Your just starting out investment portfolio: Part 2

By Gail Vaz-Oxlade on July 16, 2013
Estimated reading time: 2 minutes

Dip your toes in the investment pool by buying index funds.

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Introducing university and college students to the idea of investing usually leads to the question, “There are thousands of things I could invest in, where should I start?” It’s true. The investment world can seem paralyzingly huge for someone just starting out. And the work involved in learning about investing might seem overwhelming. According to The Fund Library, there are over 390 fund companies and more than 32,000 mutual funds and clones available to investors in Canada. Damn, that’s a lot of options. The New York Stock Exchange has more than 2,800 companies listed, while the Toronto Stock Exchange has more than 1,400. It can seem pretty daunting to have to wade through the options to choose the ones that are just right for beginners. I often suggest that people dip their toes into the investment pool using alternatives that reflect what the market as a whole, or particular sectors of the market, are doing. That means buying an index. A just starting out investment portfolio can be made up of index mutual funds or exchange-traded funds, also called ETFs. The idea is to eliminate individual investment choices by mirroring those indices that are considered a barometer of what’s happening in the markets. You could choose to mirror the S&P/TSX Composite, which includes about 250 companies traded on the Toronto Stock Exchange. If you do it with an indexed mutual fund, you’ll buy units of a mutual fund that holds all, or almost all, of the investments in a particular index. If you do it with an ETF, you’ll buy individual shares in the pool since ETFs are bought and sold on an exchange just like stocks. Choose an indexed mutual fund if you’re starting out small and plan to make regular contributions. If you’ve got at least $50,000 to invest and plan to make infrequent purchases, open up a discount brokerage account (look for one with no annual fee and that doesn’t charge more than $10 a trade), and pick an ETF.

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Some people believe that following an index makes the most sense that they completely eschew the idea of buying individual stocks and bonds and focus solely on using an indexed investment strategy. Regardless of where you go from your just starting out portfolio, choosing to mirror how the financial marketplace is doing is a good first step. Get busy investing in an index and keep learning as you go.