Introducing Patrick Bousfield, rookie RRSP investor.
Mr. Bousfield, 26, is a young adult who is doing all the right things with his money. Since starting his career in November, 2009, he's been paying off his debts and building an emergency fund. A $12,500 bonus received late last year went into a registered retirement savings plan.
Now, he's stuck. His RRSP money is idling in an online savings account earning just 2 per cent. He knows he needs a long-term investing approach that will produce higher returns, but he's not sure what to do. His indecision prompted an e-mail to me asking for suggestions.
Glad to oblige. What follows is the first instalment of a two-part package on getting started as an investor. Part One looks at the right investments, and Part Two next week will cover the best online brokers for newbies.
Let's get to know Mr. Bousfield a bit in order to get him on the right track for investing. Here's an edited transcript of a recent conversation that I had with him:
How would you describe your investing knowledge level?
It's increasing every day, but it started from not even knowing what an RRSP meant. On a scale of one to 10, I went from zero to a four now.
Have you thought about whether you want to invest on your own, or use an adviser?
I want to do it on my own. I think that with such a small amount in my account, I'm going to get killed with fees without getting any real benefit out of it.
Have you asked family and friends for help?
It's an awkward subject to bring up. Everyone has an opinion and they're not really looking at it from my perspective as someone just starting out.
How do you feel about the risk of losing money by investing in stocks?
My generation is terrified of it. But I am definitely not afraid of it. I know there are going to be times when I'm going to take a loss.
You mentioned in your e-mail that you've been looking at index mutual funds and exchange-traded funds. Why not mutual funds?
Based on all the articles I've read, it seems like it makes sense to stay far away from mutual funds because of the management expense ratios. What I've found with mutual funds is that you have to watch the fees.
How much do you plan to contribute to your RRSP every year?
I want to max it out as much as I can.
Mr. Bousfield's own short list of investing options included the Streetwise index fund portfolios from online bank ING Direct, and ETFs. I suggested he add the e-series of index funds from Toronto-Dominion Bank's mutual fund division to his short list.
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Name: Patrick Bousfield
Employment: Works for a reinsurance broker (insurers insuring insurers)
Education: Graduated 2008 from the University of Western Ontario with a four-year undergrad degree in political science and economics
Debts: Student loans and unsecured line of credit
Assets: A small but growing emergency fund and a registered retirement savings plan of $12,500
Housing: Renting an apartment in downtown Toronto
How he got started with retirement saving: "I got my first-ever bonus and instead of spending it, I put it directly into an RRSP account."
THREE OPTIONS FOR A STARTUP PORTFOLIO
Investing newcomer Patrick Bousfield has asked for help in finding the right investment for a registered retirement savings plan he started late last year. Here are some observations on the three options he's considering.
Resources for learning about ETFs
Globeinvestor.com's ETF page http://tgam.ca/etf
Rob Carrick's How to Use ETFs For Your RRSP Slideshow http://tgam.ca/Be30
The Toronto Stock Exchange's TMX Money website http://bit.ly/HnUUmF
Traditional ETFs are basically funds that deliver the returns of major stock and bond indexes, minus a fee that is much smaller than what mutual funds charge. You need a brokerage account to invest in ETFs because they trade like stocks.
The fact that ETFs trade like stocks means there are brokerage commissions to consider. A few brokers charge nothing to buy ETFs (more on them next week), while others charge as little as $5 to $29 per trade. ETFs are very cheap to own, with management expense ratios far below mutual fund levels. You could easily build a diversified ETF portfolio with an MER of less than 0.5 per cent. A comparable portfolio of mutual funds might run you close to 2 per cent or more.
PROS AND CONS
By tracking major stock and bond indexes, ETFs give you more diversification than owning a few stocks or bonds. Low ownership costs are another big benefit - the less you pay, the more you keep for yourself. A drawback with ETFs is the burden of choosing the right funds from among the hundreds available. And then there's the ongoing responsibility of maintaining an ETF portfolio.
ING Direct's Streetwise Funds
Streetwise funds are actually diversified portfolios of index funds wrapped up in a single product. There are four Streetwise funds, each designed for a different level of aggressiveness. The funds are sold directly by the online bank ING Direct and there are no buy or sell commissions.
Think of Streetwise funds as either pricey index funds or cheap mutual funds. MERs come in at 1.07 per cent, which is a fair bit more than the other options listed here. The extra value you get for that fee is ongoing rebalancing. If the stock or bond portion of a Streetwise fund rises or falls, ING will rejig things on a regular basis.
PROS AND CONS
The cost of Streetwise funds is on the high side for index investing, but it may be worth it for investors who want something they can buy and forget. The simplicity of Streetwise funds - they cover Canadian, U.S. and international stocks, plus bonds - may appeal to investing newcomers, but some investors may want more diversification.
Here's a column I wrote on Streetwise not too long ago http://tgam.ca/D5kb
TD e-series Index Funds
Ultra low cost index funds that are sold only online through TD Asset Management or the online brokerage TD Waterhouse. There are 17 different e-series funds, which means there's more variety than you'll find with Streetwise and much less than you'll get with ETFs.
The MER for e-series funds is in the 0.3 to 0.5 per cent range, which is very close to ETF levels. The bonus here compared to ETFs is that you pay nothing to buy or sell.
PROS AND CONS
The e-series lineup is perfect for investors who like the idea of building a very low-cost portfolio based on a limited but still adequate menu of choices. The e-series funds work best when you buy them through a TD Waterhouse account (more on that next week). By investing in e-series funds through an online broker, you give yourself the option of adding ETFs or stocks to your portfolio at some point in the future.
Here's a column on TD's e-series funds http://tgam.ca/CXMe
Two more thoughts
I asked people in my Facebook personal finance community for suggestions on what investment approach a newcomer to RRSP investing should use. Check out what they had to say here: http://tinyurl.com/6mlzjlf
My latest book is full of financial and investing advice for young adults (and their parents). It's called:
How Not To Move Back In With Your Parents: The Young Person's Complete Guide to Financial Empowerment
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