When you first start investing, you may have a lot of questions. Most importantly, how should you get started, and what stocks should you buy?
Investors who start with only a small amount of money, say $500, may be wondering what the best course of action is to take.
Should you buy just one stock and forgo diversification for now? Or perhaps you want to buy a specific sector ETF such as cannabis if you think the stocks in that industry might boom.
Whatever you decide to do, much of that will be based on what your financial plan is. So if you are starting with $500 today and plan to add $500 a month of savings, you may want to choose a different path than someone who might only save $500 every six months.
That’s why it’s crucial that you have a long-term investing and financial plan before you start your investment journey. Once you have a rough idea of what you want to do and how you plan to do it, then you can start to buy investments.
New to investing? Consider these assets
As I said before, diversification is one of the most important factors in investing. That’s why if you’re just starting out and have a relatively small amount of money, that will make diversification difficult.
If you find yourself in this position, one of the top investments recommended is an index ETF. One of the most popular among Canadian investors is the iShares TSX/S&P 60 Index ETF.
Owning an index ETF is attractive for several reasons, the chief being diversification. The fund consists of the 60 biggest stocks on the TSX, representing all 10 sectors.
Index investing is extremely simple: just save your money and continue to buy the funds throughout the years. You don’t even have to worry about the timing of your investments. Statistically, that’s proven to be less efficient than just investing the money as soon as you have saved it and holding for the long-term.
Because it’s so simple, it’s a strategy that Warren Buffett recommends for almost every retail investor.
Minimize your risk
The entire point of diversification is to minimize your risk without impacting your return potential. And although buying an index fund of 60 stocks is a good start, you’re still going to need more diversification at some point. Right now, although you have exposure to 60 different stocks, all of them are Canadian stocks.
While some may have operations worldwide, for the most part, you’re exposing yourself heavily to the Canadian economy. So as you start to add more cash to your investing account, you may want to consider a U.S ETF or perhaps even an emerging market fund.
This way, if the Canadian economy is impacted for some reason, like the oil shock in 2015, your entire portfolio won’t be affected.
When you first start to save and finally start investing, it can seem a bit intimidating. However, these days there are several tools to help make it extremely easy for new investors to get the feet wet.
When it comes to investing, one of the most important factors is the time you give your money to compound. So it’s crucial that when you’re ready to start, you begin immediately. Don’t be cautious or reckless. However, don’t wait on the sidelines too long, either.
If you do decide you want to buy individual stocks alongside an index fund, here are three high-potential growth stocks ready to take off...
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.