Rob Carrick
A proud father wrote me recently about his daughter, a 24-year-old who has a good job and has saved $17,000. What, he asked, should she be doing to get started properly as an investor?
This young woman is seeing a financial planner, which means she has the opportunity to get some guidance on more than just investing. That's great because young adults have some big financial decisions to make, not all of which hinge on the right investment products to buy.
To start, I suggest this young woman makes sure her planner actually offers financial planning and isn't just a seller of mutual funds. The term planner can be used freely outside of Quebec without guidelines on accreditation or the services clients should expect. Next, she should confirm how the planner is paid. It might be through fees embedded in mutual funds, a fee charged as a percentage of the amount of money in her account or a flat or hourly fee.
The next step is to talk about goals. For example, does this young woman want to buy a house? She doesn't need to rush into the housing market at 24, but many millennials are obsessed with home ownership. If she wants to own, she should ask the planner about a safe parking spot for the money she'll be saving. The stock and bond markets are no place for money she'll need to access in less than five years.
Money being invested for retirement should be placed mainly in funds that hold stocks – maybe 80 or 90 per cent of her portfolio. Confer with the planner to make sure low-cost funds with consistent returns are used. Avoid boom-bust funds coming off a good year or two. Not all planners use them, but low-cost exchange-traded funds are excellent portfolio building tools for both young and old.
Buying a house might be a short-term goal, and retirement is for the long term. Between the two is another timeframe that this young woman and her planner should discuss. Does she want to return to school in a few years to upgrade her skills and credentials, or take a sabbatical to travel? Is she a contractor who may need to draw on her savings through periods of unemployment between jobs? If the answer is yes, she and the planner should work out a way to plan for these events.
The best thing a parent can tell his or her 24-year-old about preparing for a lifetime of investing? Think about your goals, first, and then worry about which investments to buy.
Rob Carrick