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Stocks, Bonds etc. ->Investing

Investing

Investing is a lifelong pursuit that will help you achieve financial independence.  We think that the best way for a novice investor to invest is through buying exchange-traded funds (ETFs).  The sooner you start investing in these, the better.  We gave ETFs to our grandchildren when they were born, and add to them annually.  As they grow older, we explain that they own shares in companies which provide products that they use every day.  If doing this, don't forget about the attribution rules.

Once you've paid off your high interest (over 8%) debt, you should think about investing, because it is possible to get a higher rate of return on your investments than you pay on your debt, by using the plan below.  Therefore, if you wish, you can take your "pay yourself first" money (15% of gross income) and invest it in RRSPs.  There is some risk involved, because with this strategy you would be 100% invested in stocks by holding ETFs, and the prices of stocks fluctuate.  If you can hold these funds for 10 years or more, you will probably be better off to invest in RRSPs rather than pay off your debt more quickly.  If you take our advice and buy ETFs, and then become worried about your investments so much that you can't sleep at night, try investing less in RRSPs, and pay down your debt faster.

This plan takes the emotion out of dealing with your investments.  Once you have decided to go with this plan, you have no further decisions to make.  You buy holdings in several different ETFs, with the plan of holding them for a long term.  You buy 3 to 4 times a year, never sell, and don't try to time the market.  By buying the funds over a long period of time, it helps to reduce any volatility.

This plan is very simple.  You will have very few holdings to keep track of.  If you are making monthly deposits of 15% of your gross income (pay yourself first), it will take less than an hour a month.

If you hold these funds over a long period, this plan should provide average returns of 9%+ per year.

If you are still interested in this strategy, here's what you should do:

If you are a novice investor and are going to use our plan, do not use a full service brokerage.  Open a self-directed RRSP account with a discount brokerage.  The advantages of using a discount brokerage are:

bullet low commissions
bullet no broker calling to recommend that you make trades
bullet easy online access to your brokerage accounts
bullet you can easily make your own purchases, either by phone or online

This is a good time to shop around for a financial institution.  All the financial institutions want all of your business - loans, mortgages, savings, RRSPs, credit cards, and brokerage accounts.  So when you arrive at their door, have your financial plan with you (including goals, budgets), showing what you want to do over the next 10 to 25 years.  Tell the financial institution what you want to do.  Donít let them tell you what to do.  Tell them you are willing to give them your business and to stick with them as long as they give you the best rates.  They probably can't reduce discount brokerage rates, but you may be able to save on loan or mortgage rates, and account administration fees for your chequing or other accounts.

If you want to shop around for a discount brokerage, you should compare the following:

bullet commission schedule (costs for making trades)
bullet whether they allow US dollar balances in registered accounts, which is very common now.  If they don't:
bullet whether they provide the service of washing trades for registered accounts
bullet What exchange rate do they use when converting US$ dividends to Cdn$ for registered accounts - the sell rate, or the Bank of Canada noon rate?  The noon rate will pay you more in Cdn$.
bullet What is the difference (spread) between their rates for converting your purchases and sales of US$ transactions to Cdn$?  This will vary depending on the amount of the transaction, but it also varies between brokerages.  The lower the difference, the less you will lose on US exchange.
bullet online trading ease of use
bullet online reporting features
bullet administration fees
bullet withdrawal fees
bullet interest rates on account balances

Now see our article on Recommended stocks/ETFs for inside or outside of your RRSP.

Tax Tip:  If you are selling investments outside of an RRSP, make sure you know the tax consequences.

See our article Tax issues re investing, and tax treatment of different types of investments.

Revised: September 19, 2017

 

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