How To Get Started With An Index Portfolio
“I’m interested in investing but I don’t really understand how to get started. Could you please explain how to begin investing in index funds?”
The work involved in learning about investing may seem overwhelming when you have no idea how to begin.
The following is a primer on how to get started investing with an index portfolio.
How to get started with an index portfolio
The absolute simplest way to start is to go to your bank and open up a mutual fund account. You will be asked to complete a “Know Your Client” questionnaire to determine your investment knowledge, time frame and risk tolerance.
You will strongly explain to the advisor that you want to purchase index funds. All banks have their version of index funds that are quite similar and will give an investor plenty of diversity. Minimum initial purchases are as low as $100 (TD) or $500 (the other banks).
Related: Why TD e-Series funds aren’t just for beginners
A typical conservative asset allocation is 40% fixed income and 60% equities. As a young investor saving for the long term, you may want to increase the equity portion – 25% in each of Fixed Income, Canadian Equity, US Equity and International Equity is a common allocation.
The best way to grow your portfolio is by setting up an automatic savings plan. The minimum amount is usually only $25 per fund but you will want to increase this amount as soon as you are able.
Mutual funds are user friendly and there are no commissions to buy or sell, which makes it cost effective when you need to rebalance your portfolio.
Balanced Index Funds
If you can only invest a small amount to start with, or don’t want to bother with rebalancing a three-to-four asset portfolio you can purchase a single balanced index fund.
A balanced index fund is a diversified assortment of Canadian bonds and stocks with some US and International stocks mixed in. It is a good option for new investors. The fund is automatically rebalanced quarterly.
TD has a version of a balanced index fund that must be purchased at a branch.
Tangerine Investment Funds (formerly ING Streetwise funds) allow you to open an account online. www.tangerine.ca – just follow the steps.
What about ETFs?
You can build a low cost portfolio with ETFs, but it takes a little more time and effort.
ETFs have been a widely promoted alternative to mutual funds because of their low management fees, but the savings can be quickly eroded if you are not careful.
To purchase ETFs you need to open an account with a discount brokerage. You can use the brokerage arm of your bank or a low fee alternative such as Questrade. Take a look at the fees before you open an account.
- Some require a minimum amount to set up an account of $1,000 – $10,000.
- Self Directed RRSP accounts have annual fees of $50 – $100 if assets are less that $15,000 to $25,000.
- Trading fees can be as little as $4.95 to as much as $29 on accounts less than $50,000.
If your brokerage charges for each purchase it is more suitable for larger lump sum ETF purchases.
Some brokerages such as QTrade, Questrade, Scotia iTrade and Virtual Brokers have ETFs available commission free which is an advantage for regular monthly purchases. However, they may have a limited number of ETF options, or charge a commission to sell.
Now that you have opened a brokerage account it’s time to choose your ETFs.
The largest companies that sell ETFs in Canada are iShares, Vanguard, BMO and Horizons. They each have dozens of ETF options to choose from.
Related: A two-fund investing solution
For low cost, stick with cap-weighted indexes that track indexes such as S&P/TSX, S&P 500, MSCI, EAFE and DEX Universal Bond. As with index mutual funds you can choose a single balanced ETF, or 3 to 4 separate asset classes.
As I mentioned this will take more research, but once it’s set up there will not be much maintenance involved.
Once you have chosen your funds take note of the three-letter trading symbol because it’s time to buy. Unlike mutual funds where you normally purchase by dollar amount, ETFs are purchased as shares. You can buy as little as one share.
Enter your three-letter trading symbol and the stock exchange. Some are specific – TSX. Others just want the country – Canada.
Get a quote – the ask price. Use the market price for now. (Read this post for more information on using limit orders.)
Determine how many shares you want – and click enter.
Follow the steps until the order is confirmed and make note of the order number.
If you have a problem you can call customer service for help. Once you’ve placed a few trades your confidence will grow.
To learn everything you ever wanted to know about index investing, read The Little Book of Common Sense Investing by John C. Bogle, the creator of Vanguard.
Also check out John Robertson’s, The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing – a plain language guide to investing for Canadians.
Canadian Couch Potato has a lot of good information, like how to choose your asset allocation as well as sample portfolios.
You can get a comparison of brokerages at MoneySense (or visit your local library and check out the May, 2014 edition.)
Money Smarts Blog has another good brokerage comparison.
And don’t forget Rob Carrick’s annual ranking of online brokers.
Congratulations, you’ve become an investor. As a new investor you will be tempted to check out your funds on a daily basis to see how they’re doing. If they go up, you’ll be elated. If they go down, you’ll be in despair.
What if the price goes down several days – or even weeks – at a time? What will you do? You will do – nothing! Short-term performance is irrelevant to your long-term plan.
Related: What are you doing with this stock market pullback?
Success comes from sticking with a well-chosen portfolio, having realistic goals and, above all, contributing regularly to your savings plan.
And that’s how you become a successful investor.
I think Questrade doesn’t charge any account fees or inactivity fees if the account has at least $5000 in it. Also, there are no commisions to buy ETFs, only to sell.
Coincidentally, the most recent post on Canadian Couch Potatoe lays out the 3 ETF portfolio that covers the world. VCN (about 300 Canadian stocks), VXC (about 3000 US and international stocks) and VAB (about 500 bonds).
Thanks for the info Grant. $5000 is still a lot if you’re just starting out. That’s why I mentioned that building an ETF portfolio takes a little more research so you’re not negating the low management fees.
Marie – it’s great to see how you and other bloggers like you are empowering Canadians with the knowledge they need to become successful investors.
I’d also add that for those who are looking for a hassle-free way to invest in index funds Robo-advisors could be a great choice.
Some robos use active or exotic funds, but at ModernAdvisor we only use high-quality index ETFs and build truly set-it-and-forget-it portfolios for our clients for a very low cost.