My 28-year-old daughter has finally managed to save a few thousand dollars and is ready to invest. Do you agree that exchange-traded funds are a good place to start? If so, which ETFs would you recommend?
My son is just starting to invest, too, so I’ve given this question some thought myself. And, yes, I believe ETFs are a good choice because of their low costs and diversification. But before we dig into the details, let’s deal with a few housekeeping issues.
The first thing I did for my son, who recently turned 18, was help him open a tax-free savings account with a discount broker. If your daughter doesn’t already have a TFSA, this would be a good first step as there is no sense investing in a non-registered account and paying unnecessary taxes on income and gains. If your daughter has employment income, she may wish to open a registered retirement savings plan as well.
Assuming you already have your own accounts with a discount broker, consider opening your daughter’s TFSA with the same financial institution. This will make it easier to keep track of your family’s assets and – depending on your broker’s policies – it might also qualify your daughter for reduced fees and enhanced levels of service if the combined level of family assets meets certain thresholds. Ask your broker what incentives it can offer.
Because your daughter is just starting out, you might also consider asking her whether she wishes to appoint you as an authorized trading agent. In addition to being able to execute trades on her behalf, you will have the authority to speak to the broker about any issues that arise with your daughter’s account. I have found this invaluable with my family’s accounts.
Now, what to invest in? Since your daughter is new to investing, it’s best to keep things simple. I suggest you look into one of the newer all-in-one ETFs that provide exposure to a globally diversified portfolio of stocks and bonds with a single purchase. Vanguard Canada, Bank of Montreal and iShares all offer such “asset-allocation” ETFs with varying levels of equity exposure to suit an investor’s time horizon and risk tolerance.
For your daughter, who will presumably be investing for many decades and can afford to take some risk, consider an ETF with a higher weighting of stocks than bonds. An example is the Vanguard Growth ETF Portfolio (VGRO) which – through its holding of seven other ETFs – allocates 80 per cent of its assets to U.S., Canadian and global equities and 20 per cent to bonds. VGRO’s management expense ratio is a reasonable 0.25 per cent. (In case you’re wondering, the investor pays only one MER – not the MERs on the underlying ETFs.)
Your daughter can cut her costs even further with the BMO Growth ETF (ZGRO) or iShares Core Growth ETF Portfolio (XGRO), both of which also have a roughly 80-20 mix of stocks and bonds but charge an MER of just 0.2 per cent.
If your daughter is comfortable taking on a little more risk, Vanguard and iShares also offer all-equity ETF portfolios (VEQT and XEQT, respectively). All three ETF providers mentioned here also have several all-in-one products with more conservative allocations to stocks and higher weightings to bonds, but given your daughter’s long-time horizon playing it safe might not be in her best interest.
On the other hand, if your daughter is saving for a near-term goal – buying a house, for example – then dialling back the equity exposure would be prudent.
Just as important as which ETF your daughter chooses is her behaviour as an investor. These all-in-one products are geared to long-term investors and are not meant to be trading vehicles. Buying and holding a diversified portfolio through good times and bad is one of the surest ways to build wealth, and all-in-one ETFs make it easy because the portfolios are rebalanced automatically and most of the decision-making is taken out of the investor’s hands.
By holding a single, well-diversified ETF – and contributing additional funds when she has accumulated sufficient savings – your daughter will get the best of both worlds: A simple investing strategy that will likely produce satisfying results.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
John Heinzl