My Nerdy Life

Investing Part 1: $1 Saved is $1.07 Earned!

$1 saved is $1.07 earned! Wait, what? Don’t worry I haven’t totally lost my mind (although sometimes my partner thinks otherwise)! Thanks to the all powerful, and sometimes mysterious stock market, it is perfectly reasonable to earn 7 cents for every dollar that you invest. Now you may be thinking, why would anyone care about 7 cents? Well, most people probably wouldn’t care at all, but most people also wouldn’t invest only $1.

The trick to building financial wellness is to invest early and invest often! The reason you want to do this is to take advantage of the power of compound growth. Historically, the stock market has averaged a return of 7% every year (after inflation). That means if you put your money into quality, reliable, stable investments, the value of your initial investment will grow by 7% every year (over the long term) and require little to no effort on your part.

To demonstrate the power of compounding, let’s say I make an initial investment of $1000, and every month I invest an additional $100. After 10 years, I would have $18,972.32, which would have cost $12,900 out of my own pocket, that’s a 47% gain! After 20 years, I’d have $54,523.32, which would have cost me $24,900, which means I’d have more than doubled my money! After 30 years, I’d have $124,457.52 at a cost of $36,900, that’s a 337% gain!

If I invest $1000 a month, things will really start to take off! I’d have $172,018.88 in 10 years, $510,406.06 in 20 years, and $1,176,064.86 in 30 years. That’s right, I’d become a millionaire!

Now I realize that for some people investing $1000 a month is a lot of money and it’s just not gonna happen, but that’s okay. The point is to start investing early and contribute as much as you are able to. I admit, this strategy is horribly boring and requires discipline and a lot of patience, but it does work (or at least that’s what the math and the investing guru’s of the world tell me, haha)!

Okay, okay, I get it! Invest early and invest often, but how do I know where to invest my money? What stocks do I buy?

I’m glad you asked! You buy all of them of course. Okay, maybe not quite ALL of them, but you buy a lot through something called a low cost exchange traded index fund (ETF). An index fund is basically a basket full of stocks across a range of different sectors and industries. There are A LOT of different index funds to choose from, so the goal is to pick those with low management expense fees (MER) (ideally less than 0.5% if not closer to 0.1%), those that are run by large reputable investment firms (i.e., Vanguard, iShares, Purpose), those that have a large market capitalization (>$300 million for Canadian ETFs; >$1 billion for US ETFs), and those that are well diversified across a large range of sectors.

In Canada, a lot of investors have a bad habit of primarily investing in the Canadian market. Don’t get me wrong, Canada is great and there’s plenty of great companies, but on a global scale we’re still pretty low on the totem pole, representing only ~4% of the world economy. We also have a heavy reliance on energy export (i.e., oil), so it’s harder to diversify. Traditionally, the US has been more business friendly, and has provided investors with the best overall returns. For us Canadians, the downside is we have to deal with the currency exchange, which can add volatility to our investments. Even so, the benefits still outweigh the drawbacks.

So which Index Fund do I choose?

For the total newbie, I’d recommend:

• 50% Vanguard US Total Market Index (VTI) or TD US Index Fund (TDB902)*
• 25% iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)
• 25% iShares Core MSCI EAFE ETF (IEFA) International Index

*The TD e-series is a good choice, but you need to hold an account with TD Canada Trust or TD Waterhouse.

These 3 ETFs alone would allow you to invest in literally thousands of companies around the world! They’re a great start to the world of investing and are generally considered very low-risk. In future posts I’ll discuss some additional ETFs to consider if you want to spice up your portfolio. Once you purchase these investments, you will want to try and keep the proportions roughly constant (within 5%). To do that, simply put any new contributions towards the smallest portion.

So how do I actually buy these? It’s not like there’s an aisle at the grocery store labelled “ETFs”.

Another great question! You guys are such an intelligent bunch!

You will need to open an investment brokerage account. Every major Canadian bank offers these types of accounts, and generally speaking they all function the same way. Just watch out for the trading fees, you shouldn’t have to pay more than ~$10/trade (i.e., buy/sell a stock). That also means it’s a good idea to invest in larger lump sums ($1000 or more) if you get dinged with a $10 fee every time you buy. Another option is to buy index funds that don’t charge a fee for each transaction, such as the TD US Index Fund. They do charge a slightly higher MER, but it’s still a much better way to go for smaller investment contributions. As an added bonus, this is a good way to reinvest any dividends you receive, which tend to be fairly small sums as well.

 One last thing…

Before doing any investing, make sure you have your finances in order, and you don’t have any outstanding high interest debt. If you have debt with an interest rate higher than 5-7% (i.e., most credit cards), pay that down first, otherwise you’ll just be losing money.

Check out Investing Part 2: ETFs and Making Your Money Work so You Don’t Have To!

Also, Investing Part 3: RRSP or Non-Registered or TFSA, Where Should Your ETFs Go?

Disclaimer: I do hold some of these investments, but I do not receive any form of endorsement or compensation for writing this article. I was not solicited to write this article in anyway, and provide this information on a voluntary basis. I hold no formal financial accreditations, so please consult a financial professional and ensure you understand the risks before making any investment decisions.