DIY Investing: How to create your stock market portfolio

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To become a successful DIY investor, you’ll need to understand the accounts you can use and the financial products available to achieve your goals. In my opinion, this is the fun part of being a DIY investor! You’re in the driver’s seat and you have the freedom to choose what to invest in.

It’s important to do it right—or you could face hefty taxes or penalties. Find out which investment accounts are best for your financial goals and how to create your own investment portfolio.

Types of investment accounts

In Canada, there are a variety of investment accounts that you can open. They all provide different benefits, and eligibility requirements, along with various tax implications. Here’s a high-level overview of these accounts. You can do further research to learn more about how they work based on the links below. All these accounts will allow you to invest in mutual funds, index funds, ETFs, GICs and more (which we’ll cover in the next section).

Registered Retirement Savings Plan (RRSP)

A popular investment account is the RRSP, where Canadians can save their money towards retirement until age 71. The main draw is the amount that you contribute will help to reduce your taxable income. The RRSP contribution limit is 18% of your income from the previous year.

Tax-Free Savings Account (TFSA)

The beauty of the TFSA is that the money you invest, any growth on it, will be tax-free. Thus far, the lifetime contribution limit is $88,000, if you have been at least 18 years old since 2009 (when this account first became available). The contribution limit for 2023 is $6,500.

It also provides flexibility when withdrawing your money compared to the RRSP. Keep in mind that the amount you withdraw in a given year, you’ll have to wait until the following year on January 1st to contribute back that amount.

Non-registered account

Another option to invest your money is through a non-registered account, which means the income earned and capital gains will be taxable. Any contributions to this account aren’t tax deductible. The upside is that this type of account doesn’t have any contribution or withdrawal limits. This may be a good option for those who have maxed out their RRSP and/or TFSA.

Registered Education Savings Plan (RESP)

If you have kids, then you may want to save for their post-secondary education. With the Registered Education Savings Plan (RESP), you can contribute up to $50,000 per beneficiary. Plus, if you contribute a minimum of $2,500 per year, you can receive a 20% match (up to $500) thanks to the Canadian Education Savings Grant (CESG). Fortunately, any capital gains earned within the account are tax-free.

First Home Savings Account (FHSA)

Since April 1, 2023, this registered account allows aspiring homeowners to save up for their first home. You can contribute up to $8,000 per year, for a total lifetime contribution of $40,000. Some financial institutions have started offering FHSAs while others are expected to launch this year.

Keep it simple

If you’re new to investing, you may choose to open one or two accounts to keep things simple—instead of trying to juggle multiple accounts. Most Canadians already have a difficult choice choosing between contributing to their RRSP versus their TFSA. So, unless you’re already maximizing your existing investment accounts, or you’re looking to save up money for your children’s education or for a down payment on a home, then you may consider starting out with a TFSA and RRSP.

How to create your stock market portfolio

Now that you know what type of investment accounts to choose from, the next step is to assemble your portfolio. Here are some tips to help you decide how to invest your money in the stock market.

Consider a mix of stocks and bonds

When you’re investing in the stock market, you can purchase different types of assets such as stocks (shares of individual companies) and bonds (also called fixed income). Generally, having a mix of stocks and bonds can match your risk profile.

What are the types of investment products can you purchase?

  • Mutual funds – This type of investment contains a portfolio of asset classes such as stocks, bonds and other securities. Money is pooled together from individual investors, and a fund manager will manage the fund’s assets. It only trades once a day after the market closes. Beware of the fees as they can be expensive.
  • Index Funds – This is a portfolio of funds that is designed to mimic the performance of a certain financial market index, such as the S&P 500 and is not actively managed. They typically offer lower fees. 
  • Exchange-Traded Fund (ETF) – This is similar to a mutual fund, but the main difference is that it can be bought and sold on the stock exchange in the same manner as an individual stock, so the price can fluctuate. ETFs can be designed to track a particular commodity, sector or an index. Just like index funds, these fees are cost-effective.
  • Guaranteed Investment Certificate (GIC) – This is a safe investments as you’re guaranteed a fixed amount of income over a specified period of time and you won’t lose your principal investment. Although, you typically have to lock in your money for a certain period, so be sure that you don’t need to access it right away.

Diversify your stock market portfolio

When it comes to long-term investing, you’ll want to ensure that you have diversification in your portfolio. It basically means putting your eggs in many baskets. If you put all your eggs into one basket and that basket tanks, then you’ll lose all your hard-earned money.

Invest globally vs. locally

You can diversify your investments by expanding beyond Canada and branching out to the United States and international markets. With human nature, we tend to have a home-based bias, meaning that we like to invest in our home country.

Don’t get me wrong, Canada is a wonderful country but if you think about it, most of the companies are clustered around financial institutions, energy, basic materials, and telecommunications. By investing in developed and emerging international markets, you’ll get exposure to other countries and companies that have their own specialties.

Invest in many sectors vs. several sectors

What’s more, you’ll want to consider investing in many sectors or industries as opposed to handpicking a few. The reason is that perhaps AI could be the hottest sector this year, but next year, it could be the healthcare sector that is booming. You never know and it’s almost impossible to predict accurately year after year. So, why not save yourself the stress and just invest in all sectors?

The way I like to think of it is when you go to a buffet, are you going to eat one item for dinner? (unless you’re the type who likes to feast on the crab legs or sushi!). Or are you going to choose a little bit of everything? As DIY investors, the world is your oyster, so go ahead and indulge in everything!

Be cautious with risky and volatile stocks

It wasn’t too long ago when cryptocurrency, NFTs and meme stocks were the talk of the town. It seemed like everyone was jumping on the bandwagon as a way to get rich quickly and FOMO was rearing its ugly head. Now we’ve seen the fallout of numerous bankruptcies and a plethora of financial scams.

Nowadays, AI is all the hype. Only time will tell which companies will last. If you want to try your hand at selecting a few hot stocks, consider allocating a very small percentage to risky and volatile stocks as part of your overall investment portfolio. This way, you can still play around with your “fun money” but you can still sleep at night knowing you’re not putting all your eggs in one basket.

Even for seasoned investors like myself, I dabbled in some bitcoin ETF (which I ended up selling at a loss because it wasn’t worth my time and energy to go on a rollercoaster ride of volatility).

Also, be sure you understand the implications of day trading in your investment accounts. For example, the CRA may audit you and charge you with hefty taxes if they find you day trading with your TFSA.

Your path to financial success

Hopefully, you have a solid understanding of the investment accounts and products that are available to you.  Now you can choose the ones that are best suited for your financial goals. Do your research to create a portfolio based on your risk tolerance.

Having a diversified portfolio, with low-cost funds and a long-term focus is key to becoming a successful self-directed investor. Remember, you always have the opportunity to change your selections if you find they aren’t suitable for you. In the next article, I will show you how to choose and open a brokerage account.

About Sandy Yong

Sandy Yong is a personal finance writer, TEDx and Keynote Speaker, and the award-winning author of The Money Master. She's also an avid real estate investor owning several rental properties. Her work has been featured in a variety of platforms including MoneySense, TurboTax, and moneyGenius.

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