Canadian Investment Advice sought

Factual Questions
1

Hello,

I am getting older, my job is pretty good, I have some money (but not a lot, in the range of $2500) in a savings account, and I am looking to do something with this money. I don’t mind some risk, and feel like I should invest at least some of it in an RRSP. As I understand it an RRSP is a tax shelter where you only get taxed on the money when you withdraw it for retirement (I do know of the special house buying use, but I doubt I will be buying a house in the next couple of years). These RRSPs are usually made up of Mutual funds. Mutual funds are investments managed by professional money people who invest in a range of stocks for you and the other people who invest in said fund and take a fee for doing so. This is where things begin to get confusing for me.

How much of a fee is a reasonable fee?

What does no-load, low-load mean?

I know what MER stands for I just don’t know what is reasonable. As I am going to be a small time investor (for now) I don’t want to pay a bunch of fees for being a small time investor, such as 'you have less then 10k, you must pay us $50" or something similar.

Are some companies more geared towards smaller investors?

Are Banks the right place to go for investment advice? They seem to make billions every year!

What other kinds of investments are out there? Not like day trading or anything. I don’t have the time, inclination or brains to invest my money without any help. I don’t want GICs or Term deposits though, they barely make any money, I would be better off leaving it in my savings account. At least I could access it then. So besides mutual funds, is there some way for a small time investor like myself to make money?

I won’t be retiring for at least 30 years, should I be worrying about RRSPs? Should I invest some money in RRSPs, other money in some other sort of investment?

I accept all advice knowing it is just that, not professional advice, you are not my lawyer/doctor/invesment advisor/mother and so forth, you will not be held accountableor liable in anyway for any answers posted to this thread. Ok?

Thanks for the help.

2

With an RRSP contribution you also get a tax deduction. This is substantial, so don’t ignore it.

Banks make billions for themselves, not for you. Personally I feel banks are a terrible source for investment advice. You are likely to end up talking to some low-level schmuck who makes less than you do.

Everyone who gives financial advice has their own agenda. They either charge a fee for the advice, or get a commission for selling you something. Nothing wrong with that, but be wary of taking the advice of someone who is commission paid as his incentive is to get you to buy the investments that earn the most commission, not the ones that are right for you.

Since it seems you don’t want to put a lot of effort into this yourself, your idea of a mutal fund seems reasonable. Although with only $2500 to invest it might not be worth it given the fees you will pay. If $2500 is all your savings, I wouldn’t worry about investing it. You need some cash to handle life’s emergencies. Stick it in an ING savings account.

3

Thank you.

How am I to know if someone is commission paid or not? Just ask?

Is there no way for small time investors to get started without paying lots of fees, and potentially cutting into any money I would actually make? 2500 isn’t all of my savings, I still have an emergency fund, but all I ever hear about money matters is that people aren’t investing enough, people aren’t thinking about their retirement early enough, people are being foolish with their money and so forth. I openly admit money is not my forte and need some professional help.

Are there no ‘rules’ about what to invest in? What kind of management fees are reasonable? It seems there is a fairly large spread in Management fees, from 0.85-2.25% that I have seen, as well as in the MER, 1-2.74%.

If 2500 is just going to get eaten up by fees, what amount is a reasonable one to begin investing?

4

I’m actually looking into investing as well. I want to buy a house in the next 5 years, but I don’t have much in the way of savings yet. Pretty much all I have is a $5000 inheritance. Is an RRSP a good option, you think? I have a meeting with my bank about this on Saturday.

5

Yes, you should VERY seriously consider contributing to an RRSP (all employed Canadians should). RRSPs can be made of savings, mutual funds, stocks and bonds (in a self-directed RRSP), Canada Savings Bonds, or combinations thereof.

Mutual Funds Glossary will answer your questions about no load funds, MERs, etc.

You can certainly buy into mutual funds on your own without paying a broker or any service charges (other than management fees that are built right into the funds themselves and form part of the MER). That’s what I do. You might want to find yourself a book on investing in mutual funds just to get more comfortable, but poking around in any place that sells mutual funds will get you lots of info - for example Mutual Fund Basics or Mutual Fund Primer.

See ING Direct if you want to put it in savings and still get something in the way of interest. There are no service charges or minimum balances with ING Direct.

As you might guess from the above links, I use TD Canada Trust and Altamira for my mutual funds. That’s really neither a recommendation for nor against them- I ended up with them many years ago and I’ve been happy, but I have no reason to believe other banks or mutual fund companies would be any better or worse. I do STRONGLY recommend ING Direct for savings.

6

I would. If you don’t get a straight answer that might be a warning sign. Note, I don’t really think anything is wrong with this. People need to earn a living. It’s just you can make better use of their advice if you know their biases.

If that’s outside of your emergency fund, then I can’t see you going wrong in putting that into an RRSP eligible mutual fund. Of course, you want to shop around for a low management fee.

I do. You can withdraw some of it later tax-free for the house down-payment. Your bank guy will have the details. I think it’s 20 grand.

7

Looks like I’m in the same boat as you guys – or rather, I was, and I’m getting out. I’ve been fed up with Canadian banks, and I’m now going the Financial Planner route – one guy who helps me figure out where my investments should go, shows me how to minimize taxes now and 30 years from now, and how to minimize how much the govt will get when I die so more can go to my offspring.

My planner doesn’t charge a fee – he gets paid by his company based on the amount of my portfolio that his company handles (in essence, he gets a cut of the MER), and he gets a bonus if my total portfolio increases (whether it’s with his company or not, like my stocks and company pension plan).

I’m doing this because my experience with banks has been pretty useless – they ask a standard bunch of questions every year, then try to direct me towards “balanced” mutual funds that fail to meet any stock index (TSX, Dow, take your pick) and charge MERs of up to 2.5% for the privilege.

As for the other questions in the OP:
You can put anything you want to in an RRSP. You can buy stocks directly and have them tax-sheltered, or you can buy millions in GICs, or you can buy mutual funds. It’s up to you.

A fee is whatever seems reasonable. Ideally I want a return on my investment of 6-7% that I get to keep. If the investment makes a 10% return, with a 2% MER, then I’m pocketing 8%, and that’s okay by me. If the investment reaps a 3% return and charges me .5% MER, that’s too much for my blood. YMMV.

Loads are what’s charged whenever you buy an investment. It’s like sales tax, except it’s going straight to whoever is selling you the mutual fund (or whatever).

Overall the best way to make money is to make regular investments every week or month. $2500 is still going to be pocket change 30 years from now. You need to keep adding to it on a regular basis.

8

What is the difference between a bank and a financial adviser? We all know TD is a bank. Is Altamira a financial advisor? (to use the above links as an example). Or are financial advisers a title? Banks would employ them, Altamira would employee them, etc? I really am quite ignorant about all of these things.

The Bank I use, Citizen’s Bank, is big into ethics and whatnot, and use an Ethical Fund, or what they call Socially Responsible Investing (SRI), however in some of my readings these have been slammed as underperforming. What does ‘underperforming’ mean exactly?

9

Underperforming probably means the Ethical Fund’s return is lower than a GIC.

TD is a bank, but it also has an investment arm that deals with stocks, mutual funds, etc. Companies like Altamira, Fidelity, Investors Group are financial companies that deal exclusively with stocks, mutual funds, and other investments. (You should remember that banks only moved into the mutual fund business in the past two decades.)

Banks do offer financial planning, but for small investors (ie. me and you) it’s just a means to sell mutual funds. Financial firms are more likely to offer a financial planner as part of their service package, or you can always go to an independent financial planner.

You know what? Pick up Saturday’s Globe and mail and look for their Financial Facelift column in the Business section. Every week they look at a couple that meets with a financial planner and they name names.

10

If that were true then you’d be losing money, since GICs are essentially riskless.

PC financial currently offers a slightly higher rate than ING(4% vs 3.5%) but there is a $1000 minimum balance. It’s easy if you already bank with PC financial (as I do) because you can transfer between accounts online quite easily.

11

Hit submit too soon. The golden rule of investing is that there’s always risk, and it goes both ways. My current investment vehicle is a used luxury car. It’s risky, but risk goes both ways. :wink:

12

$2500 is not very much - probably less than one month’s salary.

However, it indicates that you are living in credit, rather than off credit.

  • good news - Micawber rules Ok.

The ING account rang bells, in the UK they are offering a no frills a/c with really simple terms - the interest one would earn is trivial, but so are the tax savings by doing something complicated.

At some stage you will want to buy a property, building up a fund for that is sensible.

Also, a long time ago, a guy said the following to me:

’ If I have £1000 in the bank, then when I see something I want, I think I could buy it, but then I think … no, I would prefer £1000 in the bank. If I am skint, then I’m depressed, buy the thing, get even more in debt, and even more brassed off’.

I recommend that you don’t worry about it, just keep moving in the right direction.
By that I mean just keep your emergency fund moving Northwards.

13

How do you tell what return you will get? I see on prospectuses (prospecti?) that they show how they have performed for 3 months, 6 months, 1,3,5, 10 years. Which one of this are important? Does it depend on how long you are considering leaving the investment in the fund?

Also I see “annual compound returns” and “Calendar year returns”. What do these categories mean?

Thanks for all the responses so far, they have been quite helpful.

14

Cliche though it is, follow the basics of the Scott Adams one page investment advice.

Pay off your credit cards bills, buy a house if you want one and can afford it, and put your investments in mutual and index funds, registered as an RRSP, and then leave them alone. Never, ever deal with someone who is paid according to how many transactions you make.

Do not get worked up about your return on investment. Put your money in a mix of different mutual and index funds. Put away a set amount every month - although I agree you should stick your $5000 into an RRSP assuming you presently have nocredit card debt - and leave it there and check up on it only to make sure the accounting is correct. The stock market goes up over the long term, irrespective of the short term dives and hops, so by investing in index funds you’re minimizing your risk to nearly nothing, unless Western civilization utterly collapses and then you have other problems to deal with anyway. If you want REALLY low risk investments put 10% of your money into gold, which has retained essentially the same value for all of recorded history and likely always will.

If you are looking to buy a house in 5 years, put the money in an RRSP. You will enjoy a massive, massive tax benefit in 2007 - and since I know you personally now have a regular salary, it matters now - and you can take it out with no penalty to buy your house. My RRSP is what allowed us to buy our house.

It is also a good idea to lay some money aside in a savings account or a GIC that isn’t RRSP registered just in case you need emergency funds, but that’s a different story and depends on who you can fall back on or what emergencies are even reasonably possible. Since you don’t own a house NOW, you can’t have, oh, say, an exploding water heater that costs you THIRTEEN HUNDRED DAMNED DOLLARS @&#@&%#@*@!&(##"$#@

15

You need to remember that historic returns are just how much larger (or smaller) the value of the fund is relative to the starting period. I.e. a 10% return over 5 years means the fund is 10% more valuable now than back in 2001, which means it grew at 2% per year for 5 years.

Sounds like you need to hold off and get a firm grasp of some financial concepts. Take a look at the Motley Fool basics page. There’s enough similarity between US investing and Canadian investing that it will be worthy your while. 401(k) is roughly equivalent to our RRSP.

16

It’s impossible to know what return you will get with mutual funds, by their very nature. The different periods simply show how the fund has performed over the short term, medium term, long term, etc. To be brutally honest (sorry!), it sounds to me like you do need to either go talk to someone or get a book on the subject, e.g. Mutual Funds for Canadians for Dummies

17

Oh I am for sure pretty damn stupid in regards to this stuff. I openly admit it, and will not take any offense at pointing it out. Its hard to get upset about the truth when you yourself admit to it. I do, and am, going to be talking to someone. I just wanted to get at least some idea about what kind of questions I should be asking, what kind of answers I should be getting, and how to spot someone who isn’t working in my interests. Thank you all for the links, I am devouring them all.

18

I’m going to add one thing to this. In the U.S., mortgage interest is a tax deduction, so buying a house is a good investment that pays off twice.

In Canada, the same thing doesn’t apply, but there’s a workaround. If you borrow money to make an investment, the interest you pay on that loan is a tax deduction. So if you’re going to buy a house, get an even larger mortgage, then devote some funds to your house, and some to your investments.

Then you’ve got dividends and capital gains, and which do you want in your RRSP and which do you want outside. It matters because all this income is taxed at different rates!

19

What do you mean by this?

20

If you’re worried about mutual fund management fees and commissions eating into your returns, I would suggest investigating ETFs. I’m not sure if you’ll be able to get into them with $2500 or not, but I’m pretty sure you can open an account at a discount brokerage with $5000.

You will pay far less in management fees, with the added bonus that these indexed funds often outperform an average mutual fund even before taking the MER into account.