Help! I’m just starting to invest
Should you save? Should you invest? If you invest, what should you invest in? Do you need a Registered Retirement Savings Plan (RRSP)? What about the Tax Free Savings Account first? Do you need an emergency fund? What about your student loan?
This list of questions for younger investors could go on and on and on…and it will for today’s updated post.
This post will share some help for investors just starting to invest and trying to navigate the sea of funds, ETFs, advisors that want your money and much more.
Let’s get into it.
Help! I’m just starting to invest
Whether you’re in your 20s or even early 30s, I bet some of those questions above and more have crossed your mind. There are no answers that apply to everyone but this blogpost should help you out with some considerations that might apply to you. Keep reading, because in some cases I’ve “been there, done that” and could have done much better myself. Thanks to more reader questions this year here are some answers to many of your reader questions about how to get started with saving, investing, and navigating the world of financial advertising for your investing dollars.
Q1: Should I be saving now?
Absolutely, save money even if you have some debt.
How much you should save I think depends on how much debt you have. For example, if you have a huge student loan, I’d focus on that since the interest rates are usually quite high for those. If you have any credit card debt or lots of it, make that priority #1 as well for the same reasons.
When I was in my early 20s, working and living in Toronto, I had a student loan of about $7,000 in the late-1990s, rent to pay and bar money to cover my weekends out on the town. After those payments and expenses almost all my money was gone. I was fortunate to have a stable job though after graduating and getting my first degree and a college diploma. This is when I started to save for investing purposes.
I’ll be honest, my savings for investing purposes was not very much. I started out saving just $25 per month in my early 20s but saving early and often got me into the habit of saving more later on. Good habits, funny enough, are just as tough to break as bad habits. So, save early and save often and I believe your future self will thank you.
Q2: What should I invest in?
I get this question on the site all the time. First, some things to think about. As you start your research about what to invest in, what accounts to fund, what products to hold, what stocks you might buy, etc., you’ll quickly come to the realization that everyone is likely telling you something a bit different.
But that’s OK.
Take a pause.
Based on my experiences including my own lessons learned over two decades of investing myself, there are many ways to successfully build wealth. Here are just a few common paths to consider:
- Buying and owning real estate.
- Becoming a private equity investor.
- Invest in the stock market via owning various funds or companies themselves.
- Become an entrepreneur and grow a business (or two)!
I’ve used this image before on my site because it’s just so darn critical. Start with your money “whys” first before picking funds, ETFs, products or anything else.
“Why” is your starting point of any financial journey or change for that matter.
- Why do you want to have money?
- Why is money important to you or your family?
Then you can get into the “whats” and “hows”:
- What I’m saving for is my financial future; but I also want to help my kids cover some university expenses; and then I want to go on a trip to Europe in a few years; I might want to replace my older car down the road. The list goes on for you.
- How am I going to accomplish all this? How should I budget to meet these goals? Can I even meet these goals/dreams?
Answering these questions is at the heart of financial planning – it really is.
That means your financial plans should include things like goal setting, itemizing your debt obligations, understanding your insurance needs, identifying some basic tax strategies, and so on.
Before you start investing or picking any funds, etc. do these three things first.
Before you start investing – definitely consider building an emergency fund.
If you want to know what goes into a very comprehensive financial plan, please read these posts:
Q3: Really, what should I invest in Mark?
You have tough questions!
Alright, I will break it down this way. At this point in today’s post based on my guidance above I will assume:
- You can save some money for investing/retirement purposes.
- You can manage your debt obligations.
- You have a small emergency fund or cash cushion in place.
If you don’t have 1-2-3 then please re-read my content above!
I believe if you are going to invest, including in equities, common stocks, real estate or anything else that you expect some growth from, you must consider a longer time horizon. That means:
Any money you absolutely need/absolutely depend on in the next 1-2 years should likely be in cash or some form of fixed income.
For example, cash could be while you’re saving for a house when younger (i.e., you really need that down payment) or cash that is potentially set aside during retirement. I say this for the latter because who knows what the future holds and I think any combination of a basic emergency fund + cash on hand to combat at least a 12-month major market calamity or other should be readily accessible. Cash should be there when you need it or least expect to need it. I just think that’s smart planning.
I think any money you might need in years 3-5 should likely be maintained in some form of fixed income and/or in the form of assets that should deliver dependable income.
I believe the worst thing you can likely do in any potential market meltdown is sell lots of equities. You do need to stay invested. So, that means you need to consider a blend of bonds and stocks (equities) that you don’t panic sell when things get rough. This could also mean a good mix of fixed income and stocks to support a withdrawal plan that mitigates portfolio ruin in any future retirement.
This means any money for investing purposes, in equities, stocks, other should be considered for a timeline of at least 5 years.
Now that you know my investing time horizon, and you are pressing me for your investing decisions (!), as a younger investor I would consider owning some broad market Exchange Traded Funds (ETFs) for long-term wealth building. Consider owning mostly equities in your portfolio. You’re young, and you can afford to take some investment risk for reward especially if this money is for your future self.
Check out my page here for the best low-cost ETFs to invest in.
Nervous about getting your own brokerage account? That’s fine – it can wait.
Instead you can try investing in Tangerine Investment Funds.
Try TD Bank’s e-Series funds.
Try a Robo-Advisor. I have partnerships with some of them!
There are many ways to get started with investing here.
Q4: Am I in the right funds now?
Hard to know without my assessment but I would go back to the answers in Q2 above and re-assess your “whys”.
Q5: What type of ROI should I be comparing my investments to?
It is (somewhat) critical for investors to benchmark their portfolio for the simple reason that you can validate your strategy. But, it’s not essential in my view.
What is more important than benchmarking IMO is ensuring your are meeting your financial goals. Those may include:
- Am I getting enough income from my portfolio to meet my needs?
- Am I able to sleep at night, with an appropriate balance of risk and return?
There can be multiple definitions of benchmarking but the simplest one being that a point of reference is established to assess or compare against. Consider a benchmark as one way to evaluate your performance or your investing performance to be more accurate.
As an investor, we should all be mindful of benchmarking but don’t let it consume you. What is more important is meeting your own goal or goals. So, define those first. While benchmarking is important don’t obsess over it.
Q6: Will a financial advisor help me?
Quite possibly! Just be mindul how your advisor might be compensated. All financial advisors are not created equal!
I have long since dumped my financial advisor but that decision may or may not be right for you.
Q7: Mark, I’m fortunate to have a defined benefit pension plan. Should that change the way I invest?
The short answer is: yes.
I consider my pension a big bond and I think you should feel the same.
Got a defined benefit pension plan? Consider yourself lucky then consider it a big bond
Help! I’m just starting to invest summary
Investing can be overwhelming at times. So much to think about and so much to consider.
It is my continued hope that to any investor just starting to invest they consider checking out my Archives for more reading where I’ve discussed so many financial subjects, funds, and much more.
I will continue to update previous posts on this site to make them current for you. Thanks for your readership.
Got a question for me? Reply in the comments or drop me an email. Happy to help where I can!
We were faced with the should we invest or pay down the mortgage (our last debt) and we did both at the same time. Now that the mortgage is gone we will likely split the spare cash between investing more and renos. We’re happy with the road we took. Thanks for the tips as always.
Always great to read and hear about how others managed their affairs – especially for the better.
Thanks for sharing.
I think it’s good advice to save a little even if you are in debt. I keep about $5,000 in my emergency fund, and any amount above that, I put into my TFSA and RRSPs. I invest mainly in ETFs in my TFSA, though I have two TFSAs; one with Tangerine and one with Questrade. My RRSP is with Tangerine. In Questrade, I invest in ETFs. It has been working well for me.
Thanks Daisy, again, this is just my perspective, surely others will disagree.
I just think anytime you can ingrain a good habit, it’s a great thing. Same goes for anything in life, exercise, diets/eating, professional development and learning. While you can do too much of a good thing, it’s rare.
I appreciate your comment.
TD e-funds are a good choice for the novice investor, although opening an account can be a bit of a mysterious process
I think so Roger, but yes, sadly mysterious and not very well promoted.
I opened an e-series account almost two years ago and it was not difficult. In fact when I had to speak to someone on the phone about it (I think they phoned me) the lovely young woman also gave me a $200 bonus for no reason.
Wasn’t sure whether to believe it, but it did show up in my account. I was just putting in my $5500 for a TFSA. But since then I put more money into e-series funds.
It is very simple to use, I want my kids to open these accounts, but they are very risk-adverse!
I think e-series are great products. I recall I owned them for a bit until I owned ETFs and stocks directly.
These products are great for passive investing. More folks should look into them.
Thanks for the comment Barbara.
It wasn’t an issue for me to open an e-series account either. I think the process may have been simplified over the years after some bad press.
E-series funds are sufficient and simple enough for 80-90% of Canadian investors. If you’re smart and savvy enough (and have the time) to squeeze an extra few percentage points out of the costs, then go for it.
Yeah, I recall the e-series isn’t tough to open. You just have to find the right person in the branch or better still, call TD directly 🙂
I did this many years ago. For the last 5 years, I’ve been in ETFs and stocks directly.
“E-series funds are sufficient and simple enough for 80-90% of Canadian investors.”
Absolutely Robb, great point.
Why pay a management fee to the fund manager?
That is so wateful.
Diversity is so overrated.
I firmly believe that buying 5 different stocks will be just fine for long term investing.
If one of those goes bankrupt, the others will bring plenty over the course of 30 yrs.
If you want more diversity, go for 10 stocks or more, large cap, blue chip.
If in the next five yrs, stocks only yield 2.14% then that low MER fee of 1.07 will eat up half your profits! So dont do it.
I like reading your blog, but your advice is plain wrong.
Thanks for your comment Bram.
You’re probably right, buying a few different, established blue-chip stocks is probably a good thing to do but for the novice investor that might be pushing it.
Right now, I own more than 30 stocks but my investing journey didn’t start off this way. I simply needed to learn how to save money first, and invest second. I would think this is still good advice, no?
I think paying 1% for a mutual fund, and saving early, say up to $10,000 for a 20-something is still good advice. 1% of $10,000 is only $100 in fees per year. It will cost you $50 or more fees for your 5 stocks.
No doubt as the novice investor gets older, they can branch out and own ETFs and stocks directly.
Curious, when did you leave mutual funds and buy stocks directly? It took me until my early 30s to do that.
I left funds quite early, as soon as I understood the fee.
The thing is: the manager gets paid FIRST.
And he gets paid a percentage of the investment, NOT a percentage of the earnings. (Yikes!)
Originally I was under the false impression that it was a mere few percent of what I made with the investment. This would be more fair: management paid according to performance. It turns out it is a percentage of my capital.
This is truly horrendous.
ING touts a MER of 1.07% as being very low.
This may be, and others are probably higher.
ING is one of the few banks confident enough to put the MER front and centre.
But fund managers get paid before you get paid: if the fund holdings only grow 1.07% in a year, then ALL earnings that year (100%) goes to the management, and zero to you (even though it is YOUR money). Any year with below 2.14% will result in the bulk of the earnings going to the manager/bank.
This situation gets a lot worse with higher MERs.
I started noticing a discrepancy between fund performance and the performance of what it is supposed to track.
If I see S&P500 go up a certain percentage in a year, and yet see a S&P500 fund grow significantly less, I know something is up: it is the fees.
I saw this in ING Streetwise Balanced Growth: fund performed much less than underlying indices (US/CA/WD/Bonds).
I had some money in funds as I had not found a way to get TFSA or RSP investments without using a fund. The choices I saw were funds or interest saving accounts.
Later I found that you can get a stock trading account that is registered as RSP or TFSA. So I use those now.
Well, it took me a few years but over time I learned the bank always gets their money. So, now I own a few of them 🙂
The financial industry is largely rigged against small-time investors. This doesn’t mean there aren’t decent/good products on the market, there are. However, the financial industry is in the business to make money and what it can make off you and me and others, well, they will.
ING is low, but not cheap. I still think these are decent starter products for investors. Again, $100 for every year $10,000 is invested, give or take. After a few years, the keen (younger) investor diversifies away from ING because they can, and get lower fees because of it.
Sounds like you’re well aware of the fees many financial products have, good on you Bram. Buyer always beware. Thanks for the comment.
@Bram – You complain about a MER of 1 percent eating up half the returns and then say it’s okay if one of your five stocks goes bankrupt? Sorry but that is bad advice. For investors just starting out, the MER is almost meaningless.
Establishing good savings habits and increasing your savings rate every year will have far more impact on your portfolio.
The same stock can go bankrupt in the fund’s portfolio.
Or worse: a nervous fund manager may sell stocks that show big drops.
I’ll make my own mistakes, thank you very much. It beats paying for the fund manager’s mistakes ON TOP OF his fees.
“The same stock can go bankrupt in the fund’s portfolio.” Very true.
Which is why I don’t think it’s a bad idea to index invest, for most people, on the cheap using broad-market ETFs and not necessarily the 1% fee funds. 1% fee funds aren’t too bad just starting out since you don’t have much money invested to begin with. If one stock goes down, it doesn’t really hurt you.
The problem arises when you have a $250k portfolio and that is charging 1%, 2% or more every year.
1% fees on $10k is much different than 1% fees on $250k. 🙂
Also, in terms of blue-chippers in Canada, there are only about 30-40 stocks to own.
Vanguard is my favourite brokerage for ETFs (“V” ticker symbols). I can’t wait until they add more products to their portfolio. I find them to be the cheapest.. next is iShares of course, the “X” ticker symbols.
I invested about $20K into Vanguard in USD and it returned the same as in a stock I invested in (Bank of America) before I sold it, but was much less riskier (not just all my money into one stock)
Three cheers for Vanguard products!
iShares are excellent as well. Good call on the Vanguard in USD. Did you do that in your RRSP or non-registered account?