If you’re looking for money to start investing, try paying off a debt.
A 34-year-old reader plans to pay off his student debt later this year and he’s wondering how to get started as an investor. “As I shift from debt repayments to investing, my question is what my portfolio allocation should be.”
This reader is fortunate in having a defined-benefit pension plan. He doesn’t own a home and isn’t sure if he ever will. So, what’s the best mix of stocks and bonds?
How about zero of both? Bear with me here. At 34, this reader is too young to give up on home ownership. That’s why I suggest he think hard about building a home down-payment fund through regular contributions to a high-interest savings account.
If home ownership is definitely off the table, then this reader’s young age and his DB pension together argue for a fairly aggressive investing plan with an allocation to stocks of 80 per cent or even 90 per cent. All stocks is a possibility, but this reader’s risk tolerance will be tested to the max in the next market crash. Having a modest bond weighting will offer a small degree of cushioning.
A compromise approach might also work – half of his money going to his home down-payment fund and half going to long-term saving for retirement. If the house purchase never comes together, he can take the down-payment money and add it to his retirement fund or use it for other purposes such as furthering his education.
Here are three quick options for this reader if he chose to invest his former student debt payments:
- A balanced exchange-traded fund: The Vanguard Growth ETF Portfolio (VGRO-T) is a portfolio-in-a-box product with 20 per cent of its assets in bonds and the other 80 per cent in stocks.
- A simple portfolio of four exchange-traded funds: A rough mix might look like 20 per cent Canadian bonds, 30 per cent Canadian equities and 25 per cent each in U.S. and international equities.
- A robo-adviser: Add 0.5 of a percentage point or so to the costs of ETFs for help in designing a portfolio and maintaining it over the long term.
Finally, there’s the question of whether to use a tax-free savings account or registered retirement savings plan. RRSPs would allow him to use the federal Home Buyers’ Plan, but there’s a tax-based argument for using the TFSA. He could well be in a higher tax bracket when he retires, which means the tax break he gets on RRSP contributions today would be less than the tax he’ll pay on RRSP withdrawals in retirement. There’s no tax break on TFSA contributions, but you can withdraw money tax-free any time. Bottom line: This reader should think about using TFSAs first, then RRSPs.
Kudos to this reader for understanding the opportunity he has to invest once his student debt is paid in full. Take a lesson: There’s no better way to produce instant cash for investing than paying off debt.