Reader Question – Just Starting Out – Help Needed

In the My Own Advisor inbox recently I got some emails from readers about just starting their investing journey. Thanks for your emails folks, keep them coming. Today’s post will offer some perspectives on a few of those questions sent my way and I’ll provide some answers based on my experiences with saving and investing.

On just starting out…when should I invest, in what, where to start investing?

Reader: I did a bunch of research and it seemed the best choice for having a starting amount of approximately $15k was to start with (TD) e-series index funds…it seems the recommendation to start investing with ETFs is at or over $25k due to costs of trading/re-balancing etc….what do you think?

In my opinion there is no absolute right answer regarding how much your investment portfolio must be worth to own Exchange Traded Funds (ETFs) or individual stocks for that matter. Your portfolio value could be $1,000, $10,000 or more. However for me I know I transitioned to using ETFs and buying individual stocks when my overall portfolio was over $25,000. I did this because:

  • It took me some time as a DIY investor to figure out if ETFs or stocks or both was the right approach for me,
  • some discount brokerages (at that time) had account minimums, I had to pay a yearly administrative fee if my account value was not over $10,000 or $25,000, and
  • commission costs to buy and hold my ETFs and stocks were prohibitive, those fees used to be close to $30 per transaction I recall.

You can read an earlier post on that here.

The good news for novice investors is, account fees and trading costs have come way down over the years. The bad news is there is now an overwhelming amount of choice and it’s hard to navigate through all the financial jargon and marketing to figure out what is right for you; where should you invest and in what products.

I had a post here about my favourite ETFs but for today’s post I also want to list a few great personal finance books that have hit the market in recent years that I think you should read, as a beginner, before diving into buying ETF products or stocks.  Here are some recommendations in no particular order:

MoneySense Beginner’s Guide to Personal Finance (starting around $4.99)

MoneySense Guide to the Perfect Portfolio (starting around $4.99)

MoneySense2013 Canada’s Best Discount Brokerages (starting around $2.99)

You can buy the MoneySense books here.  Spending $15 or so on these books now could save you thousands of dollars later.

On Canadian discount broker comparisons…

Reader: What I think the beginner needs, is the basics, all in one spot. It would be nice to see some comparisons of brokers.

As a novice investor, you’re right, more information on the types of brokerages available in Canada would be helpful. The MoneySense links above are great and so is this one:

Rob Carrick’s Guide to ETFs (pdf file should be free, let me know if not)

You can also check out my friend’s site who updated his post comparing discount brokerages in October 2014 here.

Also make note of these 2014 Globe and Mail broker rankings here.

You can also buy The Value of Simple for a few bucks.  This book puts many basics in one spot; it not only lists some great products to start your investing journey but actually walks you through the process of setting up investing accounts and buying the products.

On diversification…and what accounts to use first?

Reader: Through basic research, I found out that diversification in any portfolio is very important, (TD) e-Series was a good bet but I was also wondering about ETFs, and where to put those ETFs. I mean, we have choices:  using TFSA, RRSP and taxable accounts. It’s hard to know what to put where…what accounts to use first…thoughts?

Yes, diversification is critical I think.  Owning a mix of stocks and bonds that suits your appetite for risk while designed to meet your long-term financial goals is essential.  Here are some of my posts that might help answer some questions:

Asset allocation.

Asset location.

In addition to these posts I think it makes sense to maximize your Tax Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) before investing in taxable accounts. I actually didn’t do this, I started my non-registered account years ago and in hindsight, I should have deferred investing in this non-registered account until I took my own advice above. You live and you learn. We recently made some contributions to our TFSAs.  Regarding our RRSPs we make monthly contributions to those accounts. We are hoping to max out my RRSP account soon and we’ll continue contributing to the other one for the foreseeable future.

Personal finance is personal so your mileage may vary. I hope this offers some perspectives for you to consider on your new saving and investing journey. Thanks for your questions readers and please keep them coming.

18 Responses to "Reader Question – Just Starting Out – Help Needed"

  1. I recently received a similar email from a reader asking what the best way to invest $5k is. He had the cash in his RRSP but wasn’t sure how to use it. Luckily he uses a low cost brokerage so fees aren’t big. I recommended ETFs because they a) provide diversity, b) are lower risk than one individual stock and c) are free to purchase. I don’t think there is one dollar amount to start investing in ETFs.

    As far as RRSP, TFSA and non-registered for most people it makes sense to maximize their RRSP, then work on their TFSA and then use a non-registered account. You could also make the argument that paying down the mortgage (if any) would be better than a non-registered, taxable account but of course this depends on the mortgage rate, tax rate, etc

    1. 100% with you Dan….re: max out RRSP and TFSA first, then go for non-registered and/or kill off the mortgage.

      I don’t think there is a specific dollar amount to start investing in ETFs either. Whenever you get a good handle on them, the earlier, the better 🙂

  2. Any new beginner considering index funds or ETFs is already on the right track. One alternative is to use Tangerine Funds to get things going and then switch to eSeries / ETFs when they are more comfortable.

    I started with eSeries but have just switched to ETFs myself this year.

    1. A bit Mr. CBB. What helped is I did a ton of reading before I made a number of my investing moves. My portfolio is not the Couch Potato model but I believe it’s working for me: a hybrid of dividend investing and indexing.

  3. I strongly advise Young investors to take a close look at their yearly income and what they project they will make in the coming years (given that it is not always easy to guess depending on your line of work) before choosing to invest in TFSA or RRSP. When I was 26, exactly 10 years aga, I put 5000$ in my RRSP in early March. I was on track to make $35k that year. However, my contract was not renewed on March 31, and ended up doing doing 5 months of Employment Insurance and then, left to work abroad in September. My total income was $21k that year This means that not only did that RRSP contribution hardly saved me any taxes, but in fact, given my current high income and the fact I’ll have a government pension when I retire, well, I’ll actually pay even more taxes on that $5k than what I saved. I know they say to invest early in the year to benefit from compound effect, but my advice is, wait until December to put money in your RRSP. Put it in your TFSA in January, and then, take it out in December and put it in your RRSP if it actually saves you money.

    Another thing, depending on the Province where you live. In Québec, marginal taxe rate can reach a total of 52%. When I left to work for a year in Ontario, I did not put any money in my RRSP. I waited to be back in Québec and make a larger contribution the following year, to save taxes at 52% instead of 40 something.

    And I did suggest to my friend who was getting started in investing to go for ETF. That’s what he did, with some Broad market ETF, to which he added some specific ETF (Namely XEG) and some stocks that he liked (Apple, Disney and he had some crazy ideas about graphit mines…). But if I’d go back 12 years ago, I’d told myself to invest in ETF (but i’m not sure they existed back then).

    1. Thanks for your detailed comment Francois.

      I think if young(er) investors can forecast how their income might rise over time, that is great, but it’s also a lot of guesswork and as you have mentioned, life happens, things change.

      On the TFSA vs. RRSP debate, I’m all for maxing out the TFSA for most people. Maxing out the RRSP is good for modest income earners (say >$60,000/year) and great for higher-income earners. The TFSA is best for everyone.

      When it comes to ETFs, there are some great products out there for low-costs and broad diversification. I think investors should flock to those first and if they want to dabble in sector ETFs or individual stocks after that, well, that is their decision. Some low-cost ETFs like XIU or VCN or VTI/VUN should be the staples of most portfolios I believe.

  4. I think the old rule of $25K was based on the old transaction fees, if you wanted to really get ahead of mutual funds charging 2% and the ETF fees were 0.5% then you wanted to get transaction costs down and at $20-30 dollars a trade that meant large bulk purchases, $30/$5000 = 0.6%. And to diversify meant owning 4 ETF’s, so to keep costs down you needed larger sums. When I started in 2011 with Virtual Brokers, the fee was $0.99 per trade, and I was doing $300 bi-weekly, which meant if I bought biweekly my fee was 0.33%, and if I bought every 4th Week it was 0.165%. Of course, purchasing ETF’s is free in a lot of places, the MER’s for ETFs have gone way down, if you start in an account with free ETF buying, there’s really no minimum you need anymore, in my opinion.

    1. Great point derico and I think my post referred to this…given commission fees have come down a great deal over the years, there is really no requirement for investors to have “a minimum” amount/portfolio value to get started with ETFs.

      Thanks for the comment.

  5. Great post for everyone starting out. Tweeted it to my followers! To my friend sthat ask about starting out I always say go to the library and take out the last two years of moneysense magazine and read it cover to cover. That alone will bring most up to speed lol.

    There is no easy answer or right route really. But there are basics everyone should know especially with so many financial vultures at every corner.

  6. Not to be that guy, but I think there might be another great book written specifically for the beginner investor looking for information on how to buy mutual funds or ETFs…

    (Ok, I’m totally that guy tonight)


Post Comment