Being a Canadian investor is not easy. The typical fund in Canada has higher total expenses than mutual funds do across the border. Nevertheless, it’s possible to do well as an investor when taking the right steps and approaching the investment processes carefully.
Here are some useful tips for Canadians looking to their future.
Don’t Save Too Little
If you’re saving for retirement, then you’ll probably need at least 25 times what you spend annually in retirement. That’s a considerable amount of money.
For most Canadian investors, they will need to save and invest over a couple of decades to accumulate enough. When doing so, don’t make the mistake of overestimating the returns you’ll receive. Sometimes markets have been rising steadily for a few years and the likelihood of strong near-term future returns is slim.
Look to the next 10-20 years but ratchet down your return expectations. Accordingly, save more to compensate for frothy markets that might not do gangbusters for a while.
Look Closely at the Management Expense Ratio
One thing to watch out for with Canadian investing is the Management Expense Ratio (MER).
The investment fees for actively managed funds are some of the highest in North America. Many Canadian funds come close to 2% in fees. When you consider that long-term returns are usually not more than 4-5% above inflation, that’s a huge chunk out of what you might receive.
Most investors in Canada are better off using a financial advisor like Berger Financial Group. Then seek out a balanced indexed portfolio using low-cost funds that track the market. Bear in mind that trying to beat the market is not worthwhile as few actively managed funds achieve that over 10+ years.
Get Enough Diversification
Investing in Canada is a bit tricky because the Canadian stock market is not anywhere as large as the U.S. one. It’s also dominated to a dangerous extent by the financial and energy sectors.
It’s a good idea to get adequate diversification by investing in Canadian businesses along with some American ones and companies in Europe and Asia too. This provides more balance to your returns to smooth them out. Also, you have the choice whether to buy index funds that have been hedged to the Canadian Looney; if you’re worried, consider hedging if you’re staying in Canada for the rest of your life.
Know Your Risk Tolerance
Risk tolerance is how much you can accept when your investment portfolio declines steeply in value.
Put simply, the more equities (stock market) investments that you own, the greater fluctuations in value that you’ll experience. The more bonds/fixed income you have, the less the ride will give you an upset stomach.
The trick with risk tolerance is to get the stock/bond mix right for you before the market takes a nosedive. The last thing you need is to be calling up your financial advisor telling them to sell all stocks after their values have plummeted. This locks in losses before they have ever had a chance to rebound back to their previous values. You cannot change your risk tolerance after a steep decline – you’ll never get ahead that way.
Start slowly, learn what you need to about investing and never invest in something that you do not fully understand.