Reprinted courtesy of the National Post
by Tom Bradley
We get asked to help young investors all the time. Sometimes, the question can be as straightforward as, ‘How do I get started?’
Instead of answering that with a ‘How to,’ I’m going to take a different tack and focus on ways the next generation can be better investors than their parents.
You got it: millennials versus boomers.
But first, a few basics.
The first step is to make sure your personal finances are in order. Credit cards must be current. No amount of investment brilliance can overcome credit-card interest. Your student loan doesn’t need to be gone, but the payments should be reasonable and the balance declining.
In his book, The Wealthy Barber, David Chilton promoted the idea of saving 10 per cent of every paycheque. Too few of his generation followed this advice but you have a chance to entrench the habit.
Purpose of the money
The next step is to determine what the money is being invested for. Is it going to be used to buy a car or make a down payment? Or is it for retirement? Investors often make the mistake of not being crystal clear on what their objective is.
If you have more than one purpose, don’t despair. You can put the money in different buckets — condo, retirement, etc. — and invest each accordingly.
One dial on your investment dashboard is more important that all the others. ‘Asset Mix’, which is the blend of cash, bonds and stocks you hold, has the most impact on your return and risk, so it needs to be a part of every investment decision.
‘This is all I have. I can’t lose it’
The risk piece is often misunderstood because it varies depending on time frame and objective. For money needed in two to four years, market dips are a big risk. The money has to be there, so any attempt to generate a higher return must be tempered by the need for stability.
Conversely, volatility isn’t a risk at all for longer-term money (i.e. retirement). You won’t be touching it for decades, so weak markets are only good news. They give you a chance to buy shares at lower prices (Warning: When stocks are down, loud demonstrations of glee may offend older investors).
The fear of losing money, which is human nature, often results in asset mixes being too conservative (i.e. invested in savings products like GICs). This is a crucial mistake because with the benefit of time, you can take more risk (stocks), which is the fuel that builds wealth.
RRSP, TFSA, OMG
Your parents started investing when it was fun, even cool. In the ’80s and ’90s, it was all about RRSPs (Registered Retirement Savings Plans). To be clear, RRSPs and TFSAs (tax-free savings accounts) are account types, not investments. How you use them will depend on your goals, flexibility and tax situation.
For most young investors, the priority is to participate in any matching program at work. You never want to turn down free money. Next comes the TFSA. Don’t let the name fool you. TFSAs are for investing, not saving.
And later when you’re in a higher tax bracket and can take advantage of the tax deduction, a RRSP may enter the picture.
Just do it
There are a few clinchers that will guarantee you win the generational race. They relate to your behaviour and discipline, which will have the most influence on your investment success.
The earlier you have real money at stake, the faster you’ll learn.
- Establish a routine that includes reviewing your statements quarterly and making regular contributions (however small).
- Read an investment book a year and subscribe to a blog.
- Unlike the boomers, don’t spend a minute obsessing about where the market is going. It’s impossible to predict. Focus on what you invest in, not when.
- Start by investing in low-cost mutual funds and ETFs that offer diversification and professional oversight. If you want to buy individual stocks, do that after you’ve been through some ups and downs and have enough money to put in a separate bucket.
And do something your parents' generation don’t do nearly enough of — ask questions. The investment industry is anything but transparent, so it’s important to understand what fees you’re paying, how you’re doing and what service you’re entitled to.
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