Your just starting out investment portfolio: Part 2

Dip your toes in the investment pool by buying index funds.

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Introducing university and college students to the idea of investing usually leads to the question, “There are thousands of things I could invest in, where should I start?”

It’s true. The investment world can seem paralyzingly huge for someone just starting out. And the work involved in learning about investing might seem overwhelming.

According to The Fund Library, there are over 390 fund companies and more than 32,000 mutual funds and clones available to investors in Canada. Damn, that’s a lot of options. The New York Stock Exchange has more than 2,800 companies listed, while the Toronto Stock Exchange has more than 1,400. It can seem pretty daunting to have to wade through the options to choose the ones that are just right for beginners.

I often suggest that people dip their toes into the investment pool using alternatives that reflect what the market as a whole, or particular sectors of the market, are doing. That means buying an index.

A just starting out investment portfolio can be made up of index mutual funds or exchange-traded funds, also called ETFs. The idea is to eliminate individual investment choices by mirroring those indices that are considered a barometer of what’s happening in the markets.

You could choose to mirror the S&P/TSX Composite, which includes about 250 companies traded on the Toronto Stock Exchange. If you do it with an indexed mutual fund, you’ll buy units of a mutual fund that holds all, or almost all, of the investments in a particular index. If you do it with an ETF, you’ll buy individual shares in the pool since ETFs are bought and sold on an exchange just like stocks.

Choose an indexed mutual fund if you’re starting out small and plan to make regular contributions. If you’ve got at least $50,000 to invest and plan to make infrequent purchases, open up a discount brokerage account (look for one with no annual fee and that doesn’t charge more than $10 a trade), and pick an ETF.

Some people believe that following an index makes the most sense that they completely eschew the idea of buying individual stocks and bonds and focus solely on using an indexed investment strategy. Regardless of where you go from your just starting out portfolio, choosing to mirror how the financial marketplace is doing is a good first step. Get busy investing in an index and keep learning as you go.

6 comments on “Your just starting out investment portfolio: Part 2

  1. Thanks Gail for the great article on index investing! I have but one concern regarding the article, if some of the greatest investors in the world encourage index investing along with the academic world then why would anyone want to try and "beat" the market returns when in fact over the long term we all know the end result!?

    Cheers,

    Jamie

    Reply

    • The same reason Vegas exists. Sometimes you really do come out ahead.

      Also, it can be hard to know whether you did well on a stock because of skill or blind luck. Most people assume the former when in reality it is the latter.

      Reply

      • So you are in fact confirming my opinion on investing. Most people "gamble" with their life savings by speculating in the stock market. If you ask me, I'd rather just make more money and not worry about it.

        Cheers.

        Reply

  2. I'd say go with ETFs because most discount brokers have no fees for buying them, only for selling (and low ones at that). I say this mainly because ETFs have lower MERs than mutual funds with same goal.

    Reply

  3. This is only my own opinion, but I prefer to buy stocks of the big multi national companies that do business around the world than buy emerging market or European etfs. This eliminates currency risk and allows me to buy companies ( never more than 5% of your portfolio each stock) that I am famiar with their products & have a market edge. Examples would be KO, JNJ, WMT, PG, MCD, CL. I would also buy a dozen or so, again no more than 5% each of the biggest bluest companies in Canada ( RY, TD, BNS, TRP, THI, BCE, EMA, FTS, ENB) etc , By splitting 1/3 of your portfolio in US multinationals, 1/3 in Canadian blue chip and the remaining 1/3 in bonds ( XBB & CBO) your portfolio will thrive for years.

    Reply

  4. Gail, why the $50,000 recommendation before getting ETFs?
    If this is to do with brokerage fees, could you at least put a reference in to the article?

    Reply

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