The more money you have, the more attention you get from the investing industry.
Young investors are pretty much invisible to Bay Street, then. Bank branches will sell mutual funds to anyone with a pulse and $500 to spend, and investment advisers will often take their clients' kids on as a courtesy. But no one is reaching out to people who are starting out in the work force and looking for ways to start investing.
That's where the Globe and Mail Gen Y Investing Guide comes in. It's designed to help 20- and 30-somethings get situated as investors without being mauled by fees and commissions. Parents, pass this guide along to your kids.
1. Especially for students and recent grads
Virtual Brokers, which ranked first in the 15th annual edition of The Globe and Mail's online brokerage ranking (published this week), has created what could very well be the only investment plan aimed at young investors. It's called the Kick Start Investment Program and it allows clients to set up an automated purchase plan where money goes into exchange-traded funds or individual stocks in the S&P/TSX 60 and S&P 500 indexes with zero commission costs.
The minimum monthly contribution is $100 and you can invest in as many as five stocks or ETFs. Contributions are drawn from a linked bank account and then used to buy as many full shares as possible, with any remaining money left to sit in your account as cash. Kick Start has zero cost for students and people who have graduated within the past two years. Everyone else pays a $50 annual fee, but no commissions when buying shares (normal sell commissions apply).
2. When you're starting from nothing and have only small change to invest
Check out the ING Streetwise Balanced Growth Portfolio, which is sold by the online bank ING Direct (changing its name to Tangerine in the new year). You can invest any amount in this ready-made portfolio, which is based on index funds tracking Canadian bonds and cash (about 24 per cent) and Canadian, U.S. and international stocks (76 per cent). That's an appropriately aggressive mix that will reward you well in up markets for stocks and offer a modest cushion in down markets.
The fee associated with owning this fund is 1.07 per cent, which is acceptable for a turnkey portfolio that allows you to contribute any amount and any time without paying any commissions.
With as little as $100 to start, you can buy the e-series of index funds from Toronto-Dominion Bank. Set up an account at TD's online brokerage firm, TD Direct Investing, and use it to build a portfolio based on the funds in the e-series lineup. There's no fee to buy or sell and the cost of owning these funds is very close to exchange-traded funds, which we'll cover shortly. Note: If you're opening a registered retirement savings plan account with TDDI to buy an e-series fund, tell them you want a basic RRSP with a low annual administration fee of $25 that applies to accounts of under $25,000.
3. If you want ETFs
Exchange-traded funds are low-cost index funds that trade like a stock, which means you'll pay commissions of up to $29 to buy and sell them at an online broker. However, a few firms now waive some or all ETF commissions. Qtrade Investor, Scotia iTrade and Virtual Brokers have a limited list of ETFs that can be traded at no cost. Questrade and VB let you buy ETFs at no cost, but charge you a sell commission (VB has two ETF offers). Zero-cost ETFs are perfect for people who want to make monthly or quarterly investments.
4. If you want individual stocks
When starting with a small amount of money, you're best served by owning a diversified ETF or mutual fund. But for those infatuated with stock picking, you'll find the lowest commissions at Virtual Brokers, where the cost is basically a penny per share with a $9.99 cap, and Questrade, where trades start at $4.95. Avoid the big bank firms – they charge as much as $29 to clients with less than $50,000 in their accounts.
5. Be smart with registered account fees
Young investors often ask whether it's better to contribute to a registered retirement savings plan or a tax-free savings account. TFSAs are more versatile as an all-purpose investing vehicle, and young adults may find they have certain tax advantages over RRSPs (more on that online). There's also a fee-related reason to use TFSAs if you're the customer of many of the big online brokers.
The practice at many online firms is to offer TFSAs without annual administration fees, while charging up to $100 for RRSPs with assets of less than $15,000 to $25,000. Another advantage with TFSAs is that they may not be subject to a broker's minimum size requirements for new accounts. At BMO InvestorLine, for example, the $5,000 minimum is waived for TFSAs.
6. If you want to practise your skills as an investor
Online brokers are increasingly offering practice accounts, which look like the real thing and use virtual money. They're a great way to familiarize yourself with online trading of ETFs and stocks, and test your investing acumen before committing real money.
Most practice accounts are available to clients of a firm only. Suggestion: Open an account and then explore the practice accounts before doing any actual investing. Or, check out the new stock trading simulator created by TMX Group Inc., the company that owns the Toronto and Montreal Stock Exchanges. It's set up very much like the trading screens at online brokerage firms and it's available to anyone.
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