Sean O’Byrne is a 19-year-old student who wants to take full advantage of time to grow his money
Sean O’Byrne, a 19-year-old electrical engineering student in London, Ont., has been saving money since he was 13 years old. His first job was sweeping floors at a woodworking shop as well as helping his grandfather fix hand-held tools.
For several years now Sean, a diligent saver, has been able to slowly invest all the money he’s earned through summer jobs. Since he’s not planning to buy a home for at least a few more years, Sean sees a great opportunity to build his investment portfolio.
Right now, Sean has $3,000—or about 17% of his investment portfolio—in a bank dividend fund he bought two years ago and another $15,000—or 83%—sitting in a bank savings account.
“I saw the bank dividend fund as a good way to get my feet wet in investing but I don’t think it’s quite right for me for the long term,” says Sean. “Returns over 18 months haven’t been great.”
He says he’d like his new portfolio to be simple so he can manage it himself. And while he’s familiar with the Couch Potato, he feels he’d like to try some stock investing first—just to learn a bit about different company stocks and how they react to the market. “I’m young and the biggest asset I have going for me is time,” says Sean. “What investment choices should I make and in what form of tax-sheltered accounts should I hold these—if any?”
Fee-for-service planner Heather Franklin is impressed with Sean’s disciplined approach to saving and investing and thinks that his purchase of a bank dividend fund last year was a good way to get his feet wet with investing. But moving forward, she’d like him to open up a TFSA account with a discount brokerage and start contributing to it.
“He’s young and the TFSA allows for maximum flexibility for him,” says Franklin. “He can open an RRSP when he’s working full time and has a higher income since the tax savings will be more valuable at that time,” says Franklin.
(Its worth mentioning, however, that depending on when Sean turned 18 would dictate how much he could contribute to a TFSA. If he turned 18 in 2015, then he could contribute up to $21,000 into a TFSA. But the government lowered the contribution limit in 2016 so if he turned 18 in that year then he’d only have $11,000.)
Franklin is also happy to see that Sean wants to learn more about finances. What Sean shouldn’t do is over-diversify. So to start, she’d like him to divide his portfolio up equally into three stocks and then, once he’s accumulated a few thousand more dollars, perhaps add a U.S. company. “He has to embrace some risk at his age,” says Franklin. “With direct purchase of stocks, it’s cost effective and transparent for him. Plus, it gives him the hands on approach that he seems to be looking for.”
Franklin suggests Sean’s first stock purchase be a Canadian bank. “He should pick just one bank stock and put a third of his money into it,” says Franklin. “It will be a good foundation for his growing portfolio.”
For his second stock, Franklin would like Sean to explore companies that speak to his interests, such as the large Canadian engineering firm SNC Lavalin (TSX: SNC). “It’s a strong company that speaks to his engineering interests and has good international exposure,” notes Franklin.
Sean’s final stock should be a true growth company because, as he points out, he has time on his side to ride out market volatility. A Canadian growth company such as the Canadian discount retailer Dollarama (TSX: DOL) or Gildan Activewear (TSX: GIL), the T-shirt and sock company, could work. “In a couple of years, when the exchange rate is a little more favorable, and he’s saved up a few thousand dollars more, he can round out this beginner’s stock portfolio with a U.S. blue chip stock,” says Franklin.
To expand his literacy on companies and stocks, Franklin suggests Sean make a point of attending some annual meetings for the companies of the stocks he holds, and check out their filings on SEDAR—short for the System for Electronic Document Analysis and Retrieval. This site will give him access to all kinds of financial data—revenues, profits, company changes, etc.—on his Canadian holdings. “This site will allow him to follow the growth of the companies he’s bought stocks in,” says Franklin. “He’s eager and very disciplined. A little more financial literacy will give him the tools he needs to manage his own money with confidence and skill in the future.”
- A portfolio that pays $12K a year
- A low-fee portfolio for DIY investors
- Build a portfolio you can ‘set and forget’
Watch: MoneySense profiles a savings whiz kid