Early On The Career Path
You’re in your late 20’s or early 30’s. You’ve launched your career, and are climbing the ladder to success. Perhaps you’re in a serious relationship or recently married. And now, you’re starting to think about what’s next. You’ve already started to accumulate some money to start investing – but barely have the time to figure out how best to manage your money. There are many priorities – education debts, buying a condo / house, having family, planning for retirement, and of course vacations.
Get Professional Financial Advice
An Investment Advisor can help you assess which priorities should you address first, answer questions, and build a portfolio tailored to your needs and risk preferences.
What Are Your Investment Options?
Generally, at this stage of life, your focus is on growing your wealth, while really learning about investing. Here are some of your investment options:
As the world’s stock markets continue to show signs of volatility, many investors have started looking at good-quality corporate bonds, or debentures, for a certain percentage of their portfolio. Good-quality bonds — investment grade, rated BBB and higher — tend to have very low default rates (less than 1 per cent) and for the most part pay higher interest than government bonds.
Mutual funds are baskets that contain many different types of investments. The types of investments inside a fund dictate what type of mutual fund it is. If the basket contains more than 50 per cent large Canadian corporations, the mutual fund is called a Canadian equity fund. If it is composed of all Canadian bonds, it is known as a Canadian bond fund. Mutual funds have many different types of components, but it is the majority content that dictates the mandate and label of the fund. Owning a mutual fund is considered a more conservative approach than owning just one common stock, because it can be made up of so many diverse investments.
The other investments that people commonly have in their portfolios are stocks. Most investors know that when they purchase shares (stock) of a publicly traded company, they become partial owners of that entity — in most cases a very, very small owner, but an owner nonetheless. Generally, most investors don’t have a problem with buying or owning individual stocks. Owning a portfolio of stocks makes sense if there is enough cash in the account to buy a number of different stocks, so that the account will be nicely diversified. It is difficult to build a portfolio out of stocks with only $5,000. So if a portfolio is smaller, it makes much more sense from a diversification standpoint to go with a managed product such as a mutual fund.
ETFs are similar to mutual funds in that you own a basket of investments, except that you are actually buying an index. If you own an oil ETF, you will be holding a basket of oil companies. For the most part, and unlike mutual funds, ETFs are passively managed. There is no manager to decide what stays in the ETF’s portfolio and what gets thrown out. Their mandate is to own a certain index of products that may contain good or bad performers. The index is already created before the investor buys in, so the individual retail investor has no say in the makeup of the ETF. If you compare ETFs with mutual funds, you will notice that, because of their active management, the fees for owning mutual funds are much higher. I believe, however, that you always get what you pay for.
RRSPs and TFSAs
Registered Retirement Savings Plans (RRSP) are personal savings plans that let you to accumulate savings for the future, and are tax sheltered. Tax Free Savings Accounts are a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.
Debt vs Growth
Early in your career, it’s not unusual to have some education related debts or perhaps you’ve invested in a condo. People wrestle with the question – should I invest in the future, pay off my debts, or try to do a little of both? Each person’s circumstances are different, but it’s always important to look at things within the broader picture. What is the interest rate you’re borrowing at relative to what you could make by investing in equities (which includes real estate and stocks).
Individuals should have balance in their portfolios – real estate as part of a diversified portfolio makes sense, but investors shouldn’t be sinking all their disposable income into mortgages, especially if their interest rate is very low. Further reading on the blog: Don’t Put All Your Investment Eggs In the Real Estate Basket
Start Planning For Retirement Now
Although you’re young and retirement seems a long time off in the future, it’s never too early to start. As life progresses, people often find there are more demands on their financial resources, such as raising a family or helping kids with their post-secondary education. By starting now, even small amounts will build over time. The power of compounding rates of return is quite compelling for investors to begin investing as soon as possible. The more time you invest, the more money you will make.
Potential Portfolio Mix
- Financials 20% 20%
- Technology 20% 20%
- Global Infrastructure 12.5% 12.5%
- Biotech / Pharmaceuticals 12.5% 12.5%
- Asian Emerging Markets 10% 10%
- Telecommunications 10% 10%
- Europe 10% 10%
- Energy 5% 5%