Investing for the long term

There is a pro and a con to being a young investor. The con is that you probably don’t have much to invest. The pro is that with the long lead time you have before you’ll actually want to tap into your retirement savings, even a small amount that’s well-invested can grow significantly.

Caroline Hanna, an investment advisor and portfolio manager with National Bank Financial Wealth Management, likes to share this anecdote with her younger clients.

“In 1986, one of my mother’s clients had a bit of extra money. So my mother advised her to buy 100 shares of a Canadian bank stock, and reinvest the dividend. As this client earned more, she added to her position and took advantage of warrants offered during stock splits. Her total investment: $7,000,” says Hanna. “In 2011, she brought in the share certificates. The position was worth $123,000.”

Granted, not all investments will be that fruitful but, with decades to grow your savings, even the smallest of contributions can realize significant long-term growth.

There are number of low-maintenance “set-it-and-forget-it” vehicles that are perfect for young investors. The most common options are RRSPs and TFSAs.

RRSPs offer an immediate tax benefit in the form of a deduction from your income for that year, but you’ll pay income tax on the earnings when you withdraw from the fund. There’s no upfront tax-savings benefit with TFSAs, but any earnings on investments are completely tax free.

Rather than investing exclusively in mutual funds, consider joining your peers in buying individual stocks. “Younger people want to own companies they like because they’re often customers themselves,” says Hanna. “For example, Canadians know Tim Hortons—they understand people buy coffee every day and therefore don’t perceive its stock as risky.” If the company grows and shares divide, your investment only gets better.

Regardless of which style of investment you choose, at this stage in your life you likely don’t need to spend hours each day – or even month – tracking its performance.

Instead, Hanna recommends you:

• review your account statements quarterly
• meet with your advisor annually to review your portfolio, and
• modify your investment strategy as your situation changes (for instance, anew job, marriage, children)

Your advisor should also provide you with monthly and annual statements, tax slips for earnings, and keep you updated on trends and regulatory changes in the investment market.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.