A thousand dollars is a minuscule amount in the investing world, but for many young professionals it's all they've got to start off.
And while money managers aren't beating down doors to serve them, that shouldn't be a deterrent against young people investing early, even if they've only very little.
A young professional with $1,000 in a tax-free savings account intent on investing for the long term has the benefit of time on their side, which translates into a higher risk tolerance and the potential to reap big gains. While their options for investments are limited, they are clear.
Experts say there is really only one way to go: Buy global equities in a low-fee fund, and keep your hands off.
Why global equities?
Experts say investing in global equities will offer the most diversification possible with just a grand in your pocket.
"Long-term investments allow for a higher risk tolerance, so they can go heavy on equity investments with global diversification," said Ross McShane, director of financial planning services at Ottawa-based McLarty & Co. "The long time horizon will smooth out volatility in the markets, and there are a lot more equities outside of Canada to allow for diversification, which is key to investing."
Young investors need to keep an eye on the amount they're paying in fund fees, especially as the money grows, so that more of their money is actually being invested.
"You really only have money for a single investment with a thousand dollars, so go for something global where you're just buying the market and keeping costs low. You definitely don't want management costs to eat into an already small amount," said Jason Heath, a financial planner at Objective Financial Partners Inc., in Markham, Ont.
Why hands off?
A hands-off approach is best because passive investments typically perform better than actively managed ones over time, and young professionals tend to overestimate their ability to out-smart the market.
"I tell young professionals 'don't try to do sexy things,'" said Daniel Stronach, president at Toronto's Stronach Financial Group Inc. "Experience speaking, the more you tinker with it, the worse your results are going to be. You are not going to out-manage fund managers, so let them do the work."
We asked experts for their top picks in global equity funds suitable for an investor starting out with just $1,000. Stocks aren't viable options because there simply isn't enough money to buy significant quantities of individual companies, or to get enough diversification.
Jeff Kaminker, president of Toronto-based Frontwater Capital, suggests the iShares Core MSCI All Country World ex Canada ETF (XAW).
"XAW is a passive low-cost ETF [exchange-traded fund]. Approximately 53 per cent of the fund is invested in the U.S., 36 per cent in Europe and Asian markets, and 11 per cent in emerging markets. The investor gets exposure to over 2,500 international companies, which is superior diversification across the entire world market. Management expense is just 0.2 per cent, making it one of the lowest in global ETFs in the Canadian marketplace. It also pays a dividend of 1.51 per cent. The fund does not hedge the Canadian dollar unlike some other global ETFs or mutual funds. While in theory hedging sounds good, in practice, hedged products have generally underperformed for the long-term investor."
Dan Bortolotti, investment adviser at PWL Capital in Toronto, suggests the Tangerine Equity Growth Portfolio.
"I really like this fund for small investors. One thousand dollars is very small, but I recommend this fund even for investors with $20,000 to $30,000. Unlike with ETFs, you don't need to have any trading experience to have mutual funds and it's a very low initial minimum investment, only $100. The MER [management expense ratio] is 1.07 per cent, which is higher than ETFs, but it won't amount to much when you are talking about a small amount of money. This fund is 100 per cent stock, split between about 50 per cent Canadian, 25 per cent U.S. and 25 per cent international. I do think the asset mix could be better with less emphasis on Canadian stocks, but considering the ease to set up and the low fees, it's a very good place to start."
"For the more conservative investor, I would suggest the Ivy Foreign Equity [fund]. It's a focused portfolio on high quality names, and it tends to be less volatile than a lot of other global equity funds and has historically provided strong downside protection. The MER is 2.52 per cent, so its pricey, but it's a case where I'm more comfortable paying more for the overall lower volatility. The Manulife fund is virtually identical to the very well-known Mawer Global Equity fund, which carries an initial ticket of $5,000. With this fund, you are getting access to an excellent management team, good processes and a really solid offering for someone willing to take a little bit more risk than the Ivy Foreign." The MER for the Manulife Fund is 2.51 per cent.