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Graduate student Wes, 24, is doing a PhD in genetics. Remarkably, he carries no student debt and has $19,000 invested in the stock market. However, investment advisers say this saver needs protection from market volatility. (Dushan Milic for The Globe and Mail)
Graduate student Wes, 24, is doing a PhD in genetics. Remarkably, he carries no student debt and has $19,000 invested in the stock market. However, investment advisers say this saver needs protection from market volatility. (Dushan Milic for The Globe and Mail)

Portfolio Makeover

Savvy saver, 24, needs protection from volatility Add to ...

Wes likes learning how the world works. That’s why he’s doing a PhD in genetics – to him, discovering the complexities of the biological processes that make life happen is simply exhilarating.

The 24-year-old Torontonian likes investing for the same reasons: He gets to learn how the financial world works.

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“And if that can work to benefit me, or others,” he says, “bonus.”

Wes will wrap up studies in four years, and hopes to be a university professor in a major city. He wants to maximize his net worth to ensure his financial freedom; the ability to retire early down the road wouldn’t hurt, either.

Right now, he’s entirely self-guided, and has $19,000 invested in the stock market, with holdings in a handful of financial institutions and mining companies, a land development firm and one small-cap fund.

He gets by on a graduate student stipend of about $2,400 a month, and, because of academic restrictions, will have to live off that level of fixed income until he graduates. He carries no debt from his previous education, and – miraculously – rents a room for only $300 a month in Toronto. (“I realize I am insanely lucky,” he says.)

At the moment, Wes sets aside about $3,500 a year for investing. The rest of his disposable income tends to go toward cycling – he races mountain bikes competitively – and coffee: He drinks two $3.50 quad-shot espresso drinks a day.

“This exercise in itself has been eye-opening,” he says, having outlined his budget for this story. “I am going to stop wasting money on coffee. But the bikes might be a necessary evil.”

Wes decided to try self-guided investing because he thought that he might not get high-quality advice for the small quantity of money in his portfolio. He’s read numerous investing books – “I think the first book I read as a kid was The Wealthy Barber” – and talks to industry pros when he can.

His income is entirely from a government stipend, which isn’t taxed, so he puts his holdings in a tax-free savings account rather than a registered retirment savings plan.

He admits he’s lost money in his ventures so far, and knows that at this young age, he can handle market volatility. “I am long on everything and have time on my side,” he says. Self-guided investment will force him to keep learning, he says, but it always helps to have a little advice.

For advice on Wes’s portfolio, we turned to two financial experts: Jason Casagrande, a Toronto-based financial planner with Bank of Montreal; and Thomas Dobson, manager of financial planning with Royal Bank of Canada Wealth Management in Toronto.

The basics

– $19,000 in self-guided stock investments, mostly in a TFSA

– $2,400 monthly graduate student stipend

– No RRSP

– No debt

Jason Casagrande’s tips

1. “Track your expenses,” Mr. Casagrande says. “You may be surprised where your money is going and exactly how much you are spending on certain activities.” Right now, all that espresso fuelling Wes’s research is sucking up 6.25 per cent of his monthly income. Tracking and curbing expenses like this will help free up cash, which, in turn, will let Wes aim for a more ambitious monthly savings goal; Mr. Casagrande thinks Wes can go as high as $5,000 a year.

2. Wes should shift his portfolio from largely Canadian stocks to more funds-based investment. “Going forward, focus your energy on earning a consistent positive rate of return each year through the use of a exchange traded funds and/or mutual funds,” Mr. Casagrande says. “While this plan may sacrifice some of the short-term potential upsides of your current investment strategy, it will, however, limit your losses and provide you with cost-effective exposure to a wide range of sectors – giving you access to markets that you may not have had access to otherwise.”

3. It might be time for Wes to rethink the idea of investing entirely on his own. “Even with a small portfolio, obtaining professional financial advice has its benefits, such as walking through and creating a detailed financial plan – which will help you achieve your financial goals – and can instil confidence in your investment decisions,” Mr. Casagrande says. Wes can control the situation by interviewing potential advisers before signing off with one, and ask about their compensation and accreditation. If he’s worried about fees, he should consider weighing the cost of advice against the transaction costs involved in building and maintaining a portfolio on his own.

Thomas Dobson’s tips

1. If retiring early is Wes’s main goal, he should figure out just how early he wants that to be. Early, after all, is a relative term. And so is a comfortable retirement. “What will retirement look like?” Mr. Dobson asks. “Is it living like he is now, or will it be more expensive?” A professional adviser, he says, will help Wes quantify what kind of funding will let him retire comfortably on his own terms, while also helping to monitor his portfolio to make sure it adheres to his objectives.

2. “It may make sense to move the rest of the investments into the TFSA for tax-free growth going forward,” Mr. Dobson says. However, Wes may be able to use student tax credits to stave off the tax man from dipping into any capital gains that come from the holdings he keeps outside of the TFSA. If Wes keeps investing at his current rate of about $300 a month, he’ll stay within annual TFSA contribution limits. “This level of disciplined savings will pay off down the road, admittedly more so when his income is higher, but it is great Wes has established this behaviour early,” Mr. Dobson says.

3. As nice as it is to be a disciplined investor at 24, Wes should really get the help of a qualified adviser to help him diversify his portfolio. “While Wes’s goal is primarily long term, the current portfolio can be quite volatile,” Mr. Dobson says. With his money in a small-cap fund and equities – the latter with a focus on precious metals – a market correction could wipe out 30 per cent of his portfolio’s value. “At an average of 6-per-cent returns, it would set Wes back at least two years in his investment plans,” Mr. Dobson says. He should diversify not just across industries, but asset class as well, which would balance long-term growth with liquidity – a necessity should he ever run into an emergency.

You can get your portfolio reviewed by the experts, too. Send us a confidential e-mail to portfoliomakeover@globeandmail.com. If we profile your portfolio, your identity will not be revealed.

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