Through my own personal experiences I know many people who either don’t believe in investing or tried to learn it on their own and then quit through frustration or lack of understanding. The hardest part for many people is that they don’t understand what to do in order to get started or what to even invest in. Let’s face it, learning about investments such as stocks and bonds is intimidating to a lot of people.
Perhaps it’s a failing of our educational system, where math and science take much more precedence over knowing what to do with your own personal finance. You would think that knowing how to take care of your finances would be a necessary skill set in life, but those concepts were never taught to us. Maybe the system doesn’t want the masses to understand their finances because corporations and wealthy individuals want to take advantage of the ignorant. I don’t want to get into conspiracy theory talk, so let’s just leave it at that.
Keeping It Simple
If there is anything that I’ve learned through my own personal experiences of getting started in building an investment portfolio it’s that it should be kept simple. When I first started, I wanted to be a superstar. Who doesn’t want to be the person who predicted in 2001 that Apple would turn into the biggest corporation in the world? That would make for great stories with friends and put your reputation in the league of legends. Unfortunately, that rarely happens.
The easiest thing that someone could do is try to keep things simple. When I first started, I tended to overthink things. There were so many options to choose from. I read so much material talking about ETFs, mutual funds, individual stocks, bonds, etc.. With so many options and investments, it’s no wonder so many people get confused and give up. Failing to understand makes us hesitant to take action. It’s not because we don’t want to do it. It’s because we fear to do it. Investing for the first time is like flying at 25 000 ft with a parachute on your back and you are staring out the door ready to jump.
From what I’ve learned it doesn’t matter what you choose. In fact, even though I write about how costly it could be to use mutual funds, they are in fact a great way to get started. There are many mutual funds like the ones suggested by Canadian Couch Potato that make for a great starter portfolio.
Some mutual funds provide great balancing with just one simple mutual fund like the Tangerine Investment Funds. Even though the expense ratio is higher, there are many things to like about it. It’s simple, there are no trading fees, you can set up a monthly purchasing plan and have it automatically buy the mutual fund on a regular interval to help with dollar cost averaging. You don’t need to calculate the number of shares to buy because mutual funds can be bought in partial units. It’s all so simple.
You might question why buy such an expensive fund like the Tangerine Investment Funds when I’ve written about how detrimental it can be in the long run? The difference between a cheaper mutual fund like the TD e Series and the single balanced fund is about 0.40% a year. The difference between a single mutual fund and the average of a bucket of ETFs is probably about 0.80%. You have to ask yourself the question. If you are only investing about $1000-2000 to start, what difference will $10 make versus $4 or $8? Is it worth the extra complexity? You might actually end up paying more in commission fees trying to buy all the ETFs. It’s more important to get started. Remember that time is your ally, if you’re starting young.
Use Robo Investing
There are so many robo-investing firms that are popping up now that it simplifies investing. Companies like Wealthsimple and Wealthbar in Canada have come up with products that allow you, as an investor, to just contribute money and let the robot do all the work of investing.
Robo-investing portfolios were created to emulate exactly what you would try to do if you wanted to create a diversified, balanced portfolio. This simplifies the investing thesis greatly because all you have to do is deposit the money, take a risk assessment and bam, the computer does the rest.
Robo-investing has become extremely popular in America through companies like Betterment and Wealthfront. More and more young professionals are turning to robo-investing because they want to invest in the markets for the long term, but don’t have the time to learn. With greater acceptance to computers and the digital world, why not have a computer do all the math and balancing for you?
For someone who is just starting, robo-investing is great. It helps you start your investment portfolio with little to no effort. You don’t even need to understand what the funds are that the robot is buying. Only when you get beyond a large sum of money will a do-it-yourself portfolio actually be cheaper. And that’s only if you want to be hands on!
Use Your TFSA First
So many people are misinformed about the TFSA. It was the whipping boy of the Liberal Trudeau campaign, but the reality of it is that it’s the most beneficial investment account to use when you’re starting out. You won’t have to worry about complex tax calculations and you don’t have to worry about calculating capital gains and losses.
The TFSA allows you to withdraw money from the account without having to pay back taxes. If you are unsure whether you’ll need the money that you invest in the near future, the TFSA gives you greater flexibility. First off, any money withdrawn can be re-contributed the following year, so your contribution room is not affected. If you withdraw from an RRSP, that contribution room is lost forever and not only that, you need to pay taxes on your marginal tax rate when you withdrawal. Remember that tax refund you got back? Oh yeah, it was supposed to be used to pay for taxes when you withdraw in the future. You were not supposed to spend it. D’oh!
Get Started Now
The earlier that you start investing, the better off you will be. If I had known about the power of compound interest, I would have started investing when I was 18. Just remember that compound interest is exponential growth. The longer you are able to hold onto your investments, the faster they will grow in the later years. You may get paltry returns of $50 in the first year, but if you keep at it that will eventually grow into something more substantial.
Regardless of YOLO, YOYO or whatever you subscribe to, if you’re willing to take risks with your money now for current gratification, why not take risks with your money for future benefit?