How do I start investing my money?
January 31, 2009 7:48 PM   Subscribe

My New Year's resolution is to develop a grown-up financial plan for myself. What should I be doing in terms of investments?

Please spare some financial advice for a total beginner. Some background info: I'm 29 years old, have a steady income and have managed (finally!) to amass some savings. Not a lot, but it's a start. For a number of reasons, I've never gotten financial advice from anyone. I bank almost exclusively via ATMs and online, and I now realize I don't know what I am supposed to be doing to make the most of my money. Beyond my savings accounts, right now my current "strategy" basically consists of a modest RRSP (I'm Canadian). My husband and I also own a condo (and have a sizable but manageable mortgage). He has a well-paying job but also quite a bit of debt, which we hope to finally clear off this year. I'm otherwise debt-free, and we have nobody to care for financially besides ourselves.

I have read that this current economic climate presents an opportunity for potential investors, in that there are some bargains to be had. Also, the Canadian government just introduced TFSAs (Tax-Free Savings Accounts), which allow people to invest in securities and the returns are never taxed. I am clueless about investments, but I've been thinking for a while that I should buy some stocks for the sake of diversifying and I'm young enough to tolerate some risk right now. I would be comfortably playing with $6,000, maybe a bit more. My questions:

- Is getting involved in the stock market a good idea right now, given our situation? Or should I be putting my savings into 1) a lump-sum mortgage payment, 2) against my husband's debt or 3) some other strategy I haven't thought of? I am very reluctant to pay off my husband's debt on his behalf, since he is prone to splurging on stuff and I don't want to "bail him out" and reinforce his bad spending habits. His parents have, in the past and on more than one occasion, paid off his debts, only to have him rack up more, hence my position on this.

- If buying stocks is a wise idea for me, how should I go about this? Can I trust the financial adviser at my local bank, or would I be getting better guidance from an independent adviser? Do these people have any kinds of biases that I should be aware of? What kind of fees should I expect to pay this person (i.e. what rate is reasonable and what is too much)?

- Would it be incredibly foolish of me, a total amateur, to just sign up with a discount online brokerage and pick my own stocks? I'm admittedly not good with numbers, but I am good with research and I'm reasonably bright. Since the market has been slumping, wouldn't it be good to just pick up some well-reputed stocks and wait for a few years? I know there are no guarantees, but again I can tolerate some risk and am looking for a long-term plan since I'm still young.

- What are some good resources for learning about investing (ideally, content in plain language that even math dunces can understand)?

Thanks in advance for your insights!
posted by curiouskitty to Work & Money (7 answers total) 17 users marked this as a favorite
An answer to your last question, first: JD Roth's blog - Get Rich Slowly is Canadian advice-friendly (lots of us Canucks on that board).

Regarding investing: go for it. Research, invest to your own level of risk. I read WSJ and Smart Money which features market graphs that are very useful.

Ask yourself before investing that amount "can I afford to lose this?" and take the long view. You are 29 years old, you may retire at 65 so you have 36 years to recover from that first mistake, or 36 years to enjoy the fruits of that first happy investment, and add to it.

Take baby steps. Jump in, the waters are turbulent, but if you exercise caution and research a lot, it is indeed a good time to invest - carefully.
posted by seawallrunner at 9:04 PM on January 31, 2009

The first, and hardest, thing to decide is how much is enough.

Many people start out their savings plans with open ended goals: "I just want as much money as I can get." This is a costly mistake, as it causes people to take far greater risks than they actually need to in order to live comfortably.

Once you know how much money you believe will be necessary, it's pretty much a matter of working backwards. Play around with a Compound Interest Calculator and plan out exactly what you believe you can and should save to make it to your goals.

"You're young so you can afford some risk" is market professional speak for "Ka-Ching! Fresh easy money released into the market!". What you should really be thinking "You're young, so compound interest is totally on your side." Take it easy, take your time, stick with CDs and other Fixed Income investments, and do *not* by into the hype spread by companies who exist solely to leech off the market.
posted by tkolar at 10:48 PM on January 31, 2009

I'd suggest that paying off debt, and ensuring you have some savings put aside in case either of you lose your jobs, should be your first priority.

No comment on investment strategies, but I don't think we can assume that the markets have hit bottom yet.
posted by Infinite Jest at 3:11 AM on February 1, 2009

Regarding the sage advice given above to ask yourself "can I afford to lose this?", also ask yourself "how long can I go without access to this money?"
You could dump a load into gold, or cheap stocks - but unless you are willing to leave it for several years, you're going to be at risk of incurring a loss if you have to encash sooner...

A colleague of mine was watching some (UK) bank shares that have been valued highly for a long time, and are backed by the Government. The price was really low, and he decided that it couldn't go any lower - so pumped GBP10k in on a Thursday. On Monday, the bank announced that it had discovered a whole load more debt, and the share price tumbled to a quarter of the price he paid. He hasn't lost any money - *yet* - and if he can leave that money invested for the next 3+ years then he may be OK... the big trick is to not panic, and don't watch the prices on a frequent basis!

An worthwhile option to look into that is successful in wobbly market conditions like this is a dollar-cost-averaging plan - instead on sticking in 10k today, you invest gradually - say 500 per month. If prices go up, you buy a few less shares; if prices fall, you buy more.

Also when investing, don't forget to consider the cost of buying and selling your stocks. There's almost always a dealing cost going in and out - so make sure that you know what you'll be charged so that you don't wipe out any growth you've achieved. Investment bonds, portfolio bonds and investment-linked savings plans are some ways to get around this - but do a bit of research, as your requirements and risk appetite may steer you one way or another.

FWIW I'm not an expert, although I work on the periphery of the industry; we have a bit of savings that's earning a pittance in a bank account, but I can't justify the risk of tying up the money for anything longer than 12 months - I've done lots of research, but haven't found anything I'm happy with.
The best advice I can think of is to talk to an advisor, get some ideas and suggestions from them, and then go and research them yourself - find out what other people think, what risks are there, what's the total cost, what will you be charged or lose if you bail out early, etc.
posted by Chunder at 5:06 AM on February 1, 2009

Sorry, I think there's a deal of bad advice already in this thread. Paying off debt is never a bad idea, but there's not much to say about it. I'm going to stick with the investment advice.

With no experience, you really do not want to get into stock picking. With $6000 you REALLY TRULY OMG do not want to get into stock picking. Even with low-cost online brokers, commissions will erode your profits for a long time. Also, you'll have very little diversity.

What you want are mutual funds. What mutual funds you want are broad-market index funds. The obvious choices are the S&P 500 or Wilshire 5000 funds from Vanguard. Why Vanguard? For your entry point (that is, less than $10,000) they have the lowest cost. That's the only distinguishing point between index funds.

Justifying the choice of broad-market index funds would take too long (read Bogle's Little Book of Common Sense Investing) but the main reasons are: low costs, less risk, beat about 80% of mutual funds consistently, and it keeps you from chasing returns.
posted by mad bomber what bombs at midnight at 9:52 AM on February 1, 2009

I am very reluctant to pay off my husband's debt on his behalf, since he is prone to splurging on stuff and I don't want to "bail him out" and reinforce his bad spending habits.

At the most basic, basic level, you need to understand that your husband has been racking up debt that you will be liable for. You need to work together to get his spending under control. I´m not saying you should ¨bail him out¨, just realize that you are both in the same boat. If he sinks ¨his¨ boat, well, both of you are in that boat.

Both of you need to work together to keep the boat afloat. Get him to stop drilling holes in the hull.
posted by yohko at 2:11 PM on February 1, 2009

When I first started saving and investing, about 20 years ago, I found Andrew Tobias's The Only Investment Guide You'll Ever Need to be invaluable.

In terms of overall strategy, I'd suggest that the idea of the investment pyramid is a pretty good one. At the base, you have your low-risk, low-return investments, like GICs or bonds. As you go up the pyramid, to higher-risk, higher-return investments, the pyramid gets smaller, i.e. you invest less in higher-risk investments.

Andrew Tobias suggests a four-pronged investment strategy:

1. Your first few thousand dollars should go into a savings account. You want to have enough money to cover roughly three months' expenses (maybe more, in this economic situation), somewhere safe and liquid.

2. Fixed-income investments like GICs or government bonds. Low risk, easy to understand, relatively low return. In Canada, these should go into your RRSP account, so they'll compound tax-free.

3. Equity investments--broad index funds are a good idea, as mad bomber suggests. (In Canada, take a look at Exchange Traded Funds like XIU, which mirrors the TSX 60; it has management expenses of 0.17%.) These should go into your TFSA account, so the capital gains won't be taxed when you withdraw them (unlike an RRSP, where withdrawals are fully taxed). If you already have mutual funds inside your RRSP, see if you can swap them out for non-RRSP investments of equivalent value, without having to sell them.

4. Real estate, which you already have.

If we get a period of high inflation, cash and bonds will get hammered, but equities and real estate should do okay.

If we get deflation, cash and bonds will do well.

If we get a stable economy, equities will do well.

I did a Google search and came across this Toronto Star article describing a simple portfolio. Probably not a bad place to start for beginners.
posted by russilwvong at 9:42 PM on February 1, 2009 [3 favorites]

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