TFSA, ETF, WTF?! A regular gal’s guide to Investing 101

There are two types of people: those that learned the basics of finance early in life and peruse the business section with an arched eyebrow, and everyone else who would fail to notice if the stock pages were upside down. If you find yourself in your 30s without a fundamental knowledge of money it can be wildly intimidating. You might keep all your cash tucked into your chequing account. Or invest it based on the advice from the first bank teller to inform you that, uh, you should do something with that money. Or you may have so little left over after paying your bills that investing seems unnecessary.

Regardless of your income level and comfort with numbers, investing can be simplified and increasingly, it’s a necessary part of personal finance. With shrinking pension plans and longer life-spans, the funds you accumulate during your working years are likely insufficient in funding your retirement. Whaaaat you might think. You’re barely surviving now – how are you going to live without your meagre income?! Don’t panic and start buying piles of lottery tickets just yet.

There are actually two major advantages of financial planning in your 30s: compound interest and risk tolerance. Before you start to snooze, these are actually quite straightforward. In a nutshell, compound interest simply means that gains on your original investments add up and make your investable amount consistently larger. Huh? Imagine you have $100 and every month you earned 5% on this amount. The first month you would earn 5 bucks but the following month you would earn $5.25. A measly extra quarter, you might scoff. Maybe, but based on the size of your investment and rate of return this number will grow and the addition gains – your compound returns – will add up over time. Even if you fear starting an investment in your 30s is too late, it still gives you decades of working years in which to invest.

Does the idea of risking any of your money give you a stomach ache? Those under 40 are more conservative financially than previous generations, likely a result of living through the financial crisis and housing bubble. Consider the market impact of 9/11 and the sharp decline seen in nearly all investment portfolios. The loss was enough to prompt many to sell their weakened holdings and wash their hands of the entire game. Braver souls held on and ultimately one year later those that kept their investments more than made up for their September losses and subsequent years experienced numerous record highs.

But how do you decide where to put your money? For regular folks with accounts at a major bank, meeting the threshold for most Investment Advisors is unrealistic as many ask for upwards of $250k in investable assets, excluding any real estate holdings. If you, like most Canadians under 40, have less, you will likely be referred to a more junior financial planner or manager. Based on your risk tolerance and financial goals you will probably be advised to place your money in a portfolio. Portfolios can be helpful as they hold numerous securities and can give you a level of diversification with a single product. That means if a single industry is tanking – remember the oil crash a few years ago? – you will likely suffer minimal losses due to the success of other sectors within your portfolio. Sounds great! But hang on! Millennials should slap on their oversized glasses and read the fine print: some portfolios come with large MERs, which means you could be paying over 2% of your investment towards the professional management of the fund. Over time this dips into your profits and you may want to consider an alternative.

There is endless information available on buying individual mutual funds and ETFs. Surprising the two products are very similar and the most important thing to remember is ETFs are simply cheaper. As they are traded daily on the exchange, their fees are typically low cost and are a great choice for those on a budget. Many DIY online investment brokerages will let you buy and sell ETFs for only a few bucks per trade. If you prefer to go with an easier approach you can try a robo-advisor. Typically geared towards a younger demographic, these online platforms will bundle ETFs based on your risk tolerance and provide easy-to-understand updates on how your investments are progressing.  

If you are more keen on mutual funds it’s best to stick with index funds. These are a favourite of no-frills investors because they simply follow the market. They will dip and rise along with their index (for example, the S&P 500 follows top corporations) and ultimately they are a good choice if you’re not interested in having an office-load of suits actively manage a collection of funds. There’s a helpful study from 2016 that showed a fluffy cat tossing a toy mouse on a list of stocks. Using that same list, a group of professional investors carefully selected their picks. By the end of year the feline reigned supreme and his choices outperformed his human counterparts. While cute kittens can’t solve all our problems (sigh), it’s good to remember that a more expensively managed portfolio is not always better.

Once you’ve decided on your investment type, you need a place to put it all! TFSAs are a favourite choice as you can easily remove cash from these accounts without penalty. And any gains you make over the years are also free from taxes – which can really add up. Your CRA online account will show you both your TFSA room (you can add about $5,500 per year with a few exceptions of more generous years) and your RRSP allowance.

Adding money to your RRSP account is the easiest way to get money back on your tax return. If you’re looking to buy a tiny one-plus-den condo and squeeze multiple friends into it (no judgment), you can remove $25k from your RRSPs without penalty – just remember to replenish the account within the parameters. Otherwise RRSP withdrawals you make today are taxed the same way as your paycheque. They are meant to be used during your retirement where your taxes are minimal.

Regardless of how you want to approach investing it’s most important to feel comfortable with the process, its advantages and of course the possible risk. Do your own research and don’t take anyone’s advice at face value. Oops, except this one.