One Size Doesn’t Fit All
It has been a long time since one of my readers posed a question that could be answered in a blog post.
Do you have any recommendations for new investors with not allot of capital to start with? $5000 – $10000. Just wondering if there are any things you wish you knew when you started or good resources you would recommend for learning some important basics. Maybe even specific to Canada, allot of the books I have been reading are by American authors.
Before choosing what to invest in, you have to think about your time frame. Is this money going to be tied up short term (1 to 5 years) or long term? Next you have to decide on a savings goal. For example; are you saving to get married, buying a home or saving for retirement. Finally, you have measure your risk tolerance.
Some short term investment ideas
Low risk investments are usually recommend for a short term saving goals. You don’t want to risk having less money then what you started with. Unfortunately, low risk means low returns. I personally like Exchange Traded Funds (ETFs) because the management fees are lower than mutual funds and they still offer the safely of diversification. Since this blog request came from a Canadian, I will use examples from a list of BMO’s Exchange Traded Funds
- Low risk – BMO (ZGB) Government bond ETFs – offers 2.5 return
- Medium risk – BMO (ZLC) Long Corporate bond – offers 4% return
- Medium risk – BMO (ZWC) Canadian Dividend covered call – offers 6.9% return
- High risk – BMO (ZJK) Corporate high yield bond ETFs – 7.25 % return
Some Long term investment ideas
- Low risk – BMO (ZBAL) Balance ETF – 61% equities, 39% bonds
- Medium risk – BMO (ZGRO) Growth – 81% equities, 19% bonds
- High Risk – BMO (ZNQ) Nasdaq 100 – 100% U.S. equities
When it comes to investing, Canadians have some flexible options. One of the best options is opening a Tax Free Savings Account (TFSA) with a discount broker; very low trading commissions and no tax payable on income or capital gains. It can be used for both short term and long term savings goals.
Another option for people who are in a high tax bracket is a retirement account as long as you take the tax refund and reinvest it. For example: Someone in the 35% tax bracket would get a refund of $3,500 with a $10,000 contribution into a retirement account. (RRSP- Registered Retirement Savings Plan for Canadians)
For small investors, I highly recommend using a Dividend Reinvesting Plan (DRIP). Most EFTs offer the ability to reinvest the income into additional shares with no trading costs. DRIPs use a technique called dollar cost averaging which allows the investor to buy stock as it moves up and down. A great way to compound your returns.
Finally some reading resources for learning some important basics:
- The Wealthy Barber Returns
- The Good, Bad and the Downright Awful in Canadian Investments
- Canadian Securities Text Book ( buy it used on Kijiji )