Life’s good: Your debt is under control and you have goals in mind. In order to reach them you realize that it’s important to start investing. But how? Let’s take you on a straight-talking journey that’ll help you get going.
Journey from no investments to saying things
like, “My portfolio’s diversified.”
The Great Investment Voyage
You’ve now got a plan of action. Now let’s look at different risk levels.
Create an Investment Plan
The Basics: Risk and Return
Find the Right Investment Mix
Investment Management Options
Questions For Your Advisor
RSPs vs. TFSAs
Mutual Funds vs. ETFs
All About GICs
Investing Rules of Thumb
01. How to Create an Investment Plan
An investment plan means setting goals, creating an investment mix that matches
those goals, and then coming up with a disciplined approach to maintaining that plan.
Prep for the Journey
Decide What to Invest In
For longer investment timeframes a mix of stocks and bonds might make sense, but as you get closer to using the money you’ll probably want to become more conservative with the risk you take on. And that’s about it. Planning doesn’t need to be complicated, and this approach can apply to any savings goal.
Set Up a Savings Plan
If you plan to save $200 per month, in 11 years, when your first child starts post-secondary school, you'll have contributed over $31,000. With a hypothetical return of 4%, that would become about $41,000. You’ll have four more years of saving for your other child before they also start post-secondary school.
Determine Your Goal
You already have $5,000 saved up.
Let’s say you have two children, a three-year-old and a seven-year-old, and you want to start saving for their post-secondary education. You know they’ll need to begin using that money in about 15 years and 11 years, respectively.
Now that you know about risk, how do
you decide on the investment mix
that works for you?
02. The Basics of Risk and Return
Here are three different investment types:
Choose Your Path
Most Risky, Highest Potential Return
The potential return on stocks is higher, but that carries more risk. Stock prices constantly fluctuate, but the additional risk also comes with the potential for higher long-term returns.
More Risky, More Potential Return
Compared to stocks, they’re relatively safe investments. They can still fluctuate in value, however bond prices generally don’t fluctuate to the extent that stock prices do.
Not Risky, Low Potential Return
It’s the most stable, but offers the lowest long-term returns. That’s the tradeoff with risk and return: if you want the possibility of higher long-term returns it comes at the expense of greater risk.
Your individual goals
Your comfort with market fluctuations
How long you’ll be investing
What to consider when choosing the investment risk level you’re comfortable with:
Here’s a simple test: If you invested $5,000 today and two months from now your balance slipped to $4,500, would it send you into a panic? Or would you take it in stride with a long-term view to investing? Be honest. Then decide on the risk level that works for you.
OK, now you’ve chosen your investment mix. Next, let’s look at portfolio management options.
This provides the growth your portfolio needs, serving as the “offence” in your portfolio. Example: stocks.
02. Fixed Income
This provides regular interest income payments and is your portfolio’s “defence.” Examples: bonds or long-term GICs.
This provides liquidity. Examples include a high-interest savings account, short-term GIC or money-market mutual fund.
The higher the percentage of equities relative to fixed income (bonds), the higher the expected return and corresponding risk involved. Conversely, the lower the percentage of equities and higher the percentage of fixed income, the lower the expected return.
While the 100-Minus-Age rule works for retirement savings, it doesn’t work for every goal. Let’s say you’re saving for something you want within 5 years. High-interest savings accounts, GICs and high-quality bonds (or bond funds) are good investment choices. You’ll want to stay away from investments with a lot of volatility, which rules out stocks. After all, your goal is for the money to be there when you need it.
About this chart
20% Fixed Income
75% Fixed Income
This graph illustrates the concept of risk vs return as it relates to asset allocation. Source: Preet Banerjee
Investing for Less than 5 Years?
So how do you choose the right mix?
A good rule of thumb is
“100-minus-age”: When saving for retirement, have fixed income assets equal to your age, and the remainder in equities. So, if you’re around 40, that means you invest roughly 40% in fixed income and 60% in equities (100-40 = 60). Adjust this allocation perhaps every 5 years. This is a useful rule of thumb because as you get older, you probably won’t want to expose your nest egg to as much risk as you had in earlier years.
03. How to Choose the Right Investment Mix
Having the asset allocation (or investment mix) that works for you is one of the top factors in determining your portfolio’s performance. There are three main asset classes, each serving a different purpose in your portfolio:
Now you’re clear on management options and fees. If you’re considering using an advisor, there are a few things you’ll want to ask them about the service they offer.
The cost of using an advisor varies depending on their services. Some offer advice only on your portfolio, leaving them uncompetitive against automated investment services. Others provide advice that looks at budgeting, insurance, estate planning, taxation and more.
Hire a Financial Advisor
Often called robo-advisors, here’s how they work: You open an account online and fill out a questionnaire about your risk tolerance, etc. A portfolio is recommended and implemented for you. These services cost less than using an advisor.
Automated Investment Service
In this scenario, you’re responsible for selecting all of the holdings for your portfolio, as well as the ongoing monitoring and rebalancing. Note that this may not necessarily be the lowest cost. Many DIY investors trade actively and transaction costs can add up.
Investment fees directly impact your portfolio’s returns, so one of the best ways to improve performance is to reduce fees. In early 2017, Canada’s securities regulators introduced new rules to improve transparency in the retail investment industry. Investment dealer firms must now provide clients with annual reports detailing – in plain language – how much, in dollars, your investments made in the previous year and what your investment expenses are.
Fees for Managing Your Investments
04. Options for Managing Your Investments (And What They Cost)
Journey Solo, or with a Guide
There are different ways to manage your investing. Each comes with a different degree of involvement from you, and each varies in terms of fees you need to pay.
Once you’ve decided which investment management option is right for you, the next step is to familiarize yourself with the different account types and investment options.
What value-added services do I receive from you?
What direct or indirect fees are associated with my investments?
How do I pay you, and where does the money come from?
How do you choose which investments to buy or sell?
As an investor, what do you invest in?
Your advisor’s approach to staying informed of changes to your goals.
How your advisor will help identify recommendations based on your objectives.
Rebalancing your asset mix when needed and how they’ll help you set and meet goals.
Additional resources such as: tax services, estate planning or other financial planning.
Hear Tangerine's answer to this question
Listen for the following in their response:
Other administrative fees.
Fees for advice.
MER (Management Expense Ratio)
Other product fees.
Commissions and other charges.
Trailer fees and percentage of MER.
Any biases your advisor has when choosing.
How these drivers fit with your investment goals.
Factors driving the investment decision.
That their principles align with what they recommend for you (and if not, why not).
The principles behind what they do (more so than the actual investments).
Select a question to learn more.
05. Five Questions to Ask Your Financial Advisor
If you use the services of a financial advisor, here are five questions you can ask to help you understand what you’re paying for.
Assess Your Team
Now it’s time for another decision: mutual funds or ETFs? Don’t worry, we’re about to break it all down.
06. RSPs vs. TFSAs
Navigate Forks in the Road
Many people have a tough time deciding whether to save in an RSP, a TFSA or both.
This video provides an introductory view of each and presents some considerations for choosing what's right for you. You could also download our guide on RSPs and TFSAs here.
Now there’s one final option to consider: GICs.
It can be difficult as a self-directed investor to sell something that’s doing well and buy something that’s doing poorly. But that’s what the old “buy low/sell high” adage means.
By contributing a pre-set amount regularly, you don’t need to worry about timing your purchases based on the market. Your purchase will automatically buy you more units when the price is lower, and fewer units when the price is higher. This is a very effective way to build your wealth, and contribution amounts can often be as little as $25 per month.
You can set up regular contributions easily.
You don’t need to rebalance your portfolio yourself.
A mutual fund invests in dozens or even hundreds of stocks or bonds. You’re not buying a single stock or bond; you’re buying a portfolio of stocks or bonds, which means your investment is more diversified than investing in a single security. When you buy units of a mutual fund, the price you pay is based on the price per unit. If the investments that make up your fund do well, then the value of your units will go up (and you’ll make money if you sell them).
Advantages of Mutual Funds
What’s a Mutual Fund?
Watch the Video
It depends on the type of investor you are. If you want to be self-directed—creating and managing all aspects of your portfolio—you’ll probably want to choose ETFs over mutual funds. But if you don’t think you’re in a position to be self-directed, mutual funds are probably the better option.
Management fees for ETFs are usually lower than those of traditional mutual funds. If your goal is to create the lowest-cost portfolio without investing in individual securities, it’s very likely you’ll want to use ETFs over mutual funds.
For investors who want to trade and manage their investments, ETFs offer diversity. You can choose from a multitude of ETFs in the market, mirroring the values of Canadian equities, U.S. or international equities, bonds and many more exotic asset classes.
You have control.
So, which one is best?
You can lower your
Exchange-Traded Funds, or “ETFs” are investment funds that typically attempt to mirror the performance of an underlying index (like the S&P 500) by investing in the same securities as that index. They are bought and sold on a stock exchange, just like stocks. Unlike mutual funds, which don’t trade on an exchange and have only one closing price each day, ETF prices change throughout the day in the same way stock prices change.
Advantages of ETFs
What’s an ETF?
07. Mutual Funds vs. ETFs
At some point in your journey, you might want to choose between mutual funds and ETFs. But what do these mean? We’re here to break it down.
That’s your primer on the options. But there’s one last crucial piece to understanding investing: Knowing what are the smartest investment behaviours.
They can be good parking spots for cash sums that you don’t anticipate needing anytime soon.
They can help to create a steady stream of income, if they’ve been set up to mature at regular intervals.
They can be a less-risky substitute for bonds in the fixed income portion of your portfolio.
08. All About GICs
Consider the Path with the Least Risk
Guaranteed Investment Certificates (GICs) can serve many different functions:
GICs can also play a couple of roles in asset allocation strategies (your mix of different investment types). Short-term GICs mature in less than a year, so they’re considered similar to cash when it comes to asset allocation. Longer-term GICs fall into the fixed income category.
GICs are non-market based investments so they carry no market risk. But they do have interest-rate risk. This simply means that when you lock your money into an investment at a set interest rate, you run the risk of rates going up while your money is locked in at the lower rate, therefore missing out on higher interest.
The bottom line? GICs can often help investors earn a guaranteed return without the volatility that can be attached to other investments. They can also be a great place to earn a bit of extra interest over a savings account for funds you won’t need soon.
What are the risks?
Rule 3: Make a Pact with Yourself
Write an investment “contract,” stating that you recognize there will be ups and downs in the market, but that you vow to stick with your plan regardless. This pledge to yourself will help you avoid panic selling, which could weaken your investments. Think of your portfolio like a bar of soap: The more you touch it, the smaller it gets.
Control your emotions. Long-term historical market data shows that successful investors avoid panic selling and hold for the long term. Sitting on your hands has proven to be far more successful than making emotional changes to your portfolio over time.
Structure your portfolio to ensure it’s resilient to market changes. That means making sure it’s well-diversified and aligned with your investment goals and overall plan.
09. Investment Behaviour: Three Rules of Thumb
Tips for the Road Ahead
The financial markets tend to react to every event in the news—but that doesn’t mean an investor should. By controlling your investing behaviour and applying these tips, you can build an investment portfolio resilient enough to withstand potential market volatility. Here are three rules of thumb:
Retake the Journey
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Investing to meet your goals shouldn’t take over your life, or your paycheque. The most important thing is to get started, no matter how small the amount. At Tangerine, there’s no minimum balance for investors.
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