“Now that you have given us your plea on stock market investing, how do you go about it? “
The question, a summary of a few comments, followed on from Saturday’s column. It’s a bit as if I had praised the benefits of eating, and I was asked how to stock your pantry.
So it is with investment. So what do we find on the shelves?
Mutual funds (FCP)
Still the most popular financial products. Over $ 2 trillion is invested in this in Canada, a dominance maintained thanks to a powerful sales machine. Are you opening an RRSP at the bank? This is where your contributions will be directed.
An FCP works according to the principle of pooling: according to a pre-established investment policy, a manager selects securities to make up the fund, and the investor buys units. Here, everything depends on the quality of the managers of the products chosen and the advisor who will have selected them for his client.
Where are they found? In large financial institutions and with mutual fund brokers and other financial services firms. In banks, advisers are often limited to in-house products, not necessarily the best on the market.
Investors can purchase FCP units themselves through a discount brokerage account (self-service). In this case, one must buy the “Series D” units, which are less expensive in terms of management fees, since they are acquired without the intermediary of a representative.
For : accessible, easy to integrate into an automatic investment system, wide variety of products, costs (a little) declining.
Versus : quality of management and advice which often does not justify the high costs.
Exchange Traded Funds (ETFs)
I prefer exchange traded funds. The classic ETF is designed to reproduce the returns of a geographic stock market (Canada, United States, Europe, Asia, etc.), an industrial sector (energy, health, technology, etc.) or even of asset categories (bonds, metals, crypto, real estate, etc.).
My preference is based on these few characteristics: the fees represent a tiny fraction of the cost of mutual funds; they trade as easily as stocks and help build a diversified portfolio.
However, for this price, the saver is on his own. You buy ETFs with a discount brokerage account. More and more investment advisers (at full service brokers) are working with these products, but additional costs, in the form of fees or commissions, will add to the bill.
For : minimal fees, instant diversification, possibility of taking positions in cutting-edge, innovative sectors.
Versus : the industry is moving away from the original spirit by giving birth to exotic, sophisticated and expensive ETFs that are primarily used for speculation.
Actions
We have gone from prepared meals (FCP) to meal kits (FNB). With the actions, we fall into the real mess! And you can’t improvise yourself as a cook.
I often recommend investing in ETFs first (for diversification) and gradually integrating company stocks. How to choose them? The question has been the subject of many books, it would be pretentious to claim to be able to deliver the recipe in two sentences. Let us limit ourselves to remembering that we must know the companies in which we invest, so that we must stay away from the tips of the brother-in-law.
We can outsource the task to an investment advisor, who will guide us in the choice of securities. We can give it “carte blanche” in discretionary management. This service is accessible only to those who have sufficient assets.
For : higher yield potential.
Versus : risky and time-consuming, requires greater control over one’s emotions.