My start as an investor dates back to the mid-1980s, when I opened a registered retirement savings plan (at my dad’s suggestion) and put the money in – wait for it – a daily interest savings account.
Hot stuff, eh? Never mind. When you’re a young adult like I was, your goal should be to get started as an investor as soon as you can without obsessing about finding the perfect investment vehicle. A bank mutual fund is fine. A guaranteed investment certificate is OK too. Heck, even a savings account is fine if rates ever climb back to where they were in the 1980s (double digits – if you don’t believe me, ask your parents).
Invest early and invest often. As soon as you’re settled in a job after you finish college or university, find some money to start investing in a registered retirement savings plan (RRSP) or tax-free savings account. Paying down your student debts is “Priority One”, but you can start investing with even small amounts of spare money. Example: the mutual fund divisions of one particular bank will let you start an account with as little as $100 and if you sign up for a program where you make regular pre-authorized contributions, you can add as little as $25 per month.
The earlier you start as an investor, the bigger the bang you get for your investing bucks. It’s all about compounding, a term that means earning investment gains on your investment gains. If you invest $1,000 and make 10% in the first year, then going forward you have $1,100 working for you. The longer you stay invested, the better compounding works. If you invest $1,000 and make 5% annually over 20 years, you end up with $2,653. Over 40 years, you get $7,034.
As you gain experience as an investor, your choice of investment vehicle will evolve. You may start with mutual funds and move to exchange-traded funds or individual stocks and bonds. That’s why I say that your choice of first investment is less important than your decision to get going as an investor.
Don’t be stupid about your first investment vehicle, mind you. Young people are sometimes bad at understanding risk – they simply don’t believe anything bad could happen to them. This leads them to figure that they can get rich quick by investing in penny stocks (mega-speculative shares that generally cost a buck or less) or by buying stocks and quickly flipping them for a profit. Rarely do these approaches to investing accomplish anything except to waste good money.
Here are three ways to get some smart ideas about where to start investing:
1. Ask your parents, friends and relatives what they suggest.
2. Consult your parents’ financial adviser.
3. Read the financial media.
Should you play it safe or be aggressive as a young investor? I’ll answer that question in my next blog post.