Congratulations on considering the best way to invest your money in Canada. Investment is one of the best vehicles to attain financial freedom.
While Canada is a favourite destination for investors of all risk profiles, not all investments provide the same return.
How much return you get from an investment depends on how you invest. This begs the question: what’s the “best way to invest money in Canada?”
It may seem challenging to answer this question considering Investors varying risk profiles and investment objectives.
However, certain factors determine the best way to invest money in Canada for each investor. That’s exactly what this article covers.
If you’re a beginner investor wondering the best way to invest your money in Canada, this post got you covered.
Continue reading to explore the best investment options in Canada and how to invest in one that suits your investment objective and risk tolerance.
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Why Invest in Canada?
Whether you’re a citizen or a permanent Canadian resident, knowing the benefits of investing in Canada is essential.
Due to its booming economy and growing population, Canada is one of the favourite destinations for investors worldwide.
The standard of living, government benefits and infrastructural development make Canada an ideal destination to live, work and retire.
Investing in Canada provides you with an opportunity of attaining financial freedom without regard to inflation or economic downturn.
Furthermore, investing in Canada helps you achieve recurring returns in the long run. This makes it possible to grow your capital and achieve financial security.
Overall, investing in Canada is the way to go if you’re concerned about your and your family’s long-term financial security.
Determining the Best Way to Invest Money in Canada
Not all investments are suitable for all investors. Each investor has a unique situation making it essential to know the investment that suits your condition.
Here are four questions to ask yourself when determining the best way to invest your money in Canada:
1. What is Your Investment Objective?
Your investment objective is the reason behind your investing. Different investment accounts suit different investment objectives.
So identifying your investment objective is the first step in determining the best way to invest money in Canada.
From retirement planning, education funding to mortgage down payment – there are different investment objectives out there.
Thus, there’s an investment vehicle for you regardless of your investment objective.
2. What is Your Budget?
The next thing to consider after determining your investment objective is your budget. How much return you get from an investment depends on how much you invest.
Consider the duration you aim to invest when setting your investment budget. This will help you stay committed to your investment objective.
Depending on your financial situation, you may want to budget for short-term or long-term investment vehicles.
A short-term investment vehicle is ideal if you don’t have enough savings to cover emergency expenses. However, you can consider a long-term investment vehicle if you have an emergency fund.
3. What is Your Risk Tolerance?
No investment is risk-free. Your risk tolerance determines how much you can invest, on which investment and for how long.
So knowing your risk tolerance level is key to determining the best way to invest money in Canada.
Different investment vehicles have different risk levels. Investing in the wrong investment vehicle means taking more or less than the risk you can handle.
In investing, the higher the risk, the higher the return. However, not all high-risk investments provide high returns.
The following is a highlight of the major investment vehicles and their varying risk levels:
| Investment Vehicle | Risk Level |
| GICs | Extremely Low |
| Bonds | Low |
| Mutual Funds | Low to Medium |
| ETFs | Low to Medium |
| Stocks | Medium to High |
| Cryptocurrency | High |
That said, a financial advisor can help you determine your risk tolerance. You can also use Vanguard’s Investor Questionnaire or other online risk survey sites to know your risk tolerance level.
4. How Do You Want to Invest?
There’s no one way to invest in Canada. That’s why we have the question: “what is the best way to invest money in Canada?”
There are two major methods of investing in Canada: active and passive investing.
- Active investing refers to actively managing a portfolio to beat a benchmark through a fund manager. You can manage your portfolio yourself or have it managed by a portfolio manager. However, active investing has higher fees and is suitable for short-term investment objectives.
- Passive investing refers to buying an entire stock market with low fees. Passive investing usually has average returns and is suitable for long-term investment.
The question is, which do you choose: active or passive investing? Most experts recommend passive investing due to their better performance than active investing.
Even though active investing can perform better in the short-term period, they are unreliable for long-term investing.
Best Ways to Invest Money in Canada
After determining the suitable investing method, it’s time to know the best investment vehicle to invest in. This brings us to the best ways to invest money in Canada.
Frankly speaking, there’s no one best way to invest money in Canada. This is due to investors’ varying investment objectives and risk profiles.
However, you can’t make a wrong choice with any of the following investment vehicles once it suits your investment objective and risk tolerance.
1. Stocks
- Average annual return = 9-10%
- Risk level = Medium to high
Stocks are popular investment vehicles with medium to high-risk levels.
With stocks, you will get broader exposure and high returns in addition to holding a share of the world’s popular brand.
However, investing in the right stocks is essential to avoid putting your money in a risky investment vehicle.
Preferably, investing in stocks should not be your option if you have low investment risk tolerance.
2. ETFs
- Average annual return = 6-7%
- Risk level = Low to medium
ETFs stand for Exchange-Traded Funds. They are ideal for investors with low to medium risk tolerance looking to build a diversified portfolio.
With the best ETF, you can invest your money in stocks, commodities, bonds and other securities in one portfolio.
That said, ETFs are low-cost investment alternatives as they allow you to invest in different securities without investing in all of them. This minimizes your risk amidst the failure of a single or few assets.
Wealthsimple Trade is one of the best brokers for investing in an ETF in Canada. It allows you to buy and sell ETFs without commission. This helps you save more on fees.
3. Mutual Funds
- Average annual return = 6-7% without fees. Lower with fees.
- Risk level = Low to medium
A mutual fund is a collection of different stocks and bonds under one portfolio.
Mutual fund managers incorporate all the investment assets into shares and invest them according to different risk tolerance levels and investment objectives.
That said, mutual fund shareholders earn money when shocks and bonds generate dividends and interest.
RECOMMENDED: Best Mutual Funds in Canada
4. GICs
- Average annual return = 2% or less
- Risk level = Extremely low
GICs stand for Guaranteed Investment Certificates. As the name implies, GICs offer a guaranteed return on your investment upon maturity.
While they have a low return, the “guarantee” of investment return makes GICs extremely low risk compared to other assets.
All you need is to invest your money in a GIC account and wait till a particular period. GICs investment terms vary by provider. However, a 1-5 year period is the common GICs term in Canada.
Furthermore, GICs are so flexible. You can invest in RRSP, RRIF, TFS or RESP.
5. Bonds
- Average annual return = 2.7%
- Risk level = Low
Governments and companies issue bonds when looking for money in exchange for a periodic or fixed interest payment.
Lending money to a government or company is one of the guaranteed ways to earn a return from your investment in Canada.
While the returns may be low, bonds are one of the safe investment vehicles due to their low-risk levels.
6. Index Funds
- Average annual return = 6-7%
- Risk level = Low to medium
If you’re interested in investing in mutual funds, you may want to consider index funds because of their risk level and average annual return.
An index fund is a type of mutual fund that manages the complete stocks of a given market index.
For example, when an index fund tracks all the stocks of the S&P 500 market, it will hold and track the complete 500 stocks proportionally.
From international stocks, US stocks, Canadian stocks to emerging markets – index funds track all types of markets. There are also bond index funds that track corporate and government bonds.
RECOMMENDED: Best Index Funds in Canada
How to Choose an Investment Account in Canada
Choosing an investment vehicle is only a step to choosing the best way to invest money in Canada.
The investment account you choose is critical when making the best investment in Canada.
There are different investment accounts in Canada, making it challenging to choose the perfect one.
However, you don’t have to worry about which investment account is perfect for your investment objective and risk tolerance.
Here’s an overview of the major investment accounts in Canada to help you choose the perfect one.
1. TFSA
TFSA stands for Tax-Free Savings Account (TFSA). As the name implies, a TFSA is a registered account that allows you to save and withdraw your money tax-free.
Furthermore, a TFSA allows you to earn tax-free dividends and interest on your investment. However, contributing to a TFSA deprives you of tax deduction.
TFSA has been in existence since 2009. The Canadian federal government sets the contribution room annually. $6,000 is the 2022 TFSA contribution limit.
However, you can contribute up to $81,500 in 2022 if you have never contributed to a TFSA since its inception in 2009.
That said, you can hold different investment assets on TFSA ranging from stocks, bonds, mutual funds and GICs, etc.
Unlike RRSP, you can withdraw your TFSA funds tax-free whenever you want. This makes TFSA ideal for short and long-term investments.
2. RRSP
RRSP stands for Registered Retirement Savings Plan. This is a registered account that allows you to save for retirement tax-free.
Unlike TFSA, RRSP imposes withdrawal taxes. However, there are situations where you can withdraw your RRSP funds tax-free. That’s when you want to buy your first home or fund education.
Like TFSA, RRSP allows you to invest your funds in different assets, such as ETFs, stocks, mutual funds, GICs, bonds etc.
The Canadian federal government also sets the RRSP contribution limit annually. The contribution limit for 2022 is:
- 18% of gross annual income or
- $29,210
That said, it’s advisable to contribute to an RRSP during your working days and withdraw during retirement.
3. RESP
RESP stands for Registered Education Savings Plan. This is a tax-advantaged account that allows you to save for your children’s post-secondary education tax-free.
Like TFSA and RRSP, there’s no tax on interest, dividends, capital gains or any earnings generated on an RESP. However, contributing to an RESP deprives you of a tax deduction on your contributions.
The 20% Canadian Education Savings Grant (CESG) the Canadian government provides on RESP contribution makes this a worthy investment account.
That said, there are different RESP providers out there, making it essential to choose the best one.
RECOMMENDED: Best RESP Providers in Canada
4. Non-Registered Account
Non-registered account refers to a taxable account. This could be a cash account, margin account, or trading account.
Regardless of the account, non-registered accounts are not exempted from taxes. As a result, your capital gains, dividends, and interest are taxable on a non-registered account.
How to Invest Money in Canada
How you invest your money in Canada can determine your overall investment return.
There are different ways to invest money in Canada. However, the best way to invest money in Canada depends on your investment skills and experience.
If you’re a beginner investor, it’s advisable to choose one of the best robo advisors in Canada, such as Wealthsimple Trade.
Robo advisors are low-cost means of investing in Canada compared to human advisors or mutual funds.
For example, Wealthsimple Trade allows you to trade stocks and ETFs commission-free. This will help you save more on fees and maximize your investment returns.
However, if you’re an experienced investor in Canada, you should consider DIY investing to save investment costs.
Final Thoughts On Investing for Beginners in Canada
Investing for beginners in Canada may seem challenging initially.
But a comprehensive guide such as this article will open your eyes to the simple steps to the Canadian investment industry.
As mentioned previously, there’s no one best way to invest money in Canada because different investors have different investment objectives and risk tolerance levels.
Identifying your investment objective, budget and risk tolerance will help you easily identify the best way to invest your money in Canada.
Hopefully, now you know the best way to invest your money in Canada that suits your situation.
If you need more help regarding investing for Canadians, don’t hesitate to communicate in the comment section.
