Q. My kids have each saved about $4,000 from their summer jobs. Where should they invest it? They’ve already invested some of their money at a full-service firm, but they want to lower fees. Is a discount brokerage account a better idea? What about buying ETF’s of emerging markets? Their goal is long term and I think they can stomach the risk.
A. Good for both you and your kids that they have amassed these savings, and that they have an interest in investing for the future. The first question to think about is the goal. When you say “long term”, is that as in ‘retirement in 60 years’? Or ‘a down payment on a house in 10 years’? Should they also be thinking about money for a backpacking trip around the world, a car, or graduate school? They are kids after all, and even the most risk-averse kids might be interested in seeing Angkor Wat in Cambodia or owning their own wheels.
Clarity on the goal will help answer the second question: What type of vehicle the money should be invested in. An RRSP, if they want to get into the habit of retirement savings, or a TFSA, in the case of everything else.
The next question is what type of financial institution to use. A discount brokerage will lower your overall fees, but trading small amounts of money can be expensive. Consider either a robo-advisor like Nest, WealthSimple or Invisor, or a firm that offers a low fee index fund, like the TD e-series funds, which can charge as little as 0.32%.
And if moving firms seems like too much of a hassle, then make sure you explore the low fee-options your firm may already make available to you. More and more firms are offering expanding their low-cost options with index funds and, in some cases, commission free-trades of a select group of ETF.s (Our guide to the Best Online Brokerages will help you compare how many low-cost options are offered by each firm).
The last question is what to actually invest the money in. They may be able to stomach risk psychologically, but can they withstand it practically? If they want the money in five years and its value has dropped in half, what does that prevent them from doing? Emerging markets might be fine over the really long term, but too risky with a shorter window. A balanced portfolio of equity and fixed income would provide some diversification as their assets grow.
One final thought: One of the best investments I have EVER made was my six-month solo backpacking trip around Europe when I was 18 years old. I returned wiser, more confident and with a stack of memories I wouldn’t trade for $4,000, or $40,000.
Bruce Sellery is a frequent guest on financial television shows and author of Moolala
More stories like this:
- Investing 101: Dividends explained
- 10 shared traits of value investors
- Investing paralysis
- Is ethical investing good for your portfolio?
- A low-fee portfolio for DIY investors
- Investing in European markets
- Are investment fees tax deductible?
- Investing lessons from the poker table
- Should you invest actively or passively in bonds?