Basic investing concepts in a nutshell for the average investor

We are bombarded these days with piecemeal media messages on how to invest.

Some of these snippets are valid and useful, but others could get you into serious trouble.

An example of this is ads in which actor Matt Damon cites the maxim “fortune favors the brave” to imply that we should all load up on cryptocurrencies.

That kind of reckless bravado could devastate your wallet. If you had boldly loaded up, say, high-tech stocks in the tech boom of the late 1990s and then stuck with them, your portfolio would have been wrecked in the tech crash that followed.

You are much better off with a balanced investment approach that takes some risk in pursuit of reward but avoids too much.

That example begs the question of how average investors can reduce the hype to gain proper perspective on how to invest wisely.

In my opinion, the key should be to develop an understanding of the basics of investing. Think of these basics as the foundational concepts for sound portfolio management. They have been developed over time as a rough consensus among investment professionals based on research and long experience.

Since these basics can be difficult to piece together on your own, I’ve provided my take on some of the key investing basics in a nutshell below.

If you’re looking for a more detailed overview of investing basics, an excellent source is portfolio manager Dan Bortolotti’s new book “Reset Your Portfolio.”

Solid investment base

While the basics of investing are well established, they are not codified in any single document and are subject to moderate variation in how they are interpreted by different professionals.

They do, however, provide a common conceptual foundation on which investors can build with different investment strategies, be it passive indexing or various active approaches, such as growth or value.

If you invest with a financial adviser, you are likely to get advice based on these basics, as professional accreditation standards go a long way to ensuring advisers are aware of them.

Understanding the basics is particularly important if you are a do-it-yourself investor. But knowledge can also help you work more effectively with an advisor.

Basic concepts in a nutshell

The starting point for investment basics is your goals, risk tolerance, time horizon, and other individual factors.

That, in turn, provides the foundation for building a balanced portfolio that’s right for your personal circumstances, based largely on two main asset classes: equities and relatively safe forms of fixed income (typically investment-grade bonds). investment in a fund or ETF, but also government-insured bonds). GIC).

Stocks are relatively risky. They are particularly volatile in short periods. But you can also expect stocks to provide the bulk of your long-term portfolio returns. Investment-grade bonds don’t provide much return these days, but they’re essential for stabilizing your portfolio when stocks are underperforming.

While individual asset allocations will vary based on individual circumstances, the classic mix of 60 percent stock and 40 percent fixed income is an often-used benchmark that works well for many long-term investors. Retirees often suit slightly less capital and younger investors often benefit from more. You should also reduce your capital component if you’re investing for relatively short time horizons, particularly if it’s less than five years.

The equity side of your portfolio should be diversified across individual stocks, sectors and geographic areas. You proportionately share in the rewards when certain stocks or sectors prosper, but that approach also ensures that you aren’t too affected by misfortune that befalls a small segment of the market.

The addition of modest portions of non-core asset classes such as commodities or high-yield bonds may be warranted in the right circumstances. Take special care when adding volatile asset classes like cryptocurrencies, which don’t have a long-established track record.

Timing the market is very difficult or impossible to do with any reasonable degree of reliability, so investors generally need to stay close to their long-term “strategic” asset allocation. (Some well-informed investors may warrant modest short-term adjustments to their asset mix to reflect current market conditions, known as “tactical” asset allocation.)

When parts of your portfolio are affected by a recession, you should avoid selling depressed assets at discounted prices. That avoids blocking losses and allows them to recover over time.

The savvy investor also seeks to rebalance when his actual asset allocation drifts off target by a substantial degree. Rebalancing involves selling assets that have performed relatively well in order to buy more depressed assets at attractive prices.

On a practical level, you should also make effective use of tax-advantaged accounts, such as RRSPs, TFSAs, and RESPs, to minimize taxes.

Following the basics consistently should give you confidence that you’re making the most of long-term investment opportunities.

They have especially proven their worth in helping investors weather severe market downturns, such as the tech crash of 2000-2002; the Great Financial Crisis in 2008-09; and the initial March 2020 pandemic market crash.


To put the basics into practice, you need to combine them with a particular strategy for selecting individual investments.

While there are many good investment strategies that can work well if done correctly, one of the best approaches is the one advocated by Bortolotti in his book: a classic, passive approach using low-cost, broad-based stock and bond ETFs. that track the broad markets for investment-grade stocks and bonds.

Bortolotti is a Portfolio Manager and Certified Financial Planner with PWL Capital Inc., an investment firm for high net worth investors that emphasizes financial planning and uses a passive investing approach. Bortolotti also operates the influential passive investing website

Bortolotti’s book is an excellent manual on how and why to implement a passive approach for do-it-yourself investors.

It’s based on the basics of investing and covers all the nuts and bolts: setting up an account at a discount broker, selecting ETFs, and placing the order (using a “limit” order instead of a “market” order).

In recent years, DIY passive investing has become remarkably easy with the advent of asset allocation ETFs that provide fully functional portfolios incorporating thousands of securities with a single purchase. All you have to do is select the portfolio ETF that best aligns with your desired asset allocation.

“My goal is to try to convince do-it-yourself investors that the best thing for them to do is get out of their own way,” says Bortolotti. “Just create a portfolio that makes sense, save your money and step aside and let it do its thing.”

While the book shows the many proven benefits of passive investing, its value is not limited to passive investors. Even if you fall more into the field of active investing, this book can still provide you with many benefits. Bortolotti’s insights into the basics of investing and much of his practical advice apply to both types of investors.

Also, there are few pure active investors these days. Many investors incorporate passive ETFs into portfolios alongside active investments. Passive investing provides a great default and benchmark option when you don’t have a compelling reason to select active investments for specific items in your portfolio.

It is worthwhile for all investors to gain some understanding of passive investing, whether that is your predominant approach or not.

david aston, a freelance contributing columnist for Star, is an investment and personal finance journalist. He holds a Chartered Financial Analyst designation and is a Chartered Professional Accountant. Contact him by email: [email protected]