Trevor Abes: Writer

Tag: rrsp

Young Canadian Investor #25 — Why You Can and Should Invest on Your Own

As you’ve learned over the last 24 articles, there’s a lot to absorb before you can invest your money comfortably and confidently into the world’s stock and bond markets. You need to make decisions about which financial goals to pursue, for example, as well as how long you have to save before those goals can hopefully be met. That means taking a stand about how your future’s gonna look a few decades down the line and committing to it, even though you’ll likely be slapped around by life enough to periodically reconsider your priorities.

Then there’s the whole technical side of things where you get a grasp on what stocks, bonds, and index funds are, and how the different investment accounts on offer may or may not suit your situation.

It adds up and I get how the overwhelm can start to creep in. That’s why I understand if, after all this reading, you’re still feeling hesitant about opening your account and investing. Even though you know how fortunate we are as Canadians to have access to TFSAs and RRSPs, and you can see the benefits of saving money that’ll grow on its own over time, such as fulfilling dreams of all sizes, it’s still somehow not as easy as just doing it.

To that end, I came up with a list of aspects of the investing process that might cause newbies to give up or lose confidence + my own two cents as to possible solutions.

  1. The mechanics of inputting buy and sell orders for your investment funds is not everyday knowledge. You need to type numbers in that represent real money and you don’t want to make a costly mistake. That’s a normal feeling. Thankfully, portfolio manager Justin Bender has got you covered with his instructional videos on that exact subject. He has videos for pretty much every major brokerage in Canada and you’ll benefit from his approachable explanatory style.
  2. It can be a tall order to demystify how the stock market actually works. All those stock tickers, performance metrics, and constantly changing prices can be hard to crack. You should always seek out educational help tailored to how you learn. If you absorb knowledge more efficiently by reading, you can take a look at my investing guide for young Canadians. If you’re more of a visual learner, this TED video might help to fill in some gaps.
  3. Another scary part of tackling the craft of investing on your own is not having an expert check over your work and give you the go-ahead. If you can’t seem to get past this barrier and take the plunge, set up an appointment with a financial advisor in person to open your account when covid allows and have them run you through the investing process. If you’re a customer with their bank, it’s their job to help you. Just be wary of any sales pitches and stick to your plan, whether that’s engaging in active investing or setting up your portfolio of diversified index funds.

Forever is quite the stretch and the prospect of having to tend to your investments on your own for that long can seem daunting. But I know you can do it. You know why? Because you’re taking time out of your day to read an article about investing. That means you’re already part of the chosen few who are capable of investing for themselves. You wouldn’t be here otherwise. So long as you take your time and give yourself room to learn, you will prevail.

As always, if you have any questions at all, fell free to drop them in the comments.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

Young Canadian Investor #23 — Common Investing Mistakes

Just like the practitioners of any other discipline, investors have to deal with a set of common mistakes the avoidance of which separates the average from the exemplar. You don’t need specialized knowledge to avoid them, just the ability to keep your emotions in check and the willingness to read a book or two to learn how stock markets work. Being a successful investor is within anybody’s grasp. Let’s discuss why by exploring some of those common mistakes below.

  1. First thing most investors fail to consider is the appropriateness of the fees they pay. If you’re invested in funds that charge you 1-2% of whatever money you have invested every year, are the funds’ portfolio managers earning you enough money to justify those fees? Seeing as owning the global stock market through index funds has historically made you about 5% per year after inflation on average, that means a 2% fee fund needs to earn you about 9% per year, supposing 2% inflation, just to keep up.
  2. With so much praise showered on Buffett, Lynch, Templeton, and other legendary investors, too many people believe in the promise of stock-picking expertise. Truth is, though, these individuals are outliers, and research-based stock picking is just as much an art as it is a science. Over the long-term, the vast majority of practitioners will underperform those who simply buy the entire global stock market through a diversified portfolio of index funds.
  3. Unless you know what you’re walking into, it’s very easy to let your emotions get the best of you as a new investor. On any given year a stock fund can fluctuate in price, sometimes by half or more, on its way to making you money over 10 or 15 years. Investing is a long-term practice, one where businesses need to be allowed to innovate, grow, and create lasting value; to be successful, you just need to live your life and stay out of their way. That means ignoring your urge to sell an investment simply because other investors are overreacting and causing its price to drop, even though the quality of the business hasn’t changed.
  4. Many young investors think you need lots of money to participate in the world’s stock and bond markets. Thankfully, this is no longer true. Wealthsimple, for example, allows you to open an RRSP or TFSA and buy as little as one share of the investment fund of your choice without having to pay a commission. If you have a spare $50, you can start investing today.
  5. It’s a widely-held misconception that investing in the stock market is basically gambling. You can definitely use stocks to gamble by, say, buying some shares in a company your coworker gave you a tip on, or a company that makes products you’re deeply familiar with even though its business prospects may not be all that bright. Whenever you invest hastily, you’re taking a flyer and could lose money. And you already read numeral 2. If you take a more measured approach, though, and invest prudently through index funds, which offer you a long-term positive expected return—5% per year or so after inflation—you’re golden.
  6. The key to investing is staying invested long enough so that compound interest can work its magic. That means you need to buy more shares of your stock and bond funds at every paycheck over a handful of decades for satisfactory results to show. Making the rash decision to give up on funds after a few short years is always a mistake.
  7. You may also be thinking that all this investing stuff is too complicated for you to handle it yourself, meaning you need to resort to a financial advisor to put your money to work. Not the case at all, if you ask me. As someone who put the reading in, learned about which investment accounts to open, and has been building his investment portfolio over the last two years, I can tell you with absolute certainty that you are more than capable of doing the same.

If you’re interested in a short and digestible investing guide to get you going, consider my new book, Nine Steps to Successful Investing: A Guide for Young Canadians. I designed it to cut through how financial literacy is one of the most boring things you can learn. You’ll get nothing but the essentials, expressed in plain language, with extra resources only if you’re interested in learning more. Whatever you decide, don’t hold off on building your nest egg. Your future self will love you dearly for it.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

Young Canadian Investor #4 – The Privilege of Registered Investment Accounts

One of the great things about living in Canada is that the government allows you to open investment accounts where you can either, 1) defer your taxable income to much later in life, or 2) buy investments that can grow without you ever having to pay taxes on them period.

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Any money you invest in your RRSP, or Registered Retirement Savings Plan, will minimize your taxable income for that year by that amount. So if you contribute $5000, your taxable income for that year will be reduced by $5000. Your investments will also grow tax-free, meaning you receive dividends and capital gains in full. But when you withdraw any money, you’ll be taxed on it as income at whatever rate applies to you at that time.

RRSP contribution limits rise every year with inflation. For 2019, you may contribute up to 18% of your taxable income for the year up to a maximum of $27,830. 

Any money you invest in your TFSA, or Tax-Free Savings Account, will grow tax-free and can be withdrawn without cost at any time. The contribution limit goes up every year with inflation and currently sits at $6000.

If you’re 18 or older, and a Canadian citizen, you can contribute an amount equivalent to the total contribution room that has accumulated since TFSAs came into existence in 2009. That total is $69,500. 

Any withdrawals you make will give you an equivalent amount of contribution room come January 1st of the following year. So if you take $2000 out this year, you’ll get $2000 of contribution room in 2021 on top of the limit the government imposes.

These accounts are ways to park money and let it grow while you focus on living your life. Every major bank offers them and all you have to do to open one is ask. Seeing that a globally diversified portfolio of index funds has earned 7% a year as a long-term average, there’s no good reason not to invest your excess cash and let it multiply while you’re young.

When you really need the money, whether because of illness, lack of work, or not wanting to work anymore, it’ll be there to give you optionality and make for easier decisions.

Any questions? Drop em in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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