This article is the fifth in a series on personal finance and investing at different stages of your life. As some issues may overlap the different stages of life, they could be covered in a prior or subsequent article. For the full series go here.
Here you are, in your thirties or thereabouts. You're in the work force, married with a young brood running about, a sizable loan on the car and an even bigger mortgage on the house. There are bills to pay. Money is tight.
But you can still get started with building a portfolio of financial assets through dollar-cost averaging, a technique for investing small dollar amounts over time. Here are 10 points that address whether or not this is the right course for you at this stage; and how to get your portfolio up and running if decide it's time to get investing.
1. Pay down debt first?
Not everyone will be interested in accumulating financial assets at this life stage. Many knowledgeable people say it's better to pay off debt first. “You are much better off to focus on buying a home and paying off all debt, including the home mortgage, before even starting to [invest],” recommends David Trahair, author of the book, Enough Bull .
Home equity can be used as collateral and the gains on selling a house are tax exempt, Mr. Trahair says. Moreover, a house can be turned into a retirement fund: seniors can downsize or go to renting and use the money left over to support their retirement. Or they (and homeowners whose jobs allow them to move around) can sell their house and buy in a cheaper region. For example, a Vancouverite moving from the average house in his city to the average house in a New Brunswick city would net close to $300,000 cash once the real-estate transactions settled.
Another argument in favour of paying off all debt first is that the risk-adjusted return is likely to be better than what can be earned on financial assets. When lending rates are at 5 per cent, for example, amortizing debt yields a certain and after-tax return of 6 per cent to 7 per cent. That return is near the upper limit of the average annual return historically earned by the best paying of financial assets – common stocks – and they provide such returns at higher risk levels.
The Invest for Life series:
|
2. Pay off debt AND invest?
What if lending rates are below 5 per cent, like they are currently. Indeed, some mortgage rates are now as low as 2 per cent. The returns on financial assets have a greater chance of beating debt repayment.
“Another argument in support of caution when considering an investment in a home is that the investment is completely undiversified,” cautions Moshe Milevsky, a York University professor and author of Wealth Logic . A portfolio of financial assets could provide diversification of wealth and offset risks such as:
