I read some interesting advice in this Globe and Mail article recently – what to buy if you only have $1,000 to invest.
Some experts said investing in global equities will offer the most diversification. I would agree investing abroad is a wise thing to do since Canada’s market only equates to about 4% of the global market. Here is Jason Heath’s advice:
“You really only have money for a single investment with a thousand dollars, so go for something global where you’re just buying the market and keeping costs low. You definitely don’t want management costs to eat into an already small amount”.
That said, I’d be tempted to buy a U.S. dividend paying stock, a Canadian “international” company like Brookfield or a U.S. listed ETF like Vanguard’s VTI or VXUS for true low-cost diversification. Actually, this is what I’m investing in now – combinations of these assets this year.
I would certainly not agree with this advice from Dave Paterson, a mutual fund and ETF analyst. Dave recommended:
“For the more conservative investor, I would suggest the Ivy Foreign Equity [fund]. It’s a focused portfolio on high quality names, and it tends to be less volatile than a lot of other global equity funds and has historically provided strong downside protection. The MER is 2.52 per cent, so its pricey, but it’s a case where I’m more comfortable paying more for the overall lower volatility.”
Are you kidding me – recommending a fund product that costs 2.52%???
At least Dan Bortolotti’s advice was far more reasonable, suggesting the Tangerine Equity Growth Portfolio.
“I really like this fund for small investors. One thousand dollars is very small, but I recommend this fund even for investors with $20,000 to $30,000.”
My reflections after reading this advice (certainly based on what I know (now) about high fees killing portfolio values and managing my own portfolio) is the following:
- Regardless of the amount you have to invest, or your age, low fees and low transaction costs should be of paramount concern.
- Canadian investors need more fiduciary duty from financial professionals – be wary of any money management professional recommending any high-priced mutual fund product to you (over 2% MER). His or her compensation may depend on it.
- Regardless of the amount of money you can invest, seek out more diversification. This could be buying more / different individual stocks or buying a collection of stocks via a low-cost index fund. This investment selection should always align with your investing time horizon, goals and risk tolerance.
Invest wisely my friends.
Something to consider is the value of investing in the aggregate, or a global fund, as one advisor suggested. You will most likely get a lower return than with a more market-specific fund, but that’s ok (someone will always be making more than you, and someone will always be making less than you).
You can use that base-line return (say 6% gross) on which to build your other decisions. With your “passive” growth taken care of, you can now focus on developing your own personal Alpha: develop new skills, create a product, improve/expand your knowledge, etc. Example: you spend $1,000 on a computer course which you parlay into a $5,000/yr side job; over the next 25 years that initial investment has earned you a 20%/yr return.
Just another approach.
Interesting concept about “your own Alpha”. I would be inclined to do what you said, and I’m doing that actually, making investments in myself by finishing off my second degree. I think the next step for me is actually some financial planning courses but that’s in 2016.
Investing in yourself with the $1,000 is likely money well spent SST.
These high MER mutual funds are not worth owning. If I have $1,000 to invest I’d probably go with ETF right now, or purchase a Canadian company that has international exposure like BNS.
Absolutely not re: high-priced mutual funds. Actually, 5i Research posted my article about that recently:
http://www.5iresearch.ca/blog/my-biggest-investment-mistake-high-cost-funds
Nothing wrong with an international bank stock like BNS, RY, TD. I also like many Brookfield companies for that reason.
If you already have a couch potato portfolio set up, simply rebalancing your portfolio with that extra money would go nicely, wouldn’t it?
I think so BCM. This way you avoid individual stock risk. Hard to go wrong with initial money or new money to VCN, VXC, VTI, etc. There are also other great indexed products out there from iShares and BMO.
@SST – Advocis is a lobbyist and the voice of a dinosaur industry that will do and say anything to protect the status quo (high MER, transaction-based advice, inferior suitability standard). Industry reform, like what has taken place in the U.K. and Australia, is coming to Canada eventually. Yes, it may put some advisors out of work (the ones who are dependent on mutual fund commissions and don’t offer financial planning advice), but robo-advisors can fill the void (as well as better DIY platforms) on the investment side and fee-only planners can pick up the slack on the advice side.
Good post.
I made the mistake when I was young of buying mutual funds thinking buying stocks was too expensive ($30 per trade at the time). The reality is, stock is the way to go event with $1,000. Diversification? What are you really diversifying when all you have is $1,000. It hardly pays rent for one month. I really don’t think it’s time to worry about diversification when you invest $1,000. You should be worried about earning more money.
In fact, my kids are invested in stocks at $200 per deposit with $0 fees through Computershare. You can diversify at no cost, it’s just not easy to get started. Buy ENB, BNS, BMO, Telus and the list goes on. Look at Dripprimer.ca for the options. Dividends can be re-invested and you are set. ENB and Telus have beaten the TSX hands down in the past. If you want US, buy an ETF to avoid the currency exchange for now.
Like another reader, I personally find the question of investing $1,000 right now without any background to be too open ended. If you really really just have $1,000, don’t invest it as chances are it should be part of your emergency funds.
I could go either way on this Dividend Earner. I have a bias to owning CDN dividend stocks and in hindsight, given where CDN banks, telcos and many other blue chip companies have performed, going back to a younger self I would be very tempted to buy a TD, RY, ENB, BCE, or similar stock stud with my $1,000 as a new investor.
That said, if folks don’t want to take that risk, nothing wrong with a low-cost indexed product from Vanguard, iShares or BMO.
Also, assuming the investor has $1,000 to invest, I’m assuming as part of this this is not savings, it’s not an emergency fund, etc. Saving and investing are certainly different in my book.
20 units of VXC and 10 units of VCN would work, too!
Yes it would 🙂
What’s missing from all of this is the investor and what their personal and financial goals are. All these advisors were quick with suggested investments, but none of them made mention of the client. Fees and taxes should never dominate nor direct an investment decision.
$1,000 needed in 6 months to cover a planned medical procedure is going to be allocated much differently than $1,000 required in 35 years for retirement. I know in today’s world people are always looking for someone to tell them exactly what to do and that next ‘Ten Things’ list, but you can’t know where to put your money if you don’t know how that money will be used (e.g. is diversification really the best action? is loss of capital the biggest risk? is under-performance is the biggest risk? do they carry high-interest debt? etc.).
Speaking of fiduciary duty, kind of, I read an article claiming a high number of financial advisors will be leaving the profession due to the increase in regulation and compliance requirements (i.e. the easy money has left the building). I spoke with an ex-mutual fund advisor who said back in the 90’s his firm kept NO written records of anything. They had to hire Ernst & Young to help sort out their “books” when the firm got audited (which took 2 months!). Scary.
The FP article:
http://business.financialpost.com/news/fp-street/the-incredible-shrinking-adviser-how-onerous-new-rules-are-driving-away-new-planners-in-droves
Important quote: “Advocis, the Financial Advisors Association of Canada, said new regulations will have a particularly profound effect on small and medium-sized advisers, many of whom may be forced out of business as a result.”
Meaning, as has always been the practice, more and more investment business will be transferred to the big banks. I’ve seen this in action first-hand in the mid-90s. Not a terrific future for those who cannot/do not take control of their own finances. Perhaps that $1,000 should be invested in financial education so that they can make the most out of the next $1,000.
Good point. I included this in my last bullet:
“This could be buying more / different individual stocks or buying a collection of stocks via a low-cost index fund. This investment selection should always align with your investing time horizon, goals and risk tolerance.”
FWIW, when I read “invest” or “investing” I assume someone doesn’t need this cash now, or in 5-years for that matter. Money needed short-term should not be “invested”. It should be “saved”. There is a huge difference in my book.
For a young person, I don’t see lack of diversification or loss of capital as a big risk since you have time on your side to right mistakes; staying invested is your friend.
Your last point SST, investing in one’s self is likely always a good use of $1,000, young or old!
Thanks for the detailed perspective.
I agree with you, those high MER funds are to be treated with suspicion.
About the $1000 investment, I say: don’t worry about diversity.
I would buy a single stock, probably on NYSE, probably international.
And worry about diversification later:
The next $1000 you invest in a different company, rinse and repeat.
Over time, your portfolio will both grow, and it will be more diversified with each $1000 position you start.
I think diversification is overrated, especially over long term investing.
In the long term, fluctuations matter less, and in the long term, your portfolio will contain a lot of companies.
And you will have paid 0% MER.
When I moved to North America, I was appalled by the concept of paying the middleman a *percentage of your capital*.
I was expecting a *percentage of your earnings*. (Pay him for his results.)
I hadn’t come across this concept in Europe before.
Maybe because they hide it better, or maybe because it is not done that way.
My first employer used sunlife for RSP contributions, and their salesmen would not even tell me the MER.
But I did read in the prospectus that sunlife gets paid FIRST, and then you.
So if your portfolio is up 2.2% in a year and MER is 2%, then your earnings on *your* capital are 10 times as small as sunlife’s.
I’m on the fence Bram. Knowing what I know now, I’d probably invest in a CDN bank stock or telco if I was younger and had $1,000 to invest. Then again, you can’t go wrong with ETFs like VTI, VXUS, VXC, VDU, etc.
$1,000 invested in TD 14 years ago would be worth close to $17k today.
$1,000 invested in BCE over the same time span would be close to $22k today.
As I get older, I’m diversifying more; via buying new dividend paying stocks and using products like VTI.
I’m also a big fan of 0% or close to 0.05% MER with VTI. Fees and transaction costs matter big time.
Interesting comment about Sun Life. Happy to be a shareholder if they continue to get paid 🙂
Some rather surprising takes in that article. I’m with you re your comments Mark, but would stay away from an individual stock for a host of reasons. I too welcome a change to fiduciary duty from advisors.
Low cost, and international or even better global diversification are important criteria. The investor also wants to make sure that any dividends can be reinvested free, and that trading costs are low or non existent, especially on small account balances.
I think if you’re young, there is little issue in investing in a CDN blue-chip stock with your $1k.
$1k invested in RY (Royal Bank) in 1995 is now worth over $20k with an annualized return of 16+%.
Sure, easy to say now about RY today vs. back then but CDN stocks that have paid dividends for generations will likely keep paying them.
Otherwise if that’s too risky for some investors, and it might be, then by all means go with a low-cost, diversified, international investment product.
Just please don’t put the money into any fund that costs more than 1%. #highfeeskillportfolios 🙂
Good to hear from you Deane.