Last year, I challenged myself to learn about investing and how to invest in the stock market. I am so glad I did. Saving money for retirement, or to buy a house, is intimidating. What if you aren’t saving enough? What does a financial planner cost?
To find out, I visited my bank’s financial advisor to learn what I was paying in management fees (MERs) for my registered retirement savings plans. The answer was 1.92%. I had approximately $60,000 in mutual funds. Doing the math…I was paying around $1,152 per year!
There had to be a smarter and less expensive option, right?
To find the answer for myself, and for you, I put on my old journalist hat and did some good, old-fashioned research. You can’t find the answers until you start asking questions!
Here I’ve narrowed down the options to four great, passive investment choices for beginners who want to start investing in the stock market.
Tangerine Investment Funds
The first investment option we will look at is from Tangerine online bank. Tangerine’s series of index mutual funds have been around for a number of years.
They are an easy way for beginners to start investing in the stock market.
Tangerine funds are a passive investment option for Canadians who want to invest, but not actively manage their own investments.
Read: Smart Money Ideas For Women At Every Age
What is an Index Fund?
An index fund is a mutual fund that is designed to track the holdings of a specific stock market index with the hope it can match the returns of the market as a whole. It’s risky and unlikely to beat the market, so aiming to match it is just fine.
Index funds are normally low cost, due to their passive management format. They also tend to be tax efficient and diversified.
What is a MER?
MER’s (Management Expense Ratio) are the management fee’s associated with owning a fund. They are an annual rate that is calculated daily, but are incorporated into the price of the fund.You won’t see a charge for this fee, it is built into the ticket price!
Advantages of Tangerine Investment Funds:
Let’s look at the advantages of investing with Tangerine Investment Funds.
Low Cost: Average index fund fees are definitely beat those of comparative mutual funds. Fees are important, and since studies show thatmost mutual fundsdo not beat their market index, why pay the extra cost?
Low Minimum Investment: You can open an account with as little as $100.
Diversification: Building a diversified portfolio through buying individual stocks and/or bonds is not easy for a beginner investor. Tangerine’s index funds are designed to be diversified, so you won’t get too much local concentration or bias towards Canadian holdings.
Automated Investing and Rebalancing: The best thing I’ve ever done as an investor is set-up automated deposits into my investment account each month. Even a little bit of money (say $20 per paycheck) can get you started as a beginner and build-up into a nice retirement fund. Automated investing eliminates human errors, such as forgetting to transfer over money. As well, your portfolio is re-balanced for you.
Disadvantages of Tangerine Investment Funds
Cost: Tangerine investment funds are less expensive (1.07%) compared to the average fees for equity mutual funds (2.23%)
However, there are cheaper alternatives. The average robo-advisor fee is around 0.75%.
If you want to do-it-yourself and open a discount brokerage account, you can pick your own ETFs with management expense rations as low as 0.06%. However, you will pay commissions when you make a trade (approx. $10 per trade).
Flexibility: Tangerine has five funds. Investors can pick one, or a combination of funds, based on their risk tolerance and investment goals. Each fund is globally-diversified and their MER is 1.07%.
To take a closer look at Tangerine’s Index Fund options.
TD e-Series Funds
TD e-Series Index Funds are another low-cost index fund option for beginner investors who want a relatively hands-off approach to investing in the stock market.
To purchase them you will need to open a TD EasyWeb Mutual Fund account or a TD Direct Investment account. You can then buy and sell the funds online and build an investment portfolio.
The TD e-Series includes 4 main index funds that cover the Canadian, International, and US equities index, as well as the Canadian Bond index. The management fees range from 0.32% to 0.52% (as of April 4, 2020)
For a full review of TD e-Series funds try reading the Canadian Couch Potato.
Rebalancing Your TD E-Series Investment Portfolio
One important thing to note with TD e-Series funds is that you will need to re-balance your portfolio yourself.
This means re-balancing your portfolio so the target percentage allocation of all the different funds stays diversified.
For example, say you set up a portfolio of TD e-Series Index Funds to hold 25% in the Canadian TD stock index, 21% in the American TD stock index, 24% in the International TD stock index, and 30% in the Canadian TD bond index.
As the stock market fluctuates, your various index funds will go up and down. When they stray enough from your target percentages, you’ll want to sell from the index funds that are doing well, and re-invest into the ones that are stalling.
Here is a step-by-step guide on How to Re-Balance A TD e-Series Investment Portfolio.
Opening An Online Discount Brokerage Account
If you want to play more active role and build your own investment portfolio, you can open a discount brokerage account. Through this account you can purchase Exchange Traded Funds (ETFs) or individual stocks.
What Is An ETF?
An exchange-traded fund is an investment fund that lets you buy a large bundle of individual stocks or bonds in one purchase.
An ETF is similar to a mutual fund, but there are a few big differences. Mutual funds usually have humans managing them, who make stock-trades based on which ones they predict will go up or down. Most ETFs are not managed by people.
ETFs use an algorithm that tracks an entire economic sector or index, like the S&P 500 or TSX.
Since ETFs are “passively managed”, their MERs are lower, between 0.05% and 0.25%.
Building an Investment Portfolio With ETFs
Once your discount brokerage account is set-up, you’ll need to fund the account with a lump sum payment or with regular automatic contributions from your bank.
From there you’ll want to select your ETF, or portfolio of ETFs, by entering the ticker symbol(s) and purchasing your desired number of units.
Have a look at The Best ETFs For 2020.
Unless you hold an all-in-one balanced ETF, you’ll need to do your own portfolio re-balancing.
Just like with the TD e-Series funds, you’ll want to keep your funds percentage allocations balanced.
You can either re-balance by contributing new money to the fund that is lagging behind. Or you can re-balance once or twice a year by selling some of the top performing fund and buying more of the under-performing fund.
See The Ultimate Guide To Canada’s Discount Brokerages review by Young & Thrifty.
Robo Advisors
For investors looking for some more guidance with investment portfolio building, but who still want to save on fees, arobo advisor is a good choice. Opening an account with the Canadian robo advisor, Wealthsimple, was my first passive investing move.
Read our article about the Top Canadian Robo Advisors 2020 for a review of the best robo advisors for beginners.
A robo advisor creates and manages your investment portfolio using the combination of a computer algorithm and human advisor. When you create an account, you determine your risk tolerance and the advisor uses exchange traded funds (ETFs) to assemble a portfolio for you.
You have the option of holding your investment as an RRSP, TFSA, RESP, and more, depending on the robo advisor.
Robo-advisors rebalance your portfolio as you add new money or whenever your portfolio drifts away from its target allocation.
Robo Advisor Fees
My top reason for investing with a robo advisor is the low fees.
These include:
- A percentage fee based upon how much money you have invested or a flat monthly fee
- Management Expense Ratios (MERs) – another management fee
- There could be a minimum investment amount that you need to get started
No matter which robo advisor you choose, the fees will be much lower than investing with a financial advisor. For example, I paid 1.9% in fees to have my RRSP mutual funds account managed at a bank. I now pay about 0.7% investing with Wealthsimple.
Most robo advisors charge a management fee of around 0.40 – 0.80% to monitor your portfolio.
ReadSimple Steps for Getting Started With a Robo Advisor to see the process I followed when I moved my RRSP account from a bank to Wealthsimple.
How To Invest Money In The Stock Market – Comparison
| Investment Option | Cost | Pros and Cons |
| Tangerine Funds – online bank | Management Expense Ratio (MER) 1.07% | Provides balanced index funds in one portfolio – similar to a bank. Management fee is about 1% lower than the bank but not the lowest option. No cost to make monthly contributions from bank account |
| TD e-Series – individual index funds | MERs from 0.32% to 0.52% | Self directed approach – you choose the components (bonds, Canadian stocks, U.S. stocks, international stocks) and combine them to make a portfolio. Requires self-management Requires TD Direct investing account |
| Exchange Traded Funds (ETFs) – through an online brokerage Example: Questrade, Qtrade, TD Direct Investing, Scotia iTrade. | MERs around 0.15% May include trading fee around $10 per trade | Complete control over choice of stocks and bonds. Also can choose real estate, preferred shares, emerging markets. Requires more knowledge and self-management. Must re-balance assets. Cheapest option. Trading fees could be expensive if making monthly automatic contributions. |
| Robo-advisors – combination of human and computer algorithm Example: Wealthsimple, BMO Smartfolio, Justwealth | MERs around 0.60% to 0.70% Some options require a minimum balance to avoid annual $100 fee | Hands off approach to investing. No re-balancing required. Can make automatic monthly deposits from bank account at no cost. |
Choose the Best Investment Option for You
All of the above options have much lower management fees than you’ll find at a traditional bank. Tangerine Funds and robo advisors are a good fit for new investors who want to just “set-up and go”.
I started off by moving some of my RRSP retirement savings into a robo advisor account.
It was a big first step but one that immediately made me feel like I was taking charge of my finances.
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