Receiving your first paycheck can be an ‘adulting’ moment for many and there is more to consider than just how best to spend it. It did not take me too long to realize the importance of investing – to create more value out of my extra cash and lay the foundation for future financial stability. Here are some of my favorite tips on financial awareness and ways that ETFs could be a preferred investment tool for people just starting their careers.
1. The Early Bird Gets the Worm. A common misconception is that we need a lot of money to start investing, and this caused me to wait until my late 20s to take investments seriously. Investing early can help provide financial security down the line. While beginning to invest is a deeply personal decision, the average age at which someone starts to invest is 33.3 years old, losing out on 10 years of market gains if they had begun investing at age 23. If you invest $100 per month for 30 years, compounding interest at 7%, your savings grow to $114k; adding 10 more years (if you begin investing at age 23 instead of 33 and continue until you retire) your savings grow to $241k. Low-cost and easy-market access tools like ETFs can help you begin investing as soon as you want.
2. The Power of Diversification. We often fear what we don’t know, which may be why investing can appear overwhelming given the jargon and amount of investment options available today. As a result, we find that new investors often gravitate exclusively towards stocks they know. This could unknowingly introduce a lot of portfolio risk. It’s important to have a mix of bonds, stocks and ETFs across a variety of investment themes to mitigate market volatility.
3. ETFs: Friend of Beginner Investors. There are three main reasons why I believe ETFs could be a great option for new investors. Trading ETFs is as convenient as a simple buy and sell that gives investors great flexibility. ETFs can provide more diversified exposures than single stocks and reduced investment risks of choosing single company stocks. ETFs can also grant investors access to whole sectors or sub-industries they may find interesting, such as the broad Canadian stock market (XIC), the U.S. S&P 500 (XUS), the broad Canadian bond market (XBB), or exposure to numerous other sectors and trends.
4. Embrace Market Volatility. Volatility is an inherent aspect of investing and investors shouldn’t be deterred by it. The saying time in the market is better than timing the market holds true. No one has a looking glass to predict the market for certainty. In times of market stress, large downturns are not always signs to sell, they could also be attractive opportunities. Historical data consistently demonstrates that long-term investors often outperform those trying to time the market. As compared to a long-term investor, our analysis shows that if you missed the 10 best days in the stock market in the last 30 years, your total portfolio value would be 54% lower, missing the top 30 days, the total portfolio value would be 83% lower.
*Data from Bloomberg. Tracks the performance of a $10k starting portfolio that is held only in the S&P 500 index from Jan 1993 to Dec 2022.
5. A Multi-Asset Solution Could Be A Good Place To Start. For novice investors unsure of where to begin, multi-asset products like the iShares Core Growth ETF Portfolio (XGRO) could offer a diversified core portfolio in a one-ticker solution. These products invest in a mix of global bonds and stocks with varying levels of risk exposure, depending on factors like their age, return expectation and risk appetite. Investors farther from their retirement age can generally afford to withstand a higher risk tolerance, making XGRO a good option for people who are just graduating college.
6. Don’t Dismiss Bonds. As a new investor, bonds may seem complicated and out of reach. Aside from their diversification benefits, looking at the broader market, bond yields are at levels we haven’t seen in many years, presenting strong opportunities for investors to earn income without taking on higher risk. In particular, short-term bond are offering yields up to 5.16%*. Investors may consider the iShares Floating Rate Index ETF (XFR) or the iShares Core Canadian Short Term Bond Index ETF (XSB) to access these front-end yields. We also favour the belly of the yield curve, which investors can gain exposure to via the iShares Core Canadian Universe Bond Index ETF (XBB).
*Short-term bonds represented by Canadian 3-month T-bills. Source: Bank of Canada, as of August 29, 2023.
7. Quality is the Name of the Game. Outside of the core stock index like the S&P/TSX Composite and the S&P 500 Index, I believe it’s important to add quality to your portfolio in medium-/ long-term. Quality investing seeks companies with good financial health, stable balance sheets, and strong earnings – these exposures can provide some added protection in times of market volatility. You may consider the iShares MSCI USA Quality Factor Index ETF (XQLT) or the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV), which not only provides added income from dividend stocks but also exhibits quality characteristics.
Investing may seem daunting at first, but starting early can help pave the way for long-term financial success, stability, and security. As you begin your financial journey, ensure that you also take into consideration the benefits of a diversified portfolio and a consistent investment approach.
