The best investment products for beginners are cheap to buy and own, easy to manage and effective in producing competitive returns.
In Part 2 of my Ultimate Investor Guide for Generation Y, we look in detail at some specific investments that deliver on all three points (read Part One online here). Our target investor has $5,000 to start a portfolio in a tax-free savings account. TFSAs are an ideal vehicle for rookie investors for three key reasons.
- Taxes are a non-issue: Money can be withdrawn tax-free at any time.
- They typically have no annual account administration fees. Investment firms hate small accounts for the most part, and they have demonstrated it by charging administration fees on them; TFSAs are a notable exception.
- They’re versatile: You can put pretty much any type of investment in a TFSA – mutual funds, exchange-traded funds, stocks, bonds and guaranteed investment certificates.
A quick word about portfolio-building: Many of the portfolios we'll look at here use a modestly aggressive mix of 25 per cent in bonds and 25 per cent in each of Canadian, U.S. and international stocks. If I were in my mid-20s, I'd probably go 15 per cent bonds and 85 per cent stocks, but Gen Y investors tend to be on the conservative side (read more on this in an earlier column).
Now, let's look at four ways to invest as a beginner – simple, medium effort and two advanced options.
Simple – Use balanced funds.
Who sells them: Balanced funds are sold everywhere, but two of the best for beginners come from the online bank Tangerine Bank, formerly ING Direct, and the Calgary-based investment company Mawer.
What you're buying: Tangerine's balanced growth portfolio is built with index mutual funds tracking major stock and bond benchmarks. The fund is divided evenly into Canadian bonds, Canadian stocks, U.S. stocks and international stocks (outside North America). Mawer Balanced holds other Mawer funds in a blend of roughly 6 per cent cash, 31 per cent bonds and 63 per cent stocks from Canada and around the world (including large and small companies).
How to buy: Online through Tangerine. For Mawer funds, choose an online broker (my latest broker ranking is here) and confirm that you can buy Mawer products with no commissions.
Pluses: You put money in and the fund managers maintain a diversified portfolio for you. Investing gets no simpler than this. Also, there shouldn't be any cost to buy or sell either of these funds.
Minuses: The cost of owning these funds, as measured by the management expense ratio, is more expensive than the other options here, though much cheaper than most conventional mutual funds.
Takeaway: A fair price for investments that do all the work for you.
Medium effort – Use low-cost index funds
Who sells them: All the big banks sell mutual funds that track major stock and bond indexes, but the cheapest by far are in Toronto-Dominion Bank's e-Series of index funds.
How to buy: The easiest way is to open an account with TD Direct Investing and then buy these four e-Series funds online.
Pluses: Very close to the cheapness of owning ETFs, and no cost to buy or sell.
Minuses: You have to rebalance your portfolio once or twice a year to ensure your mix of investments remains where you want it to be.
Takeaway: A very good choice requiring only medium effort.
More info on TD e-Series funds
Advanced I – Exchange-traded funds
What you're buying: ETFs, which in their most effective form are very low-cost funds that track major stock and bond indexes and trade like stocks. That means you need to have an online brokerage account to use them.
How to buy: Go to your broker's online equity order screen (equities are financial-speak for stocks), add the stock symbol for your ETF and select the number of shares you want to buy. You can buy any number you want.
Pluses: The cheapest way to get the diversification benefit of investing through funds rather than picking individual stocks.
Minuses: The big one is brokerage stock-trading commissions, which can range from $9 to $29 for small accounts, depending on which firm you use. That's expensive if you add to your investments on a monthly basis. The independent brokers Questrade and Virtual Brokers (not affiliated with a big bank or credit unions) offer no-cost ETF purchases. You pay normal rates to sell, but these firms have very low commissions. One more minus with ETFs is an overwhelming selection, numbering close to 400 funds. The four ETFs shown here can certainly be used to build a complete portfolio, but there are many alternatives.
Takeaway: The less you pay for your investments, the higher your potential returns.
Advanced II – ETFs managed for you at low cost
Who does this: ShareOwner, an online brokerage firm catering to long-term, buy-and-hold investors.
What you're buying: The same ETF portfolio as above, but this time you're investing through ShareOwner.
How to buy: ShareOwner lets you pick the ETFs you want, and then set up a monthly contribution plan. In addition to the fees on your ETFs, ShareOwner applies a charge equal to 0.5 per cent of your account balance annually to buy your funds and manage your portfolio (a flat $40 per month is charged for accounts over $100,000). ShareOwner will divide your contributions between the funds you choose, in the proportion that you specify. They'll even do fractional shares to ensure your money is invested where you want it.
Pluses: 47 core ETFs are offered for portfolio building, or you can use one of five model portfolios. Once you've chosen your portfolio, they do all the work for you.
Minuses: You're giving up 0.5 of a percentage point in returns to have someone keep your account running smoothly.
Takeaway: Not a bad way for a beginner to build an ETF portfolio.
More info on ShareOwner's ETF program
Globe app users click here for a table showing the four ways to invest as a beginner.