Gail Bebee is the author of No Hype - The Straight Goods on Investing Your Money. She can be reached at firstname.lastname@example.org; her website is www.gailbebee.com. This is part two of a 12-part series for people that are new to investing on their own.
Nearly one-third of discount brokerage customers in Canada say they have been with their primary firm less than twelve months, according to a recent J.D. Power and Associates survey. Many of these new clients are people who fired their financial advisers after suffering major investments losses in the 2008 stock market meltdown. But investing on your own online isn't easy at the start.
Those who have found new homes as direct investing rookies could cause serious damage to what's left of their investment portfolios. Based on years of experience in the investing trenches, I believe that if you are new to do-it-yourself (DIY) investing, you should take these steps before plunging into the serious business of buying and selling investments on your own:
- Leave any investments transferred from your old account alone
- Park any cash in your account in a safe place
- Master the investing basics
- Thoroughly surf your discount broker's website and learn how to trade online.
While the first step requires no effort on the part of a novice DIY investor, finding a safe place to park your cash and make even a small profit requires some work in this low-interest-rate environment. The simplest option is to leave the money sitting in your account. However, you won't earn much. For example, RBC Direct Investing and BMO InvestorLine do not pay any interest on money held in such accounts. The best choice in this space is probably the Scotia iTrade Cash Optimizer Investment Account, which earns 0.75 per cent interest.
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High interest savings accounts are another safe home for your cash as they are covered by the Canada Deposit Insurance Corporation. CIBC's Renaissance High Interest Savings Account, for example, pays 0.95% annually and may be available from other brokers.
If safety is paramount, Government of Canada or provincial treasury bills are good short term investments which will pay a modest return. T-bills, as they are commonly known, are guaranteed by the federal government, available for terms of one month to one year and are highly liquid. The minimum investment is typically $5,000 or more. CIBC Investor's Edge recently listed a Canada T-bill due Oct 15, 2009, with a 0.05-per-cent interest rate.
Another very safe place to park money short term is a cashable Guaranteed Investment Certificate (GIC). A modest return rate is guaranteed, the tradeoff being some limitations on accessing your cash. Typically, after a minimum holding period (often 30 days) you can cash out early without penalty. BMO InvestorLine currently offers a one-year cashable GIC from Equitable Trust. It pays 0.50 per cent and can be cashed out with accrued interest after 30 days.
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Money market funds are mutual funds which invest in high quality, short-term government or corporate debt instruments such as T-bills, bonds and term deposits. While probably not as safe as straight T-bills or GICs, these funds are a respectable and highly liquid place to park your cash. The funds with the best return rates usually have high minimum investments and low management expense ratios (MERs). A Globefund Fund Filter screen (criteria: no load, Globe 5-Star rating of 4 or more, MER no more than one) identified these widely available money market funds which would be good places to park cash:
- $500 but less than $10,000-RBC Canadian Money Market, 1.58% one-year return*
- $10,000-$100,000-Steadyhand Savings, 1.79% one-year return*
- $100,000 or more- BMO, CIBC, RBC or TD premium money market funds, 1.67-2.05% one-year return*. (*as of July 31, 2009)
You can put the above cash ideas to work immediately with a call to your broker, and then take the time to master investing basics and the intricacies of buying and selling investments online. Your discount brokerage is a good place to start your education. Some regularly hold free educational programs at locations across Canada. Most now offer comprehensive online learning resources including detailed discussions of various investing options, tutorials and how-to videos. RBC Direct Investing recently launched practice accounts which allow clients to test drive actual online trading while risking nothing.
DIY investing may seem a daunting task to refugees from the world of financial advisers. It does take time and effort to learn the ropes and an continuing commitment to manage your investments. Fortunately, you can start simply by stashing your cash in one of the places discussed above. Then, by dedicating a small block of time every week to mastering investing basics, you will soon gain the knowledge and confidence to invest successfully on your own.
This is Part One of a weekly six-part series for people new to online investing. Part two is The all-in-one investment solution that could be for you