How to invest $20k in Canada [2024] | 4 Stategies

Summary: This guide will offer four strategies for investing $20k CAD in Canada, the advantages and disadvantages of those approaches, how to prepare for your investment journey, as well as our recommendation for a reliable broker in Canada: Interactive Brokers. 

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

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Before you start investing: 10 rules

Laying a robust financial groundwork is essential before you start investing. To do so, make sure the following factors are clearly defined: 

1. Financial goals: Are you saving for an upcoming expense, such as a car or a down payment for a house, or are you saving for retirement? Your goals will determine your investment strategy;
2. Risk tolerance: Typically, your comfort with risk will dictate the composition of assets within your portfolio;
3. Investment time horizon: The length of time you plan to hold your portfolio can significantly influence the types of investments you should consider. Longer-term investments can usually absorb more risk; 
4. Diversification: Spreading your investments across different asset classes can help manage risk;
5. Research: Understanding the fundamentals of investing and the specific assets you invest in is crucial. If you’re not confident in making these decisions, consider seeking advice from a financial advisor;
6. Emergency fund: Ensure you have enough money saved for emergencies before you start investing. A good rule of thumb is to have 3-6 months’ worth of living expenses set aside;
7. Debt management: High-interest debt, like credit card debt, should be paid off before investing, as the cost of carrying this debt may outweigh your investment returns;
8. Scams: Be skeptical of investments products that promise high returns with little to no risk; 
9. Tax implications: Different investments have different tax implications. Be aware of these, as they can impact your net return.
10. Inflation: Consider investments that can outpace inflation to maintain your purchasing power.

Where to invest $20k in Canada

Whether from a sudden windfall or by diligently saving every spare penny for years, you now have $20k at your disposal and are eager to put it to work.

Before diving in, ensure you’ve met all your financial obligations, cleared your debts, and checked off the essentials we previously discussed. Now, let’s explore the possibilities for this capital.

Below you will find our pick for the four best ways to invest $20k:

1. Stocks;
2. Index funds;
3. REITs; 
4. Cryptocurrency. 

1. Stocks

Investment type: Long-term growth

Risk Level: Varies

Broker to consider: Interactive Brokers

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started

Historically, the stock market has outperformed other forms of investments, such as bonds, property, precious metals like gold, silver, and platinum, and commodities like oil or collectibles like wine. And while it’s true that profits can exhibit substantial swings from one year to the next, the stock market has, by and large, seen a positive trajectory over the past hundred years. Plus, if investors reinvest their profits, they may even see compounding gains, which only grow more handsome as time passes.

Indeed, a buy-and-hold approach is generally the recommended strategy for dealing with the innate fluctuations of the stock market. That said, make sure your investment decisions align with your financial needs and risk tolerance. If you anticipate needing your invested funds at a specific time or are uncomfortable with the unpredictable nature of the stock market, adjust your strategy accordingly. 

Pros and cons of investing in stocks in Canada

Pros

• High return potential: Over the long term, stocks have consistently offered higher returns than most other asset classes, so at the minimum, you’ll be able to stay ahead of inflation;
• Liquidity: Stocks are highly liquid and can be bought and sold quickly during trading hours;
• Diversification: With thousands of stocks, you can spread your investments across different sectors and industries or align your stock portfolio with your ethical values (e.g., ESG investing).

Cons

• Market risk: Stock prices can fluctuate dramatically due to various factors, including market trends, macroeconomic indicators, and company performance. The volatility can be incredibly stressful for some investors;
• Loss of investment: If a company underperforms or goes bankrupt, you can lose your entire investment.
• Requires knowledge and research: Successful stock investing generally requires a good understanding of the market, the company, the industry, the sector it operates in, etc. 

2. Index funds

Investment type: Long-term growth and diversification

Risk Level: Low (varies between funds)

Broker to consider: Interactive Brokers

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started

If you’d rather bypass the challenge of selecting individual stocks and building your own stock portfolio, consider the simplicity and broad market exposure offered by index funds. Index funds are a type of investment fund — either a mutual fund or exchange-traded fund (ETF) — that replicates the performance of a specific financial market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite. Essentially, instead of trying to outperform the index, these funds focus on matching its performance as closely as possible.

Indeed, Warren Buffett, arguably the most successful investor of the 20th century, has often championed the virtues of index investing, stating: 

“A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”

Pros and cons of investing in index funds in Canada

Pros

• Diversification: Index funds offer a simple way to diversify your portfolio as they’re designed to track a broad market index, reducing the risk tied to buying individual stocks;
• Lower costs: Since index funds are passively managed, they typically have lower expense ratios compared to actively managed funds;
• Performance: Index funds aim to match the market’s performance. Over time, many index funds have been found to outperform their actively managed counterparts, largely due to their lower fees;
• Simplicity: Taking a hands-off investment approach can eliminate many of the biases and uncertainties that can arise when you pick stocks individually. 

Cons

• Lack of flexibility: With index funds, there’s no active management to shift strategy based on market conditions or to selectively invest in outperforming stocks;
• Limited upside: Because index funds mirror the market, they limit the potential for above-market returns;
• Market-cap weighting: Most index funds are market-cap-weighted, which can lead to overexposure to certain sectors or stocks. For example, the S&P 500 gives higher weights to large-cap companies. So, if, say, behemoths such as Amazon.com Inc. (NASDAQ: AMZN) and Meta Platforms Inc. (NASDAQ: META) experienced a weak quarter, it would have a significant impact on the entire index.

3. REITs

Investment type: Long-term growth and passive income

Risk Level: Medium

Broker to consider: Interactive Brokers

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started

In addition to the stock market, you might also want to invest in real estate. And while $20k is not enough for a down payment on a physical property, you can still get real estate exposure by investing in real estate investment trusts (REITs). 

REITs provide a way to invest in real estate without the associated labor associated with owning properties. These trusts, traded like equities on stock exchanges, are companies that own, finance, or manage income-producing real estate across various property sectors. 

The pros and cons of investing in REITs in Canada

Pros

• Income generating: REITs are required by law to distribute 100% of their taxable income as dividends in Canada, which can provide investors with a steady income stream;
• Diversification: REITs offer a way to invest in real estate without physically owning property;
• Liquidity: Unlike physical real estate investments, REITs can be traded like stocks.

Cons

• Volatility: Like other stocks, REITs can be subject to stock market volatility;
• Interest rate sensitivity: REITs can be highly sensitive to fluctuations in interest rates. When interest rates rise, the cost of borrowing increases for REITs, which can decrease their profitability and reduce dividend payments;
• Limited appreciation: Given the high dividend payout ratio, REITs often have less retained earnings to reinvest in their business, which could limit capital gains.

4. Cryptocurrencies 

Investment type: Alternative investment and diversification

Risk Level: Very high

Broker to consider: Interactive Brokers

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started

Investors with a greater risk tolerance may consider diving into cryptocurrencies. Crypto investing can take various forms, including purchasing individual crypto – such as Bitcoin (BTC) or Ethereum (ETH)- outright or investing in companies in the cryptocurrency or blockchain space, such as Coinbase (NASDAQ: COIN) or Roblox (NYSE: RBLX). 

However, it’s essential to recognize that cryptocurrency is classified as a high-risk investment. Given their novelty and limited track record, the prices of crypto assets, including the most well-known ones, are far more volatile than traditional instruments like stocks. And while this volatility might provide opportunities for remarkable gains, many investors will be left holding the bag. 

Pros

• High-risk, high-reward: Cryptocurrencies, while highly volatile, have shown the potential for extreme growth in a short period;
• Liquidity: Crypto trades 24/7;
• Decentralization: Most cryptocurrencies operate on a decentralized network (blockchain), which can offer transparency and security advantages over traditional financial systems;
• Diversification: Cryptocurrencies can diversify a traditional stock and bond portfolio.

Cons

• Extreme volatility: Dramatic price swings are frequent, leading to potentially significant losses;
• Regulatory risk: The regulatory environment for cryptocurrencies is uncertain and constantly in flux. New regulations could impact the value and legality of certain cryptocurrencies;
• Security risks: While blockchain technology is secure, exchanges and digital wallets where cryptocurrencies are stored may be vulnerable to hacking;
• Fraud: The lack of oversight and regulation in the cryptocurrency space makes it fertile ground for scams, including Ponzi schemes, fake initial coin offerings (ICOs), phishing, rug pulls, and pump-and-dump schemes. Read our guide on how to avoid crypto fraud for more information. 

Conclusion

As you mull over the fate of your $20k, keep your eyes on the prize: building wealth for the long term. Now, investing isn’t for the faint-hearted or the impulsive, and no matter which financial instruments you use to grow your nest egg, your portfolio will see both gains and losses over the years. But stick to it, don’t lose your cool when the ride gets bumpy, and you may soon tenfold your investment, seeking our help on how to invest $200k.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

FAQs about how to invest $20k in Canada

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started