You need to invest in the stock market.
I’m not saying you “really should” or you should “give it a try”, I really mean that you need to do it. Because you’re not going to earn enough of a return on your savings accounts at current interest rates, the stock market is your only choice to build liquid, long-term wealth. If you ever want to retire or enjoy any kind of long-term financial security, you need to invest.
Most young people aren’t investing. They feel intimidated by the complexity of the financial markets and worry they don’t have enough money to get started.
However, getting started investing is much simpler than you think. It has never been easier to get into the stock market, and new investors have never had as many options to invest as they do now. In other words, you’re living in the luckiest time to get started in the stock market!
Mutual funds get a bad rap because of their high fees, but depending on what funds you choose, they can be a great way to get started in the stock market for a new investor.
Mutual funds are typically available directly from your bank, and you can get started with as little as $25 or $50. When you invest in a mutual fund, you’re giving your money over to a fund manager who will invest it in a series of stocks, bonds, ETFs and other investments on your behalf.
The MER, or Management Expense Ratio, is a percentage of your investment that you pay to fund manager for the trouble of pushing your money around in the stock market. Typically these are around 3%, but they can be as low as 1% or as high as 5%.
A Word of Caution: avoid mutual funds with sales or trailing commissions, set-up fees, and redemption fees. Mutual funds sold by financial advisors typically come loaded with additional fees because the advisor needs to make commission on the sale.
If you find a low-cost mutual fund (MER ~1%), this is a perfect option for a new investor that does not have thousands of dollars saved up to get started investing. Check what types of mutual funds are offered by your bank, and look for a low fee option to get started.
Low-cost mutual funds to consider in Canada:
Robo-advisors are online wealth management tools, and work similarly to a mutual fund, except your investments aren’t selected by a fund manager. This is why they can charge lower fees, typically less than 1%. Fundamentally there is a real human behind it all, but they’re using technology rather than their own personal stock picking strategies to build your investment portfolio.
Robo-advisors to consider in Canada:
A Self-Managed Portfolio
If mutual funds are for absolute beginners, robo-advisors are for intermediates, then a self-managed portfolio is the advanced class of investors — but it’s still easy. And, of all the choices, this option offers the lowest fees and the highest possible returns.
With a self-managed portfolio, you’re responsible for choosing your own investments. You can make it as straight-forward or as complex as you want, and your choices of investments and asset allocations will depend on your confidence as an investor. You can have a simple portfolio made up of as little as 2 or 3 ETFs, or you can buy common stocks and trade options. It all depends on your level of understanding and comfort with the market.
I have an investing eCourse called The Six-Figure Stock Portfolio that is the perfect guide to building a robust and profitable investment portfolio, from $0 to $100,000.
Ultimately, the investing option you choose should reflect your financial goals and risk tolerance, but don’t make the mistake of NOT investing — you can’t afford it!
Ack! Why do you Canadian folk have to pay such high fees for index funds? That’s unfortunate. Here in the states, the fees for index funds are often a small fraction on 1%. The big three investing firms – Vanguard, Fidelity, and Charles Schwab – are basically in a race to the bottom with their index fund fees charging as low as .04% for some funds.
Great content as always! You’re doing a great service to the younger generation. Keep it up! 😉
I know!! Isn’t it crazy? Canadians pay some of the highest mutual fund fees in the world! Not very proud of my country in that respect lol
Totally demonstrating my ignorance here… Can you invest in Vanguard or the like as a foreign investment with the lower fees? I will say you have a lot else going for you… health care, respect of human tragedy, Trudeau… Potentially uncorrelated, but I’d take it over lower fees.
Vanguard Canada offers ETFs traded on the Toronto Stock Exchange. Definitely preferable to paying USD for American funds.
While Canadian mutual funds are more expensive than some of their American counterparts, ETFs are not. Furthermore, Canadians have robust tax-sheltering accounts like the TFSA and RRSP to reduce the overall cost of their investments.
I wonder how easy it would be to park your money on an American index fund. Might incur a funny tax situation tho…
You can purchase American index funds. They’re offered by plenty of Canadian ETF providers.
Alternatively you can purchase American stocks/funds directly. Dividends are subject to a 30% withholding tax, but you can get this refunded at tax time.
(Wouldn’t recommend buying US holdings with the Canadian dollar so weak though. Good time for Americans to buy Canadian, however)
I can’t think of why you’d want to, though. If you’re looking for USD currency exposure, then you’re better off buying a CAD ETF that holds US stocks like VUN. If you own VUN and the Canadian dollar falls, your return in CAD will be higher.
You also have currency conversion costs assuming you want your cash in CAD. And if you’re a taxable investor, tracking your adjusted cost base is a nightmare.
But index funds don’t equal mutual funds. Vanguard offers the low cost index fun etfs. Same price as its US offerings. Mutual funds = actively managed while indexing is passive.
I was referring to index ETFs!
I really want to do the self-managed portfolio thing, so I need to take your course like ASAP. I feel like I’ve said this to myself 2000 times.
Thanks for all of the tips. I have already employed two out of three so that’s a good start, right?!
Awesome starting guide. I love and use Robinhood for stock investing after leaving Ameritrade. Have you tried it out?
Well done! I really enjoyed the article Bridget. The advice that you give about avoiding mutual funds with sales or trailing commissions, set-up fees, and redemption fees is especially good. These fees add up and along with poor taxation structure, can decimate returns. Keep on writing that amazing blog posts!
Great article. I typically don’t blog about this high level stuff (for instance, I just posted on metrics to assess the stock market), so I think that I will refer my beginner readers to this. Thanks!