Investing Series: Scared of investing your money and have no clue WTF you’re doing? Start here.

This is a part of the Investing Series.

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I am seeing a trend when I talk to people who are not part of our little personal finance community, and even with those who are!

THEY’RE ALL FRIGHTENED TO DEATH OF INVESTING!

It seems like a big mumbo jumbo mess of numbers and words that make no friggin’ sense because it doesn’t sound like English.

What pains me is that these are people who are otherwise FANTASTIC at saving their money.

These people have a budget, they don’t overspend or live beyond their means and are otherwise smart people, but they only keep shoveling their cash into things they understand, but nothing else.

Are you one of these people? Here’s my quick, totally unscientific 5-question quiz to find out if you are:

1. Do you save your money every month but just kind of leave it in your savings account?*
2. Do you think the only way you can safely invest is if you buy a home because you can at least touch it?
3. Do you get uncomfortably squirmy when around the words “invest” or “stock market”?
4. Do you just kind of trust that the mutual fund you randomly picked at your work is fine?
5. Are you fearful of losing all your money because you invested wrongly, so you do NOTHING?

*At least make it a HIGH-Interest savings account. I am with ING Direct Canada (they generally give the best rates).

At ING Direct Canada, use my referral code: 32726976S1 to get $25 CAD FOR FREE!

If you have answered yes to any of those questions above, you need to read this guide.

I have already created what I think is a relatively easy start guide to Investing, but I am still getting a lot of resistance and a very low response rate in general. This should not be the case and it worries me (not so much that I stay up at night, but it does make me wrinkle my brow in consternation).

It’s time to stop hiding your head in the sand, throwing pity parties for not knowing what all these finance terms mean, and ignoring the investing elephant in the room.

Take charge of your money because it is YOUR MONEY.

Isn’t that motivation enough?

If you aren’t interested enough in YOUR MONEY, for sure, someone else is.. namely making your money become THEIR money.

It is kind of sad that you are able to save so much and aren’t getting the maximum out of it. Some very kind people might call this “financial paralysis” and let you slide, but I’m more inclined to call it “sheer laziness that needs that proverbial kick in the ass to get started“.

You know I’m right.

What else can be so much more important than taking care of your money once and for all?

More Facebook browsing of people’s status updates to keep up with friends?

Dilly dallying on Twitter?

Shopping online.. AGAIN?

Watching TV?

Please.

Consider this post your money kick in the ass to stop being so effin’ lazy and to get started.

WHAT YOU SHOULD DO WITH YOUR MONEY?

So here’s my opinion on what you should do with your money.

If you are interested in finding out the details of what I am suggesting, my Investing Series goes into such details.

THE DILEMMA #1:

You have lots of savings but nothing is invested on the stock market, so it’s really losing about 3% a year due to inflation.

THE GOAL:

Find a brokerage or bank to start investing your money.

HOW TO DO THIS:

In Canada the two best options are:

1. TD Canada Trust Bank to buy TD Canada Trust E-Series Index Mutual Funds
2. Questrade Brokerage to buy Index Exchange Traded Funds (ETFs) from Vanguard or iShares

How to pick between the two?

Questrade is cheaper than TD Canada Trust (especially once you start investing in the 6-figure range), but it is more difficult to learn and navigate if you are a newbie, and you will have to buy index fund ETFs which act a lot like stocks, instead of just dumping your money into index mutual funds.

TD Canada Trust is easier for first-timers to invest in (index mutual funds) but they will charge you more money to make it easy for you to invest with them.

I am personally with Questrade.

Use my Questrade referral ID: o0soehds and get $50 in free trades

If you want to go with TD Canada Trust, read this post on how to get a TD Canada Trust E-Series Account.

In the U.S. the best option is:

1. Vanguard

When I lived in the U.S., all my money was with Vanguard.

That’s it.

THE DILEMMA #2:

Your money is sitting in some random mutual fund at work you chose out of desperation on Orientation Day.

THE GOAL:

Find & invest in the INDEX funds offered so that your money is invested properly and efficiently.

HOW TO DO THIS:

1. GET A LIST OF ALL THE MUTUAL FUNDS YOUR WORKPLACE OFFERS AND RANK THEM

1. Find a list of all the mutual funds offered by your workplace to invest your savings in
2. Look for all the funds that have the word “INDEX” in its name and eliminate the rest*
3. Now sort or rank the list by the HIGHEST “Management Expense Ratio” or “MER” which is the cost of the fund

*Be reasonable about this. If NONE of your mutual funds say “Index”, then just skip to Step #3

The MER kind of looks like this in each mutual fund’s “General Description”:

 

2. PRE-ELIMINATE THE TOP HALF OF THE MOST EXPENSIVE MUTUAL FUNDS

Now that your mutual funds are ranked by MER, cross off or eliminate the most expensive mutual funds on your list, and get that list down to half.

So if you have 20 mutual funds, eliminate the top 10 most expensive ones and focus on the bottom 10 cheapest ones.

3. GO THROUGH YOUR REMAINING MUTUAL FUNDS AND LOOK FOR ANY COMBINATION OF THESE WORDS:

You only need to really concentrate (right now) on these 4 words / phrases to look for:

1. S&P 500 Total Return Index / Standard & Poor 500 Index
2. TSX Index / Toronto Stock Exchange Index
3. MSCI EAFE / Morgan Stanley Capital International Europe, Australasia and Far East Index
4. MSCI Europe Index / Morgan Stanley Capital International Europe Index

There are plenty of ways to get this information, you just need to scan the page.. here are a few areas you will see these words:

Under the title “BENCHMARK” for instance, it may look like this:

If you can’t find a “Benchmark” title, then under the title “SUMMARY” or “OBJECTIVE” you may see some financial speakease like this:

Or it could look like this in some financial sites:

The key phrases to focus on aside from just the names above are:

• “Low MER”
• “One-step exposure to large, well-established companies….. index”
• “The Index is comprised of..”
• “Seeks to track the total return of the [ S&P 500 / TSX / MSCI EAFE / MSCI Europe ] Index…”

4. INVEST IN THE FOUR FUNDS YOU HAVE PICKED

Choose one in each region (U.S., Canada, Europe, International), and invest your money in those 4 funds, and ONLY THOSE 4 funds.

Do not be swayed by other sexier looking mutual funds that promise 30% returns (from last year!!) but are triple the cost (MER) of these index funds. It is not worth it.

How much you invest in each fund is up to you, but if you really don’t know what to do, start with this and tweak it based on how you feel:

• 70% in your own home country (e.g. U.S. would be S&P 500)
• 15% in another stable region (e.g. Canada would be TSX or Europe would be MSCI Europe)
• 15% in a riskier set of markets (e.g. Australasia / Far East / Europe would be MSCI EAFE or MSCI Europe)

So if you have $10,000 and live in the U.S.:

• $7000 in a mutual fund that tracks the S&P 500
• $1500 in a mutual fund that tracks another stable region such as the TSX or MSCI Europe
• $1500 in a riskier set of markets that are still developed, such as MSCI EAFE

So if you have $10,000 and live in Canada:

• $7000 in a mutual fund that tracks the TSX
• $1500 in a mutual fund that tracks another stable region such as the S&P 500 or MSCI Europe
• $1500 in a riskier set of markets that are still developed, such as MSCI EAFE

Note to all fellow Canadians:

I actually personally prefer investing MORE in the U.S. stock market (S&P 500) than in my own Canadian one, because our TSX is so limited.

My ratio is more 50% U.S., 25% Canadian, 25% Foreign / Overseas.

5. WANT TO BE MORE DARING?

Too boring for you?

Well how about emerging economies?

You will notice I left out any index funds that deal with the BRIC countries (Brazil, Russia, India, China).

Here are the reasons why:

One: Any index fund tracker that deals with BRIC nations will have a much higher MER.

Two: BRIC countries are considered “super high risk” because they’re “emerging markets” with a lot of potential for growth but also a lot of potential to bomb/implode spectacularly (I’m placing bets on China to bomb in the future).

Three: I would invest in them but not more than 10% of your money because it’s a lot riskier than investing in Europe or Canada.

THE DILEMMA #3:

You have all the accounts open and money in them…. but you haven’t done squat with them.

THE GOAL:

To get that cash invested in the stock market instead of just sitting there.

HOW TO DO THIS:

Depending on where you have your money, the process is different, but the steps are the same as Dilemma #2 highlighted above.

In summary of the steps from Dilemma #2 above:

1. Get a list of all the mutual funds
2. Eliminate any that do not have “index” in their names
3. Rank those index funds by management expense ratio (MER) (also known as ‘cost’)
4. Eliminate 50% of the most expensive ones
5. Focus on the cheapest 50%
6. Look for words like: S&P 500, TSX, MSCI EAFE, MSCI Europe in the Benchmark, Summary, Goal, or Description
7. Allocate a percentage of your money into each (e.g. 50% S&P 500, 25% TSX, 15% Europe, 10% EAFE)
8. Adjust your allocations each year if you feel the need to rebalance your portfolio

THE DILEMMA #4:

You don’t think you have enough money to really be investing right now.

THE GOAL:

To see if you really don’t have enough money to be investing.

HOW TO DO THIS:

Do you have?

1. An emergency fund fully funded? (e.g. 3 months of living, or $5000 or whatever pre-determined amount you have)
2. A retirement plan where your employer matches your contributions somehow?
3. Next to nothing in your RRSP / 401K?
4. No consumer or student loan debt? (I’m giving you a pass on the mortgage for now, but not car loans)

If you have answered YES to all of the questions above, then you are ready to invest whatever cash you have saved ABOVE AND BEYOND your emergency fund.

If you are planning on saving that money for a down payment on a house instead, just remember that a house still costs money to run in retirement.

Just because you own a home, it doesn’t mean it’s going to pay its own taxes, utility bills, etc… and feed you to boot when you’re retired. You still need money invested in the stock market for the long-term to use in retirement.

P.S. Save your emergency fund in a high-interest savings account like ING Direct Canada.

At ING Direct Canada, use my referral code: 32726976S1 to get $25 CAD FOR FREE!