When you first begin investing, you might be overwhelmed — I know I was! Fortunately, an easy, stress-free way to begin is to invest in mutual funds.
Mutual funds are fantastic if you don’t have the time or desire to learn about how the stock market works, how to pick stocks, how to diversify etc. Unfortunately, as with most things in life, the hardest road is often the most prosperous — this is why, investing in mutual funds will not give you the same level of return on investment as you could gain my doing the hard work yourself. Furthermore, you will have to pay someone to do this work for you. Let me explain.
Mutual funds are offered by almost every bank in Canada (in Québec, not all banks offer mutual funds). When you’re researching a fund, you’ll want to look at a few things. First of all, how expensive is it? Mutual fund managers charge between 0.35% and 2% to manage your fund for you and you have to pay this every year — regardless of whether your fund makes money or not.
Second of all, you’ll want to look at how the fund has performed over the past few years. Has the fund been continuously increasing? That might be a red flag. Has the fund crashed and not recovered since the 2008 recession? That is also not a great fund to invest in.
Next, you’ll have to decide how much to invest and how. You can either invest within a registered plan (ie, an RRSP or TFSA) for various tax purposes or outside of a registered plan. Not all funds are eligible for registered plans so be careful about this. You’ll also have to watch out for minimum investment amount and minimum monthly contribution amounts.
While researching mutual funds, it’s a good idea to look at the types of shares that are being held in each fund. A good rule of thumb is to invest no more than your age in bonds. Bonds are very safe investments with low rates of return. If you are 24, like me, you can invest up to 24% of your portfolio in bonds and the rest should be more aggressive investments. If you’re 75, 75% of your portfolio should be held in bonds. The idea behind this rule is that, macabre as it sounds, as you grow older, you run out of time to allow your risky investments to recuperate.
Once you’ve found a good fund, take down the name of the fund manager. If the fund performs well while he/she is managing it, you’ll want to invest with that person (meaning, if he/she moves to a different bank/fund, you’ll want to begin investing in the new funds that he/she manages. Remember, if he/she is able to creat a balanced, growing portfolio and then leaves, you won’t know how the next person will manage your money!)
Next week I will discuss investment methods.
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You’re so smart! I totally remember doing all the research when I first started investing. I went with a target retirement fund so I wouldn’t have to deal with rebalancing. It rebalances on its own based on my target retirement date, which is what I chose based on my age. I went with a more risky one (retiring in 2050) so that the fund doesn’t have like..any bonds. Mostly stocks.
We’re the same age!!!!!!!!!!!!
Thank you for this post! I understand it -slightly- better now. A long way to go, keep the investment posts coming!
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