Investing For Retirement

 

Investing is easy, but requires discipline. If you’re saving for retirement you should be investing in equities and bonds. If you’re saving for a purchase within five years, put it away in a guaranteed savings account.

Equities, or stocks, are public companies that you interact with every day. When you’re invested in equities you become a partial owner of those companies. Buy a share of Starbucks, you own part of it.

Bonds, or fixed income, is simply debt. When you buy bonds you’re essentially buying companies, or government debt.

Another important term to know in investing is Index funds. An index is a group of stock or bonds based upon a certain criteria. For example, the most popular index in the world is the S&P 500. The S&P 500 is a group of the largest 500 companies listed in the United States. So when you buy the S&P 500, you own a part of Starbucks, Google, Apple and 497 other competitive powerhouses.

Index funds have become extremely popular. They have much lower fees than an actively managed fund and you don’t need to second guess them. If the entire market falls because of a recession, no problem, you keep holding the fund, buy more if you can and wait for it to come back. But if you have an actively managed fund and it falls more than the market, is it temporary? Should you sell? It becomes a headache.

Next up, mutual funds and exchange traded funds (ETFs). The biggest difference between buying an index in mutual fund or ETF format is that mutual funds are typically better for smaller, more frequent purchases as you can get ones that don’t have trading fees. ETF’s are typically better for larger or infrequent purchases as they trade on the stock market and you pay a trading fee, but they are typically less expensive.

So, we now know we’re going to invest in equity and bond index funds in either mutual funds or ETFs. Next, who do you invest with?

 
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There’s a spectrum of investing options, but we’ll keep it low cost and simple.

Human Advisor. Typically these have been expensive, but Vanguard now has a great option, the Vanguard Personal Advisor Service which provides you with access to a professional for a 0.30% fee. Vanguard also has some of the most competitively priced funds. If you go with them, you’re in good hands. Requires $50,000 minimum in assets

Robo Advisor. If you want slightly lower fees and don’t like talking to humans you can go robo. There’s a couple big players in this market: Betterment, Wealthfront and in Canada, Wealth Simple, Nest Wealth. They all have a program that will help you with your asset allocation (split between equities and bonds, as well as which equity and bond funds to buy).

Do it yourself. If you’re comfortable, everything above was redundant and you’ve never panicked when the market crashed you could look at investing yourself. You simply set yourself up with an online broker, dig into the details by reading everything you can get your hands on and then start. Bogleheads and Canadian Couch Potato are popular resources in this space.

The biggest win with the first two options is that you will have professional help in figuring out your asset allocation, or what percentage you should allocate to equity and bonds as well as which funds specifically. They will also help you adjust that allocation as you get older and rebalance between the mix as the markets move. Asset allocation makes up the majority of your return, some studies show almost 90% of your return, so you need to get it right.

Taxes will also eat your return so be sure to invest in a 401(k) and/or a Roth IRA. In Canada, invest in RRSP/TFSA’s first.

I’d like to finish with a warning. Take everything that you see with a grain of salt. The finance industry is enormous and companies are willing to spend lots of money to get a consumer. Lots of slick salesmen are out there knocking on doors hawking expensive products. If you see a yearly fee in the 1.5%+ range that is ridiculous. If they charge you a large percentage fee when you put your money in or take it out, that’s crazy. Ask how the person you’re dealing with is compensated. It’s your money, you’ve worked hard for it, don’t let someone siphon it away!

My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)
— Warren Buffett

While the 90/10 equity/bond split may not be right for you (Warren Buffett has a lot more money so his family can weather great storms), you should take comfort that one of the world’s best investors believes in index funds and Vanguard.

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