Once your finances are in order - meaning you've paid off your consumer debts and started spending less than you earn – you might be wondering what to do with your extra money each month.
Finding the right investment approach can be tricky when you're first starting out. There are plenty of options available, from GIC's and bonds to mutual funds, stocks and ETFs. Next, you need to consider your age and risk tolerance. Do you have the stomach to handle stock market fluctuations of 25% or more?
If you're serious about saving for retirement, you need an investment plan. Here are a 3 investing tips to get you started:
First time investors: build your portfolio
The journey of a thousand miles begins with a single step. The best way to build up your portfolio is to start small and make it automatic. Determine what you can afford to contribute to your investments each month and set-up an automatic transfer from your bank account when you get paid.
Most people go into their bank branch to talk to an advisor about their investment options. Beware: your financial advisor may be a mutual fund salesperson in disguise. More often than not they push their in-house mutual funds, which have some of the highest management expense ratios (MER) in the industry.
One of the best investing tips is to avoid funds with high fees. A good place to start building your portfolio is with TD e-series funds. They are simple, low cost index funds that can be set-up for as little as $25 a month. Best of all, there are no commission fees to buy e-series funds.
When it comes to asset allocation, this is the approach I recommend:
|Fund Name||Allocation||Expense Ratio|
|Canadian Equity||TD Canadian Index - e||25%||0.33%|
|US Equity||TD US Index - e||25%||0.35%|
|International Equity||TD International Index - e||25%||0.50%|
|Canadian Bonds||TD Canadian Bond Index - e||25%||0.51%|
What to do when your portfolio reaches $25,000+
Once you've built up $25,000 or more in your TD e-series portfolio, it's worth opening up a discount brokerage account where you can trade ETFs and individual stocks.
The $25,000 threshold is important because once your portfolio surpasses $25,000 then the annual administration fee is waived, saving you $100 a year.
Exchange Traded Funds are worth a look at this point if you’d like to get more sophisticated with your investments. ETFs are securities that trade on a stock exchange and generally track the performance of an index. ETFs usually have much lower fees than mutual funds, but you'll typically pay a commission for every transaction.
Here's a look at a model ETF portfolio that gives you exposure to different markets and asset classes for a fraction of the cost:
|ETF Type||ETF Name||Allocation||Expense Ratio|
|Canadian Equity||Vanguard FTSE Canada All Cap Index (VCN)||20%||0.06%|
|Global Equity||Vanguard FTSE Global All Cap ex Canada Index (VXC)||40%||0.25%|
|Canadian Bonds||Vanguard Canadian Aggregate Bond Index ETF (VAB)||40%||012%|
If you start using ETFs rather than index mutual funds, one of my best investing tips is to contribute new money once or twice per year rather than monthly. This way you avoid paying a lot of commissions for your smaller transactions.
What about individual stocks?
I am a big fan of investing in index funds and ETFs because they're easy to use and they cost much less than the mutual funds sold by your bank or advisor. That said, there’s a good argument to be made for investing in dividend stocks, particularly the type of companies that regularly increase their dividends.
Dividends can account for as much as one-third of market returns and the steady income comforts investors during volatile periods. Avoid chasing growth stocks that don't pay dividends, including the latest fad stocks and IPOs.
Discount brokerages such as the ones offered by the big banks can give investors free access to market research and stock screeners to help you track and build your investment portfolio. Using these free tools to improve your decision-making ability is one of the best investing tips I can offer.
The downside of a discount brokerage is the cost, which can amount to between $9 and $29 per trade. If you find yourself trading more frequently, try an online brokerage like Questrade, which offers free ETF purchases and stock trades as low as $4.95.
Investing doesn’t have to be complicated. Take a deep breath, get started, and you’ll be surprised at what you can accomplish.
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