In my last post I was helping my friend Donald figure out what to do with his new-found riches after landing a role in a movie. The truth is there really isn’t a simple answer to the question “where should I invest my money?”
I have been a fitness buff since as far back as I can remember and have taken the personal trainer course. I always think that getting physically fit is a lot like getting financially fit. The amount of effort exerted is directly proportional to the results one can expect.
If you wanted to lose weight for example, I might suggest you cut back on high calorie drinks and go for a brisk walk every night. Or I might suggest you hit the gym 3-5 days a week doing a mix of free weights and cardio and put you on a diet of egg whites and protein shakes.
How good do you want to look? How good do you want your net worth to look?
With that in mind, I’m going to outline 4 possible investment options for Donald. Some will require very little effort and some will be a little more involved but will deliver superior results.
I’ll just call this first category “fixed income” and have that include savings accounts, money market funds and savings bonds. The good thing about this kind of investment is that it’s very easy to do and you have no chance of losing your money. The bad news is that you won’t really make any money either. Rates are so low on these kind of investments right now that they don’t even keep up with inflation. For example, if you put your money in an ING Direct Investment Savings account you will currently be earning 1.35% interest and inflation in Canada is currently 2%. The value of your money will be shrinking every year.
Although recently mutual funds have come under fire for the fees they charge, I still think they represent a good first investment for several reasons. Mutual funds are easy to set up and can be purchased from the bank you currently deal with. You can start buying mutual funds with very little money, and by owning just a couple of funds, you gain exposure to a large number of stocks. I suggest opening a Tax Free Savings Account and then set up an automatic purchase plan where you buy $100-$200 worth of mutual funds every month. This way you are taking advantage of dollar cost averaging. A powerful tool when buying any investment. Hopefully your bank offers Index Funds which have lower fees and generally out perform the market. Splitting your money between a TSX Index Fund (Canadian market) and a Dow Index Fund (U.S. market) would mean that you had partial ownership in the biggest, most successful companies in North America. This should serve you well over time.
Mutual funds are kind of like stock investing with training-wheels on. Someone else is managing your account and sending in a buy orders to the market on your behalf. This person is also being paid for his/her services. If you buy mutual funds please read the quarterly statements. Know what stocks your funds hold, what fees you are paying, what returns you are earning. This is how you become a better investor.
After owning mutual funds for a while and getting comfortable with the investing process, you might start to yearn for lower fees and better returns. This is where Exchange Traded Funds come in. ETFs have been gaining popularity over the past decade and money has been pouring out of mutual funds into ETFs. An ETF is just like a mutual fund in that it holds a basket of stocks but the big difference is that they trade on the stock market just like stocks. The fees on ETFs are a fraction of what they are on mutual funds so the returns are better.
You would have to open an online brokerage account to buy ETFs. This is as easy as opening a checking account, but some people might find it intimidating to place their own orders. My brokerage account has a customer service number that I call and get them to hold my hand every time I’m not sure what I’m doing.
I didn’t make any suggestions on what type of ETFs to buy, but again you would just spread your money between a few funds covering the U.S. and Canadian markets. I am sure readers of this blog have some suggestions.
Once you had an online brokerage account set up and had amassed a nice portfolio of ETFs you may want to branch out and buy some individual stocks as well. I am a big fan of buying big blue chip (large market cap) Canadian companies that pay a dividend. These companies pay out cash every 3 months and that money is taxes very favourably. I like owning part of my favourite companies and always see myself as a business owner and not a stock trader. I own part of a ski resort and part of the company that made the shirt on my back.
This post was long and so I had to skip many details. Please post any questions and suggestions in the comment section. Let’s learn from each other!