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retirement and rrsps

Keep it simple, keep it cheap.

These are Carrick's rules for investing a small amount of money.

As part of Finance February here at The Globe, we'll be looking at how to invest amounts of money ranging from $10,000 to $1-million. I volunteered to start things off because small amounts require special handling. A $10,000 investment is like planting a seedling. If you have six figures or more to invest, you're much closer to the whole tree.

A seedling needs some TLC to grow, so here are some things I wouldn't do with $10,000:

  • Put all the money in one stock: That’s guesswork.
  • Buy speculative stocks or funds: I don’t want to lose 20 or 30 per cent in a bad week.
  • Buy anything with fees that include investment advice: Advice may come in handy later, when my investment grows; for now, it’s just overhead.

Neither would I mollycoddle my $10,000 by putting it all in guaranteed investment certificates, bonds or bond funds. These types of investments are fine when mixed into a diversified portfolio – essential, even. But you can't build wealth in any serious way by relying entirely on returns of 1 to 2.5 per cent.

My goal for the $10,000: Growth at an average annual rate of 6 to 7 per cent, after fees and including bond interest and dividends from stocks. My preferred investing tools: A balanced fund or a small number of exchange-traded funds (three should do fine).

A balanced fund is an instant portfolio run by managers who keep stocks and bonds in the right proportion and, ideally, include both Canadian and global content. This is an ideal vehicle for a $10,000 portfolio because it removes both the need and temptation to be an interventionist investor.

The best thing you can do to nurture a $10,000 investment – once you've found something good – is to buy and hold it indefinitely.

There's not much point in actively trading such a small portfolio because even today's sub-$10 online brokerage commissions can erode returns. One trade per month at $10 chops 1.2 percentage points off your returns.

Balanced funds require one of the most emphatic caveat emptor warnings in all the investing world. Fund companies have sold billions of these things to oblivious investors who pay high fees and get returns that are too often sub-standard.

But there are a few cheap and expertly run balanced funds available, and I'd want one for my $10,000. A fund worth highlighting is Mawer Balanced Class A, which my wife and I have been more than happy with since buying it a couple of years ago for one of her accounts. People in the know like this fund because its management expense ratio is impressively low, at 0.95 per cent, and the returns consistently beat both its peers in the global neutral balanced fund category and its benchmark stock and bond indexes.

Mawer Investment Management is a low-profile Calgary company that focuses mainly on managing money for high-net-worth individuals, non-profit organizations and pension funds. It has a minimum upfront investment requirement of $5,000 if you buy through an online broker, and $50,000 if you buy directly from the firm (only residents of Ontario and the four Western provinces can do so). Most online brokers charge nothing to buy this fund, but don't place an order without checking first.

The three-pack of ETFs requires a little more work, but not a lot. In their classic form, ETFs are index-tracking funds that trade like a stock. For my $10,000 portfolio, I'll have one ETF for bonds, one for Canadian stocks and one for global stocks (see table).

The online brokers Questrade, Qtrade, Scotia iTrade and Virtual Brokers offer some form of no-cost ETF trading, which means you might avoid any commissions to invest your $10,000. There are fees involved when you own ETFs on an ongoing basis, but they're lower than mutual fund fees by quite a lot.

You want a simple approach for your $10,000 because too much messing around could well leave you poorer than you started. You want low costs because small accounts can't grow if their returns are strangled by fees.

Finally, you need patience. While a six- or seven-figure portfolio looks big from the get-go, at $10,000 you need time in the market to build your account into something significant. At 6 per cent annually after fees, your $10,000 more or less doubles in 12 years.

One more tip for growing small accounts: Add new money. With annual additions of $2,500, your $10,000 grows to $100,000 in about 17 years. Stand by for ideas on how to take that size of portfolio to the next level.

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