money has to grow. Whether you’re a Millennial, Gen Z, Gen X, or even a Baby Boomer, investing is about creating opportunities for financial freedom for you and your family.
Why Start Investing Now?
Starting to invest can be intimidating, especially if you have other financial priorities. But the reality is: the earlier you start, the greater easier it is to grow your money.
The Power of Compound Interest
Compound interest is often called the “eighth wonder of the world,” —it’s money that makes money for you. Here’s how it works: when you invest, your initial deposit earns returns. Over time, those returns earn returns of their own, creating a snowball effect. The longer your money is invested, the bigger that snowball gets.
Let’s say you invest $100 a month starting at age 25, earning an average yearly return of 7%. By the time you’re 65, you’d have over $240,000. But if you waited until age 35 to start, the same monthly investment would grow to just $120,000. That’s the power of time—and starting now gives your money the maximum opportunity to grow.
Think of it like planting a tree. The sooner you plant it, the more time it has to get tall. Wait too long, and you miss out on its shade.
Beating Inflation
One of the biggest threats to your savings is inflation—the rise in prices over time that reduces your money’s value. Ten years ago, $100 could buy more than it does now. Imagine how much less it will buy in another decade.
Investing helps you keep up with inflation. Savings accounts might earn you less than 2% a year, while investments like stocks or mutual funds can provide higher returns. The stock market historically averages returns of 6–8% annually, which outpaces inflation. By investing your money instead of letting it sit, you’re giving it a chance to to grow faster than inflation.
Building Wealth for the Future
Investing early gives you head start when planning for your future. Think about what you want for yourself: owning a home, retiring comfortably, or having the flexibility to switch careers, being work optional earlier than what’s traditionally done. Investing helps make your dreams possible and gives you options. The earlier you start, the more time you have to build your nest egg. This also means you can take more calculated risks when you’re younger and shift to safer investments as you approach your goals.
Imagine having enough saved by your 30s for a down payment on your dream home. Or picture stepping into retirement knowing you have a steady income stream from your investments. Investing young is an important strategy to maximize the opportunity for your investments to compound. Remember, time is one of the most valuable assets you have as an investor—use it wisely.
Understanding Investment Options
There are a lot of options out there for investing. It can be overwhelming. So it’s helpful to understand the types of investment vehicles that are out there. Each type of investment has different risks, rewards, and levels of involvement.
How the Stock Market Started
The first formal stock market began in 1602 when the Dutch East India Company issued the first shares of stock. Merchants and traders began buying and selling “shares” in the company, allowing investors to buy partial ownership of the company. From there, the concept of buying and selling shares evolved and expanded across the globe. This paved the way for modern stock exchanges. The London Stock Exchange was established in 1698, while the New York Stock Exchange (NYSE) and Toronto Stock Exchange followed in 1792 and 1861 respectively. There are numerous stock markets around the world that became the backbone of economic growth.
Stocks
Stocks are one of the first things most people think of when they hear about “investing”. Stocks represent ownership in a company. When you buy a stock, you own a “share” in that company, making you a partial owner. If the business does well, the value of your stock may increase. Companies issue stocks as a way to raise money for growth, projects, or to expand their business, and in return, investors may benefit from:
- Dividends: Some companies share their profits with shareholders in the form of regular payments.
- Capital Gains: When the stock price increases, you can sell your shares at a profit.
Stocks offer potentially high returns. Historically, over the long term, the stock market has averaged annual returns of around 6–8%. However, you should know that stocks can be volatile, meaning their value can go up or down in the short term. Stock prices fluctuate based on a variety of factors—company performance, market conditions, and broader economic trends—which means you could lose money if the price drops. This makes them a higher-risk option, but one that can pay off if you’re investing long term.
Stock Summary:
- Profit sharing: Some stock pay share holders dividends in regular payment
- Higher returns: Historically, the stock market has produced returns greater than the rate of inflation
- Higher risk: Experience fluctuations in price
Exchange-Traded Funds (ETFs)
An ETF is like a basket of investments—such as stocks or bonds—that trade on the open stock market. ETFs typically track a specific market, sector, or asset class. Instead of picking individual stocks, an ETF lets you mix several investments into one package. An ETF might include stocks, bonds, commodities, or a mix of these.
For example, an ETF might track an entire stock market index like the S&P 500 (500 of the largest publicly traded companies in the US.). This diversification helps spread your risk since you’re not relying on the success of a single company. ETFs typically have lower fees than other options, and you can start with a small amount of money.
ETF Summary:
- Diversification: Your investment is spread across multiple assets, which reduces risk.
- Lower Fees: Most ETFs are passively managed (there is no fund manager buying and selling funds), so fees are lower.
- Flexibility: ETFs trade like stocks on exchanges, meaning you can buy or sell them at any time during market hours.
Mutual Funds
Mutual funds are similar to ETFs in that they pool money from multiple investors to invest in a range of assets like stocks or bonds. The difference is that mutual funds are managed by financial professionals who buy and sell investments on the investors’ behalf with the goal of maximizing the returns. This hands-on management is called active management. Some people like mutual funds because they like being able to have a professional manage their investments if they don’t have the time or knowledge to manage them on their own. However, mutual funds usually have higher fees, which can eat into your returns over time. If you value the expertise of a fund manager and are okay with paying a bit more for that service, then mutual funds may be something to consider.
Mutual Fund Summary
- Higher Fees: You pay for professional management.
- Less Transparency: You might not always know exactly which assets the fund holds.
- Less Trading Flexibility: Unlike ETFs, you can only trade mutual funds at the end of the trading day, when their value is calculated.
Real Estate Investment Trusts (REITs)
If you’ve ever wanted to invest in real estate but don’t have the money to buy property, REITs are worth considering. A REIT is a company that owns or operates real estate that generates income through rents like apartment buildings, shopping malls, or office spaces. When you invest in a REIT, you’re buying shares in that company, giving you indirect ownership of the properties.
REITs are attractive because they allow you to benefit from real estate without the headaches of being a landlord. Plus, they often pay out regular dividends, making them a good choice if you’re looking for investments with regular payouts.
REIT Summary:
- Real Estate: composed of income generating real estate
- Flexibility: Can be bought and sold like on exchanges like stocks
- Profit sharing: Some stock pay share holders dividends in regular payment
Cryptocurrencies
Cryptocurrencies like Bitcoin and Ethereum have been all over the news. These are digital currencies that operate on blockchain technology (a system where transactions and accounts are verified by the members in the blockchain – like a digital honour system) and are decentralised, meaning they’re not tied to a government or central bank.
While cryptocurrencies offer the potential for huge returns, they’re also very risky and unpredictable. Prices can swing wildly in a matter of hours. Approach this option with extreme caution. If you’re curious, consider starting with a very small amount of money that you’re willing to lose.
Cryptocurrency Summary:
- Risk: Very volatile and high risk
- Decentralized: Not tied to a government or central bank
Summary Table of Stocks, ETFs, Mutual Funds, REITs, and Cryptocurrencies
| Feature | Stocks | ETFs | Mutual Funds | REITs | Crypto |
|---|---|---|---|---|---|
| Ownership | Direct ownership in a company | Indirect ownership in a collection of assets | Indirect ownership in a managed portfolio | Indirect ownership in income-generating properties | Ownership of digital assets on blockchain technology |
| Management | Self-managed | Passively managed | Actively managed | Managed by real estate professionals | Decentralized, self-managed or exchange-managed |
| Fees | Minimal trading fees | Low fees | Higher fees | Medium fees and transaction costs | Low to medium (depending on trading platform) |
| Trading | During market hours | During market hours | End-of-day (value calculated at NAV) | During market hours | 24/7 real-time trading |
| Risk | Higher risk, higher potential returns | Diversified, medium risk | Medium risk, manage tries to reduce risk | Medium risk, linked to real estate market fluctuation | Very high risk, highly volatile and speculative |
Personally, I invest in almost all of these types of funds. Depending on your job or when you started investing you may have had access to different types of investments throughout your life. My mutual funds are tied the retirement accounts of my current and previous employers. Pension and group funds tend to skew toward traditional investments like mutual funds. If you work for a private company you may also have access to stock options, which are shares in the company that your work for.
What is a Financial Market?
A financial market is a place where people, companies, and governments exchange financial assets like stocks, bonds, and currencies. It’s where buyers and sellers come together to trade. These markets play a critical role in the economy. There are different types of financial markets, including:
- Stock Markets: Focused on trading shares of publicly-owned companies.
- Bond Markets: Where debt securities like government or corporate bonds are traded.
- Foreign Exchange Markets (Forex): Involves the trading of currencies.
- Commodities Markets: Trades physical goods like gold, oil, and agricultural products.
- Derivatives Markets: Deals with contracts that are based on the value of the assets they represent (e.g., futures, options).
What is a Financial Sector?
A sector is a specific part of the economy made up of businesses and industries that provide similar services. In financial terms, sectors categorize companies into groups so investors can understand what area businesses operate in. For example technology (e.g., Apple and Microsoft), healthcare (Pfizer and Johnson and Johnson), and energy (Atco or Cenovus). Investors use sectors to diversify their portfolios.
What is an Asset Class?
An asset class is a group of investments that share similar characteristics in terms of risk, return, and behaviour in the market. Each asset class has a distinct role in an investment portfolio. Common asset classes include:
- 1. Equities (Stocks)
- Represents ownership in a company.
- Potential for high returns but higher risk due to market volatility.
- Suitable for long-term growth.
- Bonds (Fixed Income)
- Loans made to a company or government in return for regular interest payments.
- Lower risk than stocks and provides steady returns.
- Often used to balance risk in a portfolio.
- Real Estate
- Physical property or investments in real estate companies or REITs (Real Estate Investment Trusts).
- Provides income (through rent) and long-term capital appreciation.
- Cash and Cash Equivalents
- Includes savings accounts, money market funds, or short-term treasury bills.
- Very low risk but also low returns. Provides liquidity in a portfolio.
- Commodities
- Physical goods like gold, silver, oil, coffee, or agricultural products.
- Acts as a hedge against inflation but carries unique risks tied to supply and demand.
- Alternative Assets
- Includes investments like private equity, hedge funds, or cryptocurrencies.
- Higher risk, potential for significant returns, but less traditional and often more complex.
Each asset class reacts differently to market conditions. For instance:
- Stocks might perform well during economic growth.
- Bonds tend to hold steady or perform better during recessions.
- Commodities like gold often rise during uncertainty, acting as a “safe haven.”
Investors often combine asset classes to create a balanced portfolio that aligns with their financial goals, time horizon, and risk tolerance. This way, if one class underperforms, others can help stabilize returns.
Summary Comparison
| Term | Definition | Examples |
|---|---|---|
| Financial Market | A platform for exchanging financial assets. | Stock Market, Bond Market, Forex, Commodities Market. |
| Sector | A specific part of the economy or grouping of companies with similar activities. | Technology, Healthcare, Energy, Consumer Discretionary, Financials. |
| Asset Class | A category of financial instruments with similar characteristics and behaviours. | Stocks, Bonds, Real Estate, Cash, Commodities, Alternatives (e.g., Cryptocurrencies, Hedge Funds). |
Conclusion
The world of investing may seem complicated at first, but the more you learn, the easier it will be to get started with building your investment strategy. Now that you’ve learned about some of the foundational concepts of investing like compound interest, the types of investments, and the types of markets in the next post we’ll take a look at how you can start creating your investing strategy.
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