How to invest in stocks, mutual funds and ETFs

M A K I N G B A N K

There’s an absolute mess of information out there (as in, on the Internet) that in big words and complicated acronyms the financial footwork of investing. What should I look for when buying a stock? What about a mutual fund? And what are these new-fangled products called ETFs?! It’s tough out there for people my age (early 20s) trying to learn all of this stuff. Good luck getting the intelligible answers, not that it matters, since many of us don’t even know what questions we should be asking anyway.

As I’ve discovered once and then a million times over, when you get into the details of it, investing can be incredibly complicated. And if you’re afraid of math, it’s even scarier. To cut through the noise I decided to talk to experts I trust to figure out what really matters and what doesn’t when making investment decisions. This top-line advice is helping me. I hope it will give you a confidence boost to help you take ownership of your own investing. And at the very least, it’s knowledge you can build upon, should you wish.

What to look for in a stock

With almost all investments, the qualities you look for when buying depend on whether you’re investing for the short-term or the long-term. Here at MoneySense, we encourage readers to think long-term, since rash decisions almost always harm your portfolio’s performance. But as I noted in my last column, when you’re just starting out, it’s okay to whet your appetite for risk to determine what you’re comfortable with. Looking to experiment with a bit of money on a short-term investment to make a quick buck? Here are a few things to watch out for.

Short-term investors, typically, don’t care about a company’s price-to-earnings ratio, the dividend yield, and so forth. They are way more interested in watching trading patterns of the company’s stock price, says Bridget Casey of moneyaftergrad.com. A key indicator here could be if the short-term moving average of a stock. When the short-term average (say the moving average over the past 50 days) moves above the longer-term average (say the average over the past 200 day), many investors take that as a cue indicating a stock will continue to climb higher. What fun!

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Now, if you’re looking for a stock to hold for longer, you shouldn’t care too much about what the stock chart for the past year or two looks like. A P/E ratio under 20 is about on par with the S&P/TSX Composite, which is a loose guide to help you decide if you’re overpaying for a company—although it will vary by sector. Value investors typically look for stocks with a P/E below 10.

Investors should also look at the longer-term performance and take a glance at the company’s business fundamentals and financial documents, suggests Casey. When you’re flipping through the company’s financials focus on how much debt is the company carrying.

The debt-to-asset-ratio (total liabilities divided by total assets) is also important. A lower debt-to-asset ratio means the company is less risky. Another aspect to consider is whether the company has a history of raising dividends. That’s a good sign, too. While all of these indicators are good and fine right now, also consider the future of that company’s industry. Do you see it adapting to changes in said industry? That could indicate that it may outlast its competitors (and make you more money than them).

What to look for when buying an ETF

If buying individual stocks still freaks you out, fear not. You can keep things pretty simple by buying an ETF. Justin Bender of PWL Capital has a few suggestions.

Look for an ETF that invests in hundreds if not thousands of individual stocks and bonds. This means the ETF is diverse and therefore less risky.

Secondly, go for a low-cost ETF, as in one that has a management fee that’s less than 1%.

Next, look for ETFs that are tax-efficient. “These tend to be the cheapest and most diversified products,” says Bender, so if you follow the first and second bits of his advice, you’re likely covered.

Especially when you’re new, stick to a plain vanilla ETF. If the ETF boasts a fancy strategy or market-timing, stay away! “A boring ETF that tracks a broad stock or bond market will do the trick,” says Bender.

What to look for when buying a mutual fund

If you’re not planning to be a DIY investor, it’s likely your first investment account will be held with a bank. Here, you’ll be sold a mutual fund by your bank financial advisor. They may present some options to you. The biggest things to look for here is a low management expense ratio (MER). Most mutual funds have MERs of 2.5% or more.

That’s a lot compared to other financial products. But what you’re paying for is something called active management. A real human is making sure the mutual fund does well. “Look for low fees and if you’re buying an actively managed mutual fund, you want to be sure it’s a truly active fund and not a closet index fund,” says Jason Heath, a financial planner Objective Financial Partners in Toronto.

A closet index fund is when the fund manager is simply trying to follow an index, which is a huge rip-off for you, since you could instead just buy an actual index fund and pay an MER of 0.5% instead.

Be sure to check back for regular updates as Prajakta leads us on a journey as she learns what it takes to invest her own money.