Investment How To

Money Tools & Rules book: Expanding on the “How to make your teenager a millionaire” chapter:

The fine print first: I only ever give feedback based on what I would do, and I am not an investment broker, investment guru, etc. Always do your due diligence and check with an investment professional, no matter what, because this how-to is for information purposes only!  For someone that age, investments should likely be in diversified good growth mutual funds with a long-term track record and no load fees. To find them, search for Morningstar, an independent rating company of all mutual funds, or it’s U.S. equivalent. Careful just giving someone some money: I would do it on a matching basis. I’ll contribute a dollar for every dollar that you save towards this goal, or I’ll contribute two dollars for every dollar, etc. But tell them a maximum, or a kid who is a great saver will surprise you, and cost you a lot more than you may have wanted to match!

Where to invest: At age of majority, everyone is entitled to contribute to a Tax Free Savings Account (TFSA) to a maximum of $5,500 a year. The great thing about the TFSA is that it isn’t income percentage linked – it’s currently $5,500 a year irrespective of income. And, while it doesn’t get him or her a tax deduction up front, it is also never taxed in the TFSA, and never taxed when it’s taken out! If the person is 20, for example, they can also use the available “room” for the prior years! They can also do it through an RRSP, but that’s to a maximum percentage of their income, and then it will be taxed when it’s withdrawn in retirement. But that’s up to you…

What to invest in: The younger you are, the higher your risk tolerance. That’s simply because you have a vast number of years to average out a bad year with a great year. The older you get, the more you need to protect your principal and not chase higher returns. That changes gradually as you get into your 50s and older. For anyone in their 20s to 40s, THE easiest investment with next to zero commissions and huge diversifications is the S&P 500. It’s a basket of the largest 500 companies – you can’t get much more diversified than that! And you can do it in ten seconds on your own (online or by call). You want (in my opinion) the S&P 500 Index Fund, ETF (electronically traded funds) in Canadian dollars (it avoids you having to do a currency exchange). The historical return over the past 50 plus years is 11.5%. That’s why I use 10% returns in all my examples. I’m using LESS than a 50 year proven track record average!

If you don’t want that, go to Morningstar and search any mutual funds in whatever category you want: Emerging markets, conservative, balanced, etc. by returns. Just make sure you’re only looking at the ones with a long-term track record!

Who to invest with: If you, or another family member is an existing customer of a brokerage firm, that’s worth checking out as to a)whether they’d take another family member with a small account as a favour to keep their (current big family) client and b) what the fees would be! If that doesn’t apply, it will likely need to be an online brokerage account. Most of the large banks have them – just don’t confuse their brokerage division with investing at a bank. That’s generally a bad idea with poor returns! Again, you can compare their published returns with those from Morningstar.

If you’re just starting, any online broker is fine. If you deal with any of the major banks, they all have an online brokerage. You just need a place and an account and can do the rest. They won’t give you advice – just execute whatever you want to buy or sell. No worries if you get the S&P Index funds – click to buy it and leave it alone until you’re in retirement. And for pete’s sake STOP checking it every month…set it and forget it.

How to get started: Open the account where you decide, and how you decide (RRSP or TFSA). I would do it under joint names. That way both names are on it (especially if I’m helping with money), and if it requires joint signatures  you’re sure the person doesn’t do something stupid and make a withdrawal to pay a bill, etc. without your consent and signature. That’s not what this money was designed to do. It was/is meant for retirement and never to be touched until then… When your minor reaches the age of majority and can contribute to an RRSP or TFSA take the investments you’ve already made and move them over to one of those! It’ll protect them from ever having to pay taxes on the returns inside either of these!!

To check reasonable annual returns: Do a web search for “historical S&P returns,” “historical Dow Jones returns,” etc. (On the yourmoneybook.com site you can click on “radio stories” and search “historical returns.” I’ve posted the chart going back about 70 years!! For someone aged 18 to 25, there are more than four decades before they should access the money, and thus four decades of markets going up and down, so the historical averages apply, and are well above the 10% used in the Money Tools example of How to Make Your Teenager a Millionaire. If you’d like, you can use a different guestimate of returns for the next four decades, and re-do the easy math (or with an online calculator) of how long it takes for the money to double. IE: If you use 8%, it’d be 9 years.

Hopefully that gives you some of the how-to and/or steps to get from here to there. (updated 11/10/2019)

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