Investing for the first time can be a daunting task.
Who should you talk to?
Where should you go?
Most people will ask someone trusted for advice, such as a parent, but not all parents have an interest in finance. We have a few tips to get inexperienced investors started on the right path:
1) Educate Yourself: Reading the business section of a newspaper is an excellent way to gain an introduction to finance. Ask someone who has some knowledge of finance to explain what the different parts of the newspaper are about. The sooner you become educated in financial matters, the better you’ll be able to put your hard earned dollars to work. Becoming educated also reduces your chances of making financial mistakes.
2) Exposure: All too often it seems like the world of personal finance is a secret. Many people don’t like talking about their personal finances with their children. Exposing them to your finances and experiences is the best way for your children to learn. We have clients who bring their children (young and mature) in with them for meetings; this is something we encourage.
3) Opportunity: Market conditions have caused many experienced investors who were incurring too much equity risk to be concerned about their investments. Stock market declines can be viewed as an opportunity for new investors to purchase quality equity investments at potentially cheaper prices. The younger you are, the longer your investment time horizon is. The longer your time horizon, the higher the probability of a positive return for your portfolio.
4) Savings: The best way to grow an investment account is through savings. There is no magical way to grow a portfolio in the short term through investment returns alone. Assume you have $10,000 at the beginning of the year. A realistic return for a moderate risk portfolio is an annualized rate of 7 per cent over time. If you make no additional contributions at all during the year, your portfolio may earn $700 by end of the year (assuming your portfolio earns 7 per cent in 2009) – the total at the end of the year is $10,700. Now assume that you are able to save $300 a month – this alone would add at least another $3,600 to your investment account. Savings have more impact on growth than returns in the short term.
5) Financial Firms: A typical financial firm has three distinct divisions for investing. The bank division is the most widely known, the following are examples: Toronto Dominion Bank, Royal Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and Bank of Montreal. The bank division is where you can speak with a person regarding buying term deposits, GICs, or mutual funds (may be proprietary funds). Generally, there is no minimum dollar amount to invest if you walk into a bank or credit union. The bank division also provides many lending services, credit cards, lines of credit, etc. On top of these bank options are credit unions, insurance companies, and investment firms with similar options.
The full-service division of the above banks are TD Waterhouse, RBC Dominion Securities, ScotiaMcLeod, CIBC Wood Gundy, and BMO Nesbitt Burns, respectively. Full-service division firms attract clients with greater dollar amounts to invest. Full service may also provide comprehensive advice relating to retirement, tax, estate, and investment planning. Full-service provides the same investment options as the bank division plus many other investment options including direct bonds, stocks that trade on an exchange, index funds and non-proprietary mutual funds. Full-service may also have advisors who are licensed to sell insurance products including GIAs, annuities, life insurance, segregated funds, critical illness insurance, disability insurance, and long-term care insurance.
The online/discount divisions often have names that are very close to the full service divisions but are distinctly different, they are: TD Waterhouse Discount Brokerage, RBC Direct Investing, ScotiaMcLeod Direct Investing, CIBC Investors Edge, and BMO InvesorLine. The online or discount option is for people who require limited or no advice. People selecting this division may feel they know what they would like to do and would like the lowest cost option to execute trades. Most of these options require people to either execute trades online themselves or through the telephone.
Although many young people are computer savvy, many appreciate receiving personal investment advice and basic planning. Utilizing the services of the bank/credit union division first may be your best option. If you feel you do not need advice, especially if your knowledge of investments is high, you may want to consider the discount option. If your investment account accumulates significant savings and/or you require advice and advanced planning, you should consider the full-service division.
6) TFSA: The TFSA is an excellent type of account for young people. The income earned in the TFSA is not subject to tax. Withdrawals are not taxed and you may replenish your account if amounts are taken out. If your annual income is below $38,000 we recommend you contribute your savings to a TFSA. Consider contributing $200 as an initial investment in early January then set up a monthly pre-authorized contribution of $400 per month at the end of every month. If your income is above $38,000 then you may want to consider opening an RRSP account. RRSP accounts should be long-term in nature. If you feel you may need to withdraw the funds early (other than through the Home Buyers Plan or Lifetime Learning) we recommend avoiding RRSPs because of the tax consequences and inability to replenish contribution room.
7) Investment Choices: The three main categories of investments are cash equivalents (cash, high interest savings accounts, cashable GICs, and treasury bills) , fixed income (GICs, bond mutual funds, bonds, term deposits, coupon, and debentures), and equities (stocks listed on a stock exchange and equity mutual funds). Cash equivalents and fixed income are generally considered low risk and low return. Equities have more risk but also have the potential for greater gains. If you are committing the funds for a period of ten years or more then we recommend investing a greater percentage in equities. If your investment savings are below $50,000 then consider balanced mutual funds (a mutual funding holding a balance of all three categories above).