If you’re looking for the best investment opportunities in Canada, you might be overwhelmed by all the different options.
I must confess that the term “best investment in Canada” is a bit misleading. Instead, you need to find what are the best investments for you.
After working in Canadian finance roles for over 11 years and experimenting with different investing methods, I’ve come up with my own strategies for what are the best investments for myself.
You can learn about all the different options for investing in Canada in the following article.
57% of Canadians own a TFSA, Canada’s most popular investment account.
Before You Start Investing
Before we can answer the question of how to invest money in Canada, there are a few things you should figure out. Let’s go over them:
Knowing your risk tolerance is key to knowing which investments are “best” for you. For example, someone with no risk tolerance at all, who would not be able to stand any losses in their portfolio at any time would have to be 100% invested in cash equivalents.
On the other hand, someone with a very high-risk tolerance would be able to invest 100% in stocks.
I want to hammer home the point that your risk tolerance is just one piece of the puzzle for determining your best investments. Just because your risk level can tolerate being invested 100% in equities, doesn’t mean you should be.
There are a few ways to figure out your risk tolerance, such as consulting with a finance professional or you can self-assess by taking an online risk survey. Vanguard has a free one you can take here.
The longer your time horizon to invest is, the more risk you can take on. If you are approaching retirement in a few years and will need money from your investments right away, you will be able to take much less risk than someone in their 30s who won’t need the money for 30 years.
Short-term cash needs
If you have large upcoming purchases to make in the next few years such as a house or paying for a child’s university education, you will be able to take on much less risk since you will be needing the money in the short term.
If you need cash to make upcoming purchases, you will need more liquid investments.
How much time you want to spend investing
Certain investments will take up more time than others. Time is money, so learn to balance how much time you’re spending on investing.
Best Investments in Canada
Here’s a list of seven of the top investment choices you can find in Canada:
1. Exchange-Traded Funds (ETF) and Mutual Funds
Risk-tolerance: Low – high
Time commitment: Low
Since ETFs and mutual funds make up over a third of what all Canadians invest in, it’s good to take a deep dive into both of them.
An exchange-traded fund (ETF), is a collection of stocks or other securities that are designed to track a certain underlying index. For example, you can buy a Canadian S&P/TSX index fund or a U.S S&P 500 fund.
Tracking major indices such as those is the most common use of ETFs for investors, but you can also invest in a variety of different industries and markets. Be careful to be aware of the risks. For example, there are even marijuana stocks ETFs, which are extremely risky.
These funds will purchase the largest companies in their respective markets, and then mirror those markets closely in performance. There are many different types of ETFs, such as:
- All-in-one ETFs – You can purchase a fully managed ETF for a low fee, such as Vanguard VGRO.
- Bond ETFs – for lower risk tolerance
- Equity ETFs
A mutual fund hires portfolio managers who will actively buy and sell stocks in an attempt to beat a benchmark index. The fund company then charges a high fee, usually in excess of 2% to its investors.
I used to work for one of the largest mutual fund companies in Canada. I do not invest in mutual funds anymore, for the simple reason that they are not proven to outperform the market after the high-fees are taken into account.
There are countless studies and evidence that show that the highly marketed “active management” that mutual fund portfolio managers boast of does not outperform the market on average.
This study highlights how in 2018, 75% of Canadian equity fund managers underperformed vs the S&P/TSX benchmark index after fees were taken into account. The same study also showed that nine in ten funds underperformed their benchmark over a 10-year period.
However, if you insist on choosing a mutual fund over an ETF, the Vanguard mutual funds are a good compromise at a decent fee.
Time commitment: Medium – High
Buying individual stocks usually involve a higher risk than buying funds because your money invested will be more concentrated. Your investments can be volatile, with potential large swings in prices.
You’ll generally spend more time analyzing and researching stocks before you purchase them as compared to an ETF. If you’re doing it properly, you’ll be researching each individual company carefully before buying or selling its stock.
As a Canadian, I think it’s wise to invest in some stocks outside of the country, to avoid what’s called a home bias. But you should be aware of the extra fees that come with buying individual U.S or other international stocks. You will usually be charged a foreign exchange fee to convert your money into the other currency.
Over the years, I’ve personally shifted more of my investments away from stocks and more into ETFs. Even though I love analyzing and buying stocks, I found it was taking up too much of my time.
If you want to learn more about Canadian stocks, read about my picks for the best Canadian dividend stocks here.
If you’re planning to purchase stocks outside of Canada, Questrade is what I use. You can get $50 in free trades if you open an account here.
Read my full review on Questrade here for more info.
Risk-tolerance: Low – medium
Time commitment: Low
Bonds, commonly known as fixed-income, are an investment you can purchase that will generate interest, regardless of how the market is performing. They are lower risk and less volatile than stocks, and are used to balance out your asset allocation between equities and fixed income.
Example: Brenda is a 30-year old sales manager. She filled out a risk-tolerance questionnaire and determined she has a low-risk tolerance. Her recommended asset allocation is 60% fixed income and 40% equities, and she decided to achieve this by purchasing a bond ETF and an equity ETF.
There are many different ways you can buy bonds, such as:
- Bond ETF – Liquid and can sell on an exchange.
- Bond mutual fund – Liquid and can sell at any time also.
- Buying an individual bond – constricts you the most and the least liquid as they usually have a locked-in time of investment.
My preferred method of purchasing bonds is using a bond ETF, as they don’t lock up your money and have low fees.
Read my picks for the best Bond ETFs in Canada here.
4. Cash equivalents | GIC | High-Interest Savings Account
Time commitment: Low
For short-term purchasing needs, you can’t go wrong with investing in cash equivalents. If you know you need to make a purchase within a year or two, putting your money in a high-interest savings account (HISA) or GIC is a no-risk way of earning some money while you wait to make the purchase.
High-interest savings accounts have seen higher rates due to the increase in online banks in Canada, which offer higher rates than traditional banks.
GICs lock up your money for a certain amount of time but will offer slightly higher rates than savings accounts.
Make sure your money is covered by CDIC insurance, so even if the bank goes belly up, you’ll still be ok.
I don’t bother with GICs personally. It doesn’t make sense to me to lock in a low-interest rate for the long-term.
For my emergency fund and short-term purchases, I use the EQ Bank Savings Plus Account, which has a savings rate of 1.50%. It’s a good way to keep pace with inflation and provides maximum flexibility for your cash.
5. Real Estate
Time commitment: High
Real estate as an investment is risky, because you are concentrating your investments on one asset, and it’s usually with borrowed money. Although the Canadian real estate market has seen staggering growth in the years following 2008, there is no guarantee it will last in the future.
Liquidity for real estate is low, meaning it would be hard to do a quick sale to get the money you needed. During an economic downturn, rents will decrease and it might be harder to find tenants for your real estate.
The housing market is seeing a slowdown and decrease in recent years, due to government efforts to control an overheated market, combined with the recent market dip.
You can also look beyond Canadian real estate investing, to international markets like in the U.S or even abroad in Europe or Asia, but that will require an even higher time commitment and risk tolerance.
Many people have gotten wealthy from real estate investing, but know that it can take a high time commitment and a high-risk tolerance to do so. An alternative to real estate is buying a REIT stock or ETF which is more liquid and requires less time commitment.
Read my post on the best real estate investment options in Canada.
Risk tolerance: Low – high
Time commitment: Low
Robo-advisors is a fancy term for an investment company that will buy and balance a basket of ETFs for you based on your risk tolerance and investment goals. You’ll do a risk survey that will place you in a managed ETF portfolio.
Because robo-advisors operate entirely online and have low overhead and purchase low-fee ETFs, they can offer its services for a relatively low fee.
These companies usually offer advisors you can reach by phone or chat, and will automatically rebalance your portfolio so you’re not straying from your investment goals. There will usually be additional features like tax-loss harvesting during tax season also.
If you are new to investing and want to spend next to no time managing your investments for a low fee, robo-advisors are a great option.
7. Alternative Investments
Risk tolerance: Very high
Time commitment: High
Alternative investments in Canada are not publicly traded and include things like private equity, hedge funds, private debt funds, and peer-to-peer lending.
The liquidity is sometimes quite low, with many of these investments requiring locked-in periods where you won’t be able to withdraw your money.
Investors choose alternative investments because they believe they can give them higher returns. However, certain alternative investments such as hedge funds that can have massive fees, are not proven to outperform the stock market.
Warren Buffett famously won a $1 million bet against a hedge fund manager that a simple ETF would outperform his chosen hedge funds over a ten-year period.
If you’re considering alternative investments, do your research carefully and see if the potential larger returns are actually worth the higher risk, larger entry minimums, and bigger time commitment.
What I Invest In
Here are my investing principles that work for me:
- I don’t want to spend too much time on investing.
- Diversification is crucial, and also to diversify outside of Canada.
- Maintain a long-term, rational approach
- Low transaction costs and fees
I currently have an investment property that I Airbnb to tenants (currently it’s being rented out long-term now due to COVID) and invest in mostly ETFs and a little bit in individual stocks. These investments give me access to international companies.
I have a manager for my investment property, so I don’t spend much time on it.
I don’t invest in any bonds, because I have a very high-risk tolerance and a long time horizon where I don’t need to touch my money for several decades. I do not recommend this for 95% of investors though.
I think most investors should have some fixed income in their investment portfolios. I will likely shift some money out of equities and into fixed income as I get older.
What I do will likely be very different than what is best for you. It’s up to you to figure out what are the best investments in Canada for yourself.
Learning where to invest money in Canada doesn’t have to be overwhelming. Get educated about investments and figure out what the best investments in Canada are for you.
That valuable knowledge can lead to a lifetime of being better with your finances.
If you want to invest in Canada but aren’t sure where or how to get started, read the Wealth Awesome guide on how to start investing in Canada here.