Financial Wellness

Online Investing for Young Employees

By Preet Pall on June, 8 2021
7 minute read

Stay up to date

Getting started with investing has never been easier. Traditionally, someone interested in an investment portfolio would speak with a financial advisor or stockbroker. These professionals would manage your investments on your behalf and charge a monthly or annual fee and earn a commission on each trade. 

Thanks to the internet, a number of discount brokerages have opened up, which allow users to manage their own investments at a low cost. In Canada, the two most popular discount brokerages are QuestTrade and WealthSimple. Both have no annual fees and have low trading fees.

 

Managing Your Portfolio or Using a Robo-Advisor?

These discount brokerages don’t provide guidance. You are left to your own devices and may purchase stocks as you please. 

Managing your own portfolio can be stressful and time consuming. As the market shifts, your portfolio will need to be rebalanced to ensure you are still meeting your targets for asset allocation and risk levels. Not everyone has the time or desire to do that. For those people, these brokerages offer-robo advisors. 

Robo-advisors are highly complex algorithms to do the job of an investment advisor. They’ll ask you a series of questions to determine how much risk you wish to take on (more on that later) and then spread your money into the market to match. Going forward, the robo-advisor will adjust your portfolio as the market shifts and your appetite for risk changes. For access to the robo-advisor, these brokerages charge a small fee— about 1% less than that charged by a human advisor.

 

Managing Your Own Portfolio With ETFs

One popular hands-off approach to investing is to purchase Exchange Traded Funds (ETFs). These are investment funds that allow you to buy groups of individual stocks and bonds with one simple purchase. 

Each ETF posts their yearly performance as well as how much of their investments are allocated to equities and bonds. This allows people to invest in ETFs that match the amount of risk they are willing to take. 

These are good options for anyone looking for more risk and higher returns, but aren’t well-versed in the stock market. With an ETF, they can invest in the market without stressing about rebalancing their portfolio or worrying about the performance of individual companies.

Two popular investment advisors with ETFs are Vanguard ETFs and iShares ETFs

 

Determining Your Risk

What to invest in will depend on how much you’re willing to lose. Equities, which is money invested in publicly traded companies, have the greatest potential to provide a large return on your investment. They also have the potential to lose investors a lot of money too. For every Apple, there are dozens of companies that went bankrupt. 

Meanwhile, bonds are a loan made from an investor to a borrower. As a general rule, debts are likely to be repaid. That’s why bonds are considered  stable and safe investments. While they don’t provide a large return, they generally don’t produce large losses either. 

The vast majority of portfolios will include a mix of equities and bonds. How that pie is split (the percentage of your portfolio dedicated to equities vs bonds) determines how much risk you are taking on. A portfolio with a high percentage invested in equities assumes a larger risk and has the potential of greater returns over a long period of time. 

One of the reasons people recommend investing early is that young adults can take on more risk. For example, the Vanguard Growth ETF Portfolio (VGRO), which is 80% equities and 20% bonds, saw a 7.05% annualized 25-year return. That means that an $50,000 investment, with no additional money added, would grow to $214,214 after 25 years. 

That’s a great return. So why doesn’t everyone invest in a high equity, low bond portfolio, take their profits and be done with it? The answer is that high equity portfolios are extremely volatile. That same portfolio’s lowest 12-month return was -28.10%. If that was the year you were planning to retire, having more than a quarter of your savings wiped out is less than ideal. 

In his book, “The Only Guide You’ll Ever Need for the Right Financial Plan”, Larry Swedroe offers guidelines about evaluating how much risk to take. One is based on the length of your investment and the other is on the maximum loss you’re willing to tolerate.



Maximum loss

you'll tolerate

Maximum equity allocation

5%

20%

10%

30%

15%

40%

20%

50%

25%

60%

30%

70%

35%

80%

40%

90%

50%

100%

Investment Horizon (in Years)

Maximum equity allocation

0-3

0%

4

10%

5

20%

6

30%

7

40%

8

50%

9

60%

10

70%

11-14

80%

15-19

90%

20+

100%

 

Putting it all Together

Whether you choose to invest on your own, get help from a robo-advisor, or follow the more traditional path of hiring an investment advisor, it’s important to remember that each investment should have a purpose.  Before investing comes goal setting.  Before goal setting comes an understanding of where you are financially.  There is little point in purchasing Bitcoin if you are carrying large amounts of high interest rate debt.  

Financial success depends upon building a solid foundation which ensures that cash flow and basic needs are addressed first.  This includes good debt management skills.  Next the focus is on financial safety such as insurance and emergency funds.  Once these foundational steps are taken care, investing and wealth accumulation can begin.  But even then timelines will dictate the amount of risk that should be taken.  Therefore, it’s important to write down your goals—saving for retirement, setting aside funds for an annual vacation, saving for a home or starting a business—and determining the amount of time before you will need to access the funds associated with each goal and how much risk you are comfortable taking.  Once this is done, then Swedroe’s charts can be used as guidelines to determine cash, bond, and equity allocations.

 

Final Thoughts

Getting started with investing doesn’t need to be complex. There are many low cost, hands-off approaches to get you started. Through the use of discount brokerages, robo-advisors, and managing your own portfolio through ETFs, even someone with little experience in the markets can get started and begin to grow their savings. 

Canadian Benefits 102: Retirement & Savings Programs

An overview of Canadian employer-sponsored retirement and savings plans.

Download

Let’s Talk