[LateStudent]

I want to help my little brother get on his feet financially. He's 34, 16 years younger than me. The problem is, I'm just learning myself; I've been in Altamira funds for 20 years, and am planning to switch to ETF's with a reasonable asset allocation and re-balancing. But I'm just learning about this stuff myself! It's like being a teacher who's studying to keep just one step ahead of the student. Anyway, I want bro to have a more solid start than I did. Here's what I plan to tell him initially:

"I suggest you look into TD e-Series mutual funds. These are "index" mutual funds, and have the lowest price of just about any mutual funds available. Index funds just follow established market indexes, and usually beat most other more managed funds most of the time, since it turns out that in a market with a lot of educated players, nobody can make better guesses about market movements than anyone else. Here's a couple of links for the TD funds:
- a listing of them: www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/mer_diff.jsp
- what they are: www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/help_eseriesfunds.jsp
- all the (too much) detail in the "Index Funds" prospectus: www.tdcanadatrust.com/mutualfunds/dprospectuses.jsp

Their main advantages are:
- cheap (very low MERs. Keeping in mind that it is realistic to expect only around 4% return after inflation, so a 2% MER will eat HALF of your expected return. So although a difference in 1/2% annual fee doesn't sound like much, it actually *is*.)
- you can add to them without paying any fees, including automatic monthly purchases if you want
- you can move them around to rebalance your portfolio without paying any fees
- they're a big enough family that you can construct a reasonably diversified portfolio

Later, you should consider even cheaper index ETFs, but hold off on this idea until your portfolio has grown bigger (this is because there is a brokerage fee to buy them, so you generally only want to do it with bigger blocks of money). "



...is this good advice? Is the TD fund family the best choice for now (I've no experience with them personally)? Is there anything else I should be telling him???

If you have comments, Thanks in advance!!!

 

[OntFA]

While it's not my first choice, TD e funds are a good option if you're looking for a hassle-free and convenient way to start investing. But they're not just for small investors. Their fees are low enough to keep accumulating in those funds for a very long time. Remember that you can reinvest without additional direct or opportunity cost which is usually not the case with ETFs.

Don't get too hung up on the 4% real return calculation. Sounds like you've been doing some reading since that's a common figure that is tossed around. Ultimately, what you can realistically expect will depend on how much risk you're willing to take and, in turn, how you end up dividing your assets between stocks bonds and cash - and more importantly how much you fiddle with the strategy over the years.

Many talk about fees but investor behaviour can easily have a much larger impact on your bottom line returns.

 

[ethos1]

I want to help my little brother get on his feet financially. The problem is, I'm just learning myself;

I've been in Altamira funds for 20 years, and am planning to switch to ETF's with a reasonable asset allocation and re-balancing. But I'm just learning about this stuff myself!

Here's what I plan to tell him initially:

"I suggest you look into TD e-Series mutual funds. These are "index" mutual funds, and have the lowest price of just about any mutual funds available. Index funds just follow established market indexes, and usually beat most other more managed funds most of the time, since it turns out that in a market with a lot of educated players, nobody can make better guesses about market movements than anyone else. Here's a couple of links for the

Later, you should consider even cheaper index ETFs, but hold off on this idea until your portfolio has grown bigger (this is because there is a brokerage fee to buy them, so you generally only want to do it with bigger blocks of money). "

...is this good advice? Is the TD fund family the best choice for now (I've no experience with them personally)? Is there anything else I should be telling him???

If you have comments, Thanks in advance!!!

You are recommending this to a relative not knowing fully what you are recommending & saying that you're just learning youself

Well its a tough call, especially brother-to-brother, it needs some further investigation I'd say, especially if your brother follows your recommendation and it goes the wrong way

Although, TD series funds - I suppose are OK, not something I would do

Good luck

 

[AdamW]

If your brother is just starting off investing and saving then your goal should be to help him create a saving strategy and stick to it.

Making regular investments to an RRSP, TFSA or other accounts will be much more important to him in the first few years than the individual investments he picks. Looking to go via low cost index mutual funds will help as he can set up regular purchases directly out of his account.

Whether or not, in the end, they will end up being the best investment will depend on how much risk he wants to take and how involved in the process he wants to be. Claymore is now offering purchase plans on a few of their ETFs so he can even skip the step of accumulating in index funds before buying index ETFs in some cases.

I think your guidance should really be towards getting him in the right habbits at first, don't focus too much on the investment decisions and costs. They shouldn't be completely disregarded but to me they aren't your brothers main problem if he is 34 and hasn't started developing good saving habits yet.

 

[LateStudent]

thanks for the responses!!

OntFA, if not TD efunds, what are good alternatives? I'm thinking of a family of no-fee cheap diverse index mutual funds, but maybe there are other alternatives for a beginning investor to start building a portfolio? hmmmm.... what... ?

ethos1, we've talked and he understands the risk/uncertainty and is comfortable with that, especially given his long horizon. ps, this IS the further investigating, at least the start of it! If you have suggestions, please bring 'em on

AdamW, I actually don't think he'll have trouble saving. He's frugal & intelligent and has never had debt problems, or anything like that. It's just that he's just recently got a very promising steady income, never had this before having been a bit of a student/free spirit up to now. He's got a pretty good grasp on what it might take to secure his financial future (we set up a spreadsheet to project/track his lifetime progress). At this point, we need a good place to put his current & future savings... know anything good besides what I was thinking of? (I'll see exactly what's available @ Claymore)

thanks again, amazing forum

 

[AdamW]

AdamW, I actually don't think he'll have trouble saving. He's frugal & intelligent and has never had debt problems, or anything like that. It's just that he's just recently got a very promising steady income, never had this before having been a bit of a student/free spirit up to now. He's got a pretty good grasp on what it might take to secure his financial future (we set up a spreadsheet to project/track his lifetime progress). At this point, we need a good place to put his current & future savings... know anything good besides what I was thinking of? (I'll see exactly what's available @ Claymore)
thanks again, amazing forum

Good to know that he'll be able to do it, lot's of people stumble on that. In terms of individual investments I think that the TD efunds would be fine to start off with. The goal would be to have him invested until he accumulates enough funds to buy an individual ETF so you just want something low cost and easy to set up on the preauthorize purchase plan.

But if you are eventually going to use ETFs and you like Claymores line up check out they new system (link below):

http://www.claymoreinvestments.ca/etf/investment-services/pacc

The minimum amount seems to be $50 so you might be able to skip TD efund as a middle man to accumulation sufficient amounts.

Hope that helps!
A.

 

[msimms]

I want to help my little brother get on his feet financially. He's 34, 16 years younger than me. The problem is, I'm just learning myself; I've been in Altamira funds for 20 years, and am planning to switch to ETF's with a reasonable asset allocation and re-balancing. But I'm just learning about this stuff myself! It's like being a teacher who's studying to keep just one step ahead of the student. Anyway, I want bro to have a more solid start than I did. Here's what I plan to tell him initially:

"I suggest you look into TD e-Series mutual funds. These are "index" mutual funds, and have the lowest price of just about any mutual funds available. Index funds just follow established market indexes, and usually beat most other more managed funds most of the time, since it turns out that in a market with a lot of educated players, nobody can make better guesses about market movements than anyone else. Here's a couple of links for the TD funds:
- a listing of them: www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/mer_diff.jsp
- what they are: www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/help_eseriesfunds.jsp
- all the (too much) detail in the "Index Funds" prospectus: www.tdcanadatrust.com/mutualfunds/dprospectuses.jsp

Their main advantages are:
- cheap (very low MERs. Keeping in mind that it is realistic to expect only around 4% return after inflation, so a 2% MER will eat HALF of your expected return. So although a difference in 1/2% annual fee doesn't sound like much, it actually *is*.)
- you can add to them without paying any fees, including automatic monthly purchases if you want
- you can move them around to rebalance your portfolio without paying any fees
- they're a big enough family that you can construct a reasonably diversified portfolio

Later, you should consider even cheaper index ETFs, but hold off on this idea until your portfolio has grown bigger (this is because there is a brokerage fee to buy them, so you generally only want to do it with bigger blocks of money). "



...is this good advice? Is the TD fund family the best choice for now (I've no experience with them personally)? Is there anything else I should be telling him???

If you have comments, Thanks in advance!!!

e-funds are good, they are some of the cheapest index non-etf funds you can find. you can invest in the bond index component, as well as exposure to various equity indices around the world. And re-investment is commision free (and if you invest directly with TD, no commisions to buy the e-series fund).

Simple and cheap (at least cheap for Canada).

 

[OntFA]

OntFA, if not TD efunds, what are good alternatives? I'm thinking of a family of no-fee cheap diverse index mutual funds, but maybe there are other alternatives for a beginning investor to start building a portfolio? hmmmm.... what... ?

I almost always recommend that beginning investors start with nothing more than a basic balanced fund. One fund, nicely diversified. Reasonable fees.

If starting with a more modest amount of savings, one of the best options is RBC Monthly Income which you can buy from any branch of RBC Royal Bank. They will try to sell the fund of funds or RBC portfolio funds but best to just stick to the cheap simple stuff.

If he's a bit more daring and has a few more bucks (at least $5k), he can do even better with a fund like Mawer Canadian Balanced RSP fund which can only be had for a $5k minimum if bought through a brokerage account (like TD Waterhouse Discount or Scotia iTrade). Now, it's as easy as that but understand the irony in that it requires a great deal of knowledge and experience to know that this is the best way for a novice to start. And it may well be a good option until his savings reach well into the six figures. I'm not kidding. Lots of people do a lot worse than a good cheap balanced fund.

You don't know me but take this advice seriously.

 

[mfd]

for the guys at work who ask me how to start I generally tell them to put their money into the ING street wise funds. This is simple and straight forward for a beginner. I then tell them once they get $20 to $30k they can think about shifting to the TD e funds and eventually move into etfs. The complexity increases as they get more knowledgeable and have gotten use to the fluctuations in the market

 

[ethos1]

for the guys at work who ask me how to start I generally tell them to put their money into the ING street wise funds. This is simple and straight forward for a beginner. I then tell them once they get $20 to $30k they can think about shifting to the TD e funds and eventually move into etfs. The complexity increases and they get more knowledgeable and have gotten use to the fluctuations in the market

I agree with mfd that start slow and easy, know the ROR, yield expectations & risks involved, since not everyone has the same tolerance level nor the understanding of the what could turn out to be high risk or even higher MER's

On ETF's I could throw in the iShares CDN S&P/TSX 60 Index Fund 'XIU' - buy it then sell covered calls on this ETF at the money long. Then all being well its possible on a one year term to yield better than 10%

Then there are other complex investing methods which are way too much for those starting out

 

[geewilickers]

This is a good beginners thread. Can we make a stickied beginner thread that links to all other beginner threads?

 

[OhGreatGuru]

Focus on the Strategy, not the Tactics

The discussion with your brother should focus on why, after 20 years of (presumably disappointing) experience with managed funds, you came to the conclusion that index funds are a better strategy. So brush up on those arguments. And give him web or printed references on the subject so he can check it out for himself - he needs to convince himself, not just do it because of your opinion.

The specific index funds he then chooses are tactical decisions, and secondary. You can tell him you like the TD e-funds for their low MER and they cover the necessary sectors adequately. But there are other choices, such as ING Streetwise funds, and most to the bansk have index fudns now. As someone else mentioned, if he doesn't have much money to invest initially he may be better of to start with a simple balanced fund.

Because of your different ages his asset allocation is likely to be different than yours as well.

 

[Howie]

Good to know that he'll be able to do it, lot's of people stumble on that. In terms of individual investments I think that the TD efunds would be fine to start off with. The goal would be to have him invested until he accumulates enough funds to buy an individual ETF so you just want something low cost and easy to set up on the preauthorize purchase plan.

But if you are eventually going to use ETFs and you like Claymores line up check out they new system (link below):

http://www.claymoreinvestments.ca/etf/investment-services/pacc

The minimum amount seems to be $50 so you might be able to skip TD efund as a middle man to accumulation sufficient amounts.

Hope that helps!
A.

I believe TD-e series funds are a very good way to start... low fees, lots of indices to choose from, low PAC minimum...

I was not aware that you could do this w/ the Claymore ETFs. Has anyone successfully done this w/ their discount brokerage? It says you do need an initial amount though... so you may end up paying some commission to start?

 

[LateStudent]

Thanks again for the responses. Given the comments, I believe I'll be sticking with the TD E-Funds, as they seem to be the cheapest, simplest, and most diversified fund family around without going to ETF's and their added complexity of brokerages & trading fees. Some suggestions were made to just go with a single balanced fund for now, but (1) I don't see why someone with such a long investment horizon should hold a large fraction of bonds vs. equities, and (2) I want bro to learn the mechanics of setting up a diversified portfolio and maintaining it for the long haul through rebalancing (skills I'm just learning myself!). Some of you have noted that there's other components that need to be learned about general financial management, and I agree; we'll be doing this over coffee, probably many times now and in the future. But at the moment, we need to take some action with the money he's got in his bank account.


Here's a couple of other things I plan to tell him that maybe someone wants to comment on:

- given his 30+ year investment horizon, he should consider investing in 80 - 100% equity vs. bond funds for the next couple of decades. I personally would choose 100%. Maybe:
25% TD Canadian Index
25% TD U.S. Index (the cheaper vanilla version, not the Currency Neutral one)
25% TD International Index (ditto, the non-Currency Neutral version)
12.5% TD European Index
12.5% TD Japanese Index

- initially he should put his investments into his TFSA room with any excess going to an RSP account. The reason for this is that the TFSA will be his emergency fund, since there's no penalty for withdrawing from it (except my wrath if he withdraws for anything but a genuine emergency!). After his emergency fund is built up, he'll preferentially put into RSP, then TFSA, then unsheltered account. (I know there's some risk holding somewhat volatile equities in an emergency fund, but I think we'll accept that risk, given that hopefully he'll never have to use it.) (Just thinking a bit more, maybe there's a case for something a little less volatile for an emergency fund, say one of the balanced funds people have mentioned earlier. But I don't think we want to cripple his potential for growth by going to a savings account or money market fund for this.)

hmmm.... not sure about the mechanics of sheltering TD E-funds in TFSA's (from my previous mutual fund experience, I know it's no prob to have both RSP and non-RSP accounts) Will the TFSA work too? If anyone can comment on this, let me know, thanks, otherwise, we'll be learning as we go...

 

[MoneyGal]

What's your specific question about sheltering e-funds in a TFSA?

The TFSA is a tax-free container, no matter what you put in it, be it stocks, bonds, money market funds, mutual funds or cash. The tax-free status comes from the kind of account (or "container") the TFSA is, not from anything you put into it.

My only other comment is that perhaps you might balance your desire to "not cripple" the growth potential in your bro's emergency fund account with a countervailing desire to not cripple his capacity to do things with the funds if he needs 'em because they've gone down in value.

 

[Rickson9]

I'm not convinced that there is any benefit to investing in half a dozen different index funds. Actually I would avoid doing this.

 

[Robillard]

LateStudent,
I think there is some overlap between the international index fund and the European and Japanese index funds. If you look at the top 10 holdings of the international index fund, it has listed:
Royal Dutch Shell Plc 1.9%
BP PLC 1.8%
BHP Billiton Ltd - Common 1.7%
Nestle SA 1.7%
HSBC Holdings Plc 1.6%
Toyota Motor Corp - Common 1.4%
Total SA - Common 1.4%
Vodafone Group PLC - Common 1.3%
Roche Holding AG - Common 1.2%
Novartis AG - Common 1.2%

Whereas the European index fund has:
Royal Dutch Shell Plc 2.9%
BP PLC 2.7%
HSBC Holdings Plc 2.5%
Nestle SA 2.5%
Total SA - Common 2.2%
Vodafone Group Plc 2.0%
Novartis AG - Common 1.8%
Roche Holding AG - Common 1.8%
Telefonica SA 1.7%
GlaxoSmithKline PLC - Common 1.7%

There is probably no need to hold both the international index fund and the other two in the same portfolio.

Also, it's my understanding that if you hold international stocks (even funds that hold international stocks), you can't recover the withholding tax on foreign dividends and interest payments on stocks/units held in the TSFA. Basically, this income is not fully tax free. If you hold international stocks in a non-registered account, you get to claim the withholding taxes paid and receive a tax credit for the foreign taxes paid. There is no such benefit for international securities held in the TSFA.

In relation to what Rickson9 said, I think there is benefit from having multiple funds tracking different indices. By diversifying across different markets, you can reduce the overall variance of your portfolio and, in theory, realise a better risk-adjusted return than holding a single index.

 

[OntFA]

- given his 30+ year investment horizon, he should consider investing in 80 - 100% equity vs. bond funds for the next couple of decades. I personally would choose 100%.

I would never put any client heavier than 70-75% in stocks. Just part of the uncertainty of investing in stocks. Holding just 1/4 in bonds or cash is a good hedge against stock market uncertainty.

Maybe:
25% TD Canadian Index
25% TD U.S. Index (the cheaper vanilla version, not the Currency Neutral one)
25% TD International Index (ditto, the non-Currency Neutral version)
12.5% TD European Index
12.5% TD Japanese Index

You've illustrated exactly why I suggested a simple balanced fund. Europe and Japan are already heavily weighted components of the International Index fund so adding to those two just tilts the portfolio much more heavily in favour of overseas stocks. If you are going to ignore the advice to have something in bonds, at least simplify the stock side by simply using the first three funds on your list.

If you want to add a bit of spice to the portfolio, add CIBC Emerging Markets Index Fund since emerging markets are not included in the International Index fund. So, a sample mix would be something like 34% Canada, 33% U.S., 25% International, and 8% Emerging Markets. Just a suggestion but it shouldn't be any more complicated than that.

- initially he should put his investments into his TFSA room with any excess going to an RSP account. The reason for this is that the TFSA will be his emergency fund, since there's no penalty for withdrawing from it (except my wrath if he withdraws for anything but a genuine emergency!). After his emergency fund is built up, he'll preferentially put into RSP, then TFSA, then unsheltered account. (I know there's some risk holding somewhat volatile equities in an emergency fund, but I think we'll accept that risk, given that hopefully he'll never have to use it.) (Just thinking a bit more, maybe there's a case for something a little less volatile for an emergency fund, say one of the balanced funds people have mentioned earlier. But I don't think we want to cripple his potential for growth by going to a savings account or money market fund for this.)

hmmm.... not sure about the mechanics of sheltering TD E-funds in TFSA's (from my previous mutual fund experience, I know it's no prob to have both RSP and non-RSP accounts) Will the TFSA work too? If anyone can comment on this, let me know, thanks, otherwise, we'll be learning as we go...[/QUOTE]

 

[Squash500]

Personally I'm not a big fan of balanced mutual funds. Some of the reasons include high mers, lack of transparency etc etc. Also if you are a DIY investor with a discount brokerage account you don't get any discount per say for picking your own mutual funds.

For somebody who is 34 years old IMHO they should have at least 35% fixed income in their portfolio.

What about a basic portfolio such as 35% xiu ---35% xbb---15% xsp and 15% xin?

 

[OntFA]

Personally I'm not a big fan of balanced mutual funds.

Good, 'cause my advice wasn't for you.

Some of the reasons include high mers, lack of transparency etc etc. Also if you are a DIY investor with a discount brokerage account you don't get any discount per say for picking your own mutual funds.

You are making generalizations. I did not recommend the "average balanced fund" in this thread. I recommended the brother consider one of two funds depending on the amount of money available to invest. One charges 1% and the other charges 1.2% in fees with no cost to buy and the ability to fully reinvest income distributions without further cost + the ability to do a pre-authorized investment.

For somebody who is 34 years old IMHO they should have at least 35% fixed income in their portfolio.

What about a basic portfolio such as 35% xiu ---35% xbb---15% xsp and 15% xin?

So, you want to tell a 34 year old who has just started making enough money to invest and has never touched a mutual fund let alone stocks (which is what ETFs are) to just start buying ETFs? You wouldn't suggest this if you had an appreciation for the anxiety people feel in doing this. And this is relevant if they're out there on their own doing this.

People who frequent these forums are not your typical Canadian investor, and certainly not your typical Canadian DIY investor.