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TORONTO (GlobeinvestorGOLD)—When it comes to investing, you have one huge advantage that now eludes even Bill Gates or Warren Buffett: a long time horizon. It's a time to chip away at debt, build real equity, brick by brick, and plant some seeds in the stock market.
It's no fun to start your professional life with debt, and neglecting a student loan or credit card balance can place an albatross around your neck that gets heavier over time. Often student loans come with an initial low repayment rate that changes shortly after the student graduates and eventually becomes a consumer loan—currently about 9 per cent interest. Even worse, credit-card balances charge a rate of about 18 per cent. To get ahead of the game, set aside a fixed amount of each pay cheque to chip away at debt. Paying off a loan at nine per cent interest, for example, is just like making an investment that pays nine per cent but without the risk or tax consequences.
Most students don't start their careers with a lot of cash to invest, so if you have to rent a place to live, keep it modest. Save for a down payment on a home you can own and keep your eyes open for a real estate opportunity over the next few years. You'd probably be surprised at the number of financing options available if you have a few thousand bucks. Banks are eager to lend, because residential real estate retains its value, and their investment is safe even if you default (they get to keep the house). Because of this, the banks will often give you more than you may be comfortable with, so be careful not to get in over your head.
At first, the bulk of your home payments will be interest regardless of the mortgage rate, but slowly, over time, you will build real equity that will go into your pocket instead of a landlord's. That equity will also come in handy later in life. You can leverage the collateral you've built up in your house or condo to borrow at the prime lending rate—currently between four and five per cent. That cheap money will help out in emergencies or when it comes time to invest.
You probably won't have much left over to invest, but still, it's important to set up the foundation of a good investment portfolio. Setting up a Registered Retirement Saving Plan (RRSP) portfolio is not as complicated as it seems. Contributions may be small, but think long-term. Don't worry about investing the maximum allowable amount—you'll need that tax shelter room later in life when you're in a higher tax bracket.
Shop around for an accredited investment advisor with one of the many reputable firms. Most IAs will start an RRSP portfolio with three basic asset classes: fixed income such as bonds, blue-chip Canadian stocks, and the 30 per cent allowable portion of foreign blue-chip stocks. The objective is steady, modest returns, and it's possible you will hold them in your portfolio throughout your life. A qualified IA with the support of a good research department will probably recommend two or three funds to get you going.
From there, take advantage of your long time horizon and consider one or two off-the-beaten-path asset classes that may take time to flourish—but could reap huge gains if you sell when the time is right. A great objective tool for mutual-fund shopping is the fund filter at Globefund.com. Scroll down the "asset class" column and have a peek at some of the funds with a more narrow focus such as natural resources or precious metals.
Natural resource and precious metals stocks are a great complement to a portfolio, because they move fairly independent of the broader equity markets. They are often volatile, however. There are a lot of good Canadian resource and precious metals stocks to keep you within your 70 per cent Canadian content limit in your RRSP. When Globefund's list of natural resource or precious metals funds appears, click on the long-term performance tab at the top and check out the five-, 10- , and 15-year performance data. Click the actual year number and Globefund will list them in order of performance.
In the case of natural resources, the best performing fund is currently RBC Energy with a 15-year average annual return of 10.6 per cent, versus an asset-class average of 7.4 per cent. The 10-year performance for the RBC Energy fund is a more modest 6.1 per cent versus a 3.4 per cent average, but the five-year average annual return for the fund is a whopping 18.3 per cent versus a 15.5 per cent average. This fund if obviously a great all-round performer.
The top performing precious metals fund over the past 15 years is the Dynamic Canadian Precious Metals fund with an annual return of 7.4 per cent—dead on with the industry average. Over 10 years, it underperformed its peers, but over five years its annual return was 26.9 per cent versus a 23.3 per cent average.
In the case of natural resource and precious metals funds, they often perform well in five year cycles. These are the type of funds you keep an eye on and consider selling every five years or so, perhaps buying them back when they returns to the bottom of their cycle.
Do the same with other broader-market independent funds like small cap or real estate. It's important to note that choosing the right fund for you requires research and isn't as simple as choosing the best-performing fund at the point of purchase. Like the man says: "Past returns are no indication of future performance." There may be a good underperformer that is poised for take-off. It's also important to try to keep the number of funds in your portfolio below eight. That's the difference between diversification and repetition.
Later in life you can start moving into fancier funds like hedge, dividend, science and technology or region-specific.
A lot of young people have trouble determining how much risk they can handle in their investment portfolio. It's up to the individual, but bear in mind that the less you have to start with, the more risk you'll have to assume to meet your goals. In other words, those of modest means must take more chances and those of privilege can afford to be more conservative in their investing. That's life.
By following these steps you will have an investment infrastructure in place right now that will determine your lifestyle in the future. Unfortunately, in the short term, money will be tighter than if you hadn't initiated a plan at all. That's called sacrifice, and for most of us there's no way around it. There is no financial plan that guarantees immediate riches, and throughout the course of your life you will be tempted to stray from that plan with get-rich-quick schemes. They may work, but they probably won't. What you will have, though, is peace of mind knowing that your future is as secure as it can be.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.