Fees And Costs Of Investments
There are different fees and costs depending on the investment type. These costs can impact your return, so it’s important to be aware of them.
Most fees and costs relating to investments fall into the following categories:
- costs to buy an investment
- costs when you sell an investment
- investment management fees
- financial advisor fees
- administration fees for registered plans
Not all costs apply to all investments. For example, the sales commissions when you buy bonds are often included in the purchase price.
Things To Look For In An Investment Advisor
Consider these points if you ask someone to help you with your investment decisions:
What Shouldyouinvest Your Money In
Here’s the tough question, and unfortunately there isn’t a perfect answer. The best type of investment depends on your investment goals. But based on the guidelines discussed above, you should be in a far better position to decide what you should invest in.
For example, if you have a relatively high risk tolerance, as well as the time and desire to research individual stocks , that could be the best way to go. If you have a low risk tolerance but want higher returns than you’d get from a savings account, bond investments might be more appropriate.
If you’re like most Americans and don’t want to spend hours of your time on your portfolio, putting your money in passive investments like index funds or mutual funds can be the smart choice. And if you really want to take a hands-off approach, a robo-advisor could be right for you.
Do Your Own Research On Your Chosen Investment
Before you even think about parting with your own money, it is crucial that you perform significant amounts of independent research. This needs to cover the asset itself, the industry that it operates in, and the overall health of the markets.Ultimately, this is one of the most important investment strategies that you can take if you want to ensure that your wealth is protected in the long-run.
What Is The Best Investment For A Beginner
If youre just getting started, you might want to read our beginners guide to investing.
The best investment is one that you feel comfortable with considering your:
- Attitude to risk
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What Should I Do With 20k
If youve suddenly ended up with $20k or you managed to save it up over time you may be wondering what to do with it now.
In response, we always recommend a clear order of how to use this to make sure youre maximizing the gains you can earn from this. This includes:
For more information on each of these, check out this article on how to invest $25k. The same strategies can also apply when working out what you should do with $20k.
The Difference Between Saving And Investing
- Saving putting money aside gradually, typically into a bank account. People generally save for a particular goal, like paying for a car, a down payment on a house, or any emergencies that might come up. Saving can also mean putting your money into products such as a bank time account .
- Investing using some of your money with the aim of helping to make it grow by buying assets that might increase in value, such as stocks, property or shares in a mutual fund.
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Understand Your Investment Options
Whether you invest through a 401 or similar employer-sponsored retirement plan, in a traditional or Roth IRA, or in a standard investment account, you choose what to invest in.
Its important to understand each instrument and how much risk it carries. The most popular investments for those just starting out include:
Investing For Retirement At Work
The easiest way to start investing is to enroll in your employers 401 or similar retirement saving plan if they offer one.
You specify how much money to invest, and your employer deducts the amount directly from your paycheck. There are tax benefits to these accounts and, sometimes, your employer may match a percentage of your investments.
You will have the opportunity to specify how you want this money invested, which Ill cover in a later section.
Be aware that money you invest in a 401 or similar retirement account is not supposed to be withdrawn until you retire . Withdrawing money earlier may require paying income tax and a 10% early withdrawal penalty.
Read more: 6 Essential Tips to Manage Your 401
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What Are Your Expectations Of Return
When you invest your hard earned money, how much of a return do you expect to get from your investment? Those who are new to investing will often say, I want to earn a return of 50% to 100% on my investmentevery year. But is this realistic? What is a reasonable rate of return to expect on your investment? To find out, lets take a look at a simple illustration of how things usually play out in the real world. Then well come back to the question of what kind of a return you expect.
To begin our illustration, we will draw a horizontal line. Imagine that this line represents all investments known to man from the lowest risk investments on the far left to the highest risk investments on the far right.
Now for our illustration, we will create some investment categories by drawing some short lines vertically across our long line. We will call these sections Low Risk, Medium Risk and High Risk.
If you were to invest in a high quality investment , try to guess how much money a Low Risk investment would earn on average over a ten or twenty year period of time ? The answer would likely range from four to six percent. Now without looking ahead, guess how much of a return a Medium Risk investment would earn on average over a long period of time? A realistic answer would probably fall between six to eight percent. So what about a higher risk investment in quality companies? Over a long period of time, you would probably earn an average of around eight to ten percent.
Invest What You Can Afford
While you can always sell your investments, it would be better if you left them alone and let them grow. Invest as much as you can while reducing the chance youll need to sell your investments to cover necessary expenses.
The goal is always to keep a few months expenses around in case something happens and invest the rest.
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Where To Begin: Bank Robo Or Diy
Now that you understand who you are as an investor, and the investment options available, you need to find a home for your investments. In other words, where are you going to park your investments? Most Canadians just make an appointment with a financial advisor at their bank. Thats perfectly fine when you first start investing, but heres what you need to know about your bank:
- A bank advisor is only licensed to sell mutual funds that belong to their banks family of funds.
- The vast majority of these mutual funds come with high fees a management expense ratio of 2% or higher.
- According to a global study from Morningstar, Canadian investors pay some of the highest investing fees in the world.
- All banks sell lower cost versions of their expensive mutual funds. These are called index funds, and well explain what these are later in the article.
Besides investing at your bank, you can also invest with a robo advisor. These are online investment firms that offer low-cost portfolios of index funds. For a small management fee theyll automatically keep tabs on your investments and rebalance them when markets go up and down, and whenever you add new contributions.
Pro tip: New investors should avoid the big banks and their sky-high fees when learning how to invest. Instead, go with a robo advisor at first to get your feet wet, and then switch to a self-directed account once youve had a few years of experience under your belt.
Ways To Start Investing In Stocks
If you own a mutual fund , for example) then congratulations! you already own stocks. A lot of people dont realize that.
But thats just one of the ways investors can get in on the greatest wealth-building machine on the planet. The four most common entry points into the stock market are:
Individual stocks. We wont sugarcoat it: Buying individual stocks requires a fair amount of research, ongoing diligence and a stomach for risk. Those arent things that most retirement savers want to deal with. In fact, many 401 plans dont even allow participants to buy individual stocks within the plan. If buying stocks sounds exciting to you, we recommend devoting no more than 10% of your retirement portfolios overall value to them.
Mutual funds. A mutual fund is a basket that contains a bunch of different investments often mostly stocks that all have something in common, be it companies that together make up a market index , a particular asset class or a specific sector . There are even mutual funds that invest solely in companies that adhere to certain ethical or environmental principles .
Whats nice about mutual funds is that in a single transaction, investors are able to purchase a neatly packaged collection of investments. Its instant, easy diversification that lets you avoid buying stocks one by one.
Automated for the people: An ode to index mutual funds
Choose an index fund, and more of your money stays in your portfolio to grow over time.
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High Yield Savings Account
I know, I know, I said letting your money sit in the bank is not an investment. However, sometimes when youre saving for something like, say real estate, youve got to keep your money somewhere.
Also, this is a great place for your emergency fund. High yield savings accounts typically pay anywhere between 1-2% . Here are some banks that have great options :
Are You Ready To Invest
Before choosing to invest your money, remember that theres always the risk that your investments can go down as well as up. That means you could lose money.
If youre not sure if youre ready, read our beginners guide to investing
Choosing whether investing is right for you also depends on:
- how much cash you have available
- how old you are
- what your personal circumstances are.
You also need to consider your goals specifically if theyre long, short, or medium term:
- short-term goals are things you plan to do within the next five years, such as take a holiday
- medium-term goals are things you plan to do within the next five to ten years, such as save for a mortgage deposit
- longer-term goals are ones where you wont need the money for ten years or more, such as a retirement fund.
For your short-term goals, the general rule is to save into cash deposits, such as bank accounts.
The stock market might go up or down in the short-term, and if you invest for less than five years you might make a loss.
For the medium-term, cash deposits might sometimes be the best answer. But it depends on how much risk youre willing to take with your money to achieve a greater return on your investment.
For example, if youre planning to buy a property in seven years and you know youll need all your savings as a deposit and dont want to risk your money, it might be safer to put your money into a savings account.
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Your Budget How Much Money Do You Have To Invest
You may think you need a large sum of money to start a portfolio, but you can begin investing with $100. We also have great ideas for investing $1,000. The amount of money you’re starting with isn’t the most important thing — it’s making sure you’re financially ready to invest and that you’re investing money frequently over time.
One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest these investments in a time of need. The emergency fund is your safety net to avoid this.
Most financial planners suggest an ideal amount for an emergency fund is enough to cover six months’ worth of expenses. While this is certainly a good target, you don’t need this much set aside before you can invest — the point is that you just don’t want to have to sell your investments every time you get a flat tire or have some other unforeseen expense pop up.
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Determine How Much Help You Want
When you invest, you can choose to receive help in a number of ways. Many people dont want to take the time to learn how to invest on their own, so they entrust their money to a financial advisor or a mutual fund manager.
The downside to both of these options is that they will charge you a fee based on a percentage of your overall investment to manage those funds.
For a slightly lower fee, you could opt to use a robo-advisor. A robo-advisor manages your money robotically using a computer algorithm. This type of management has gained popularity because it is less expensive than paying a financial advisor but still allows you to be hands-off.
However, the robotic algorithm chooses investments based on the Modern Portfolio Theory , which wont allow your investments to produce great returns or even beat the market in the long-term.
The last option may take longer but also produces the best results. You can learn this stuff on your own and Do-It-Yourself. This is the option I recommend.
It can be tempting for beginner investors to want to reach out to a professional because there are a lot of investing myths that purposely discourage people from thinking they can do it themselves.
But I want to encourage you: you CAN absolutely learn to invest on your own.
Ill prepare you in this post with a solid foundation to move forward and make smart investing decisionswithout the help of a financial advisor, robo or not.
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Things To Consider Before Investing
First things first. Before you start investing in anything, you should ask yourself a couple important questions. These questions determine whether youre in good enough financial shape to start investing right now here are the basics:
1. Do you have a lot of credit card debt?
If the answer is yes, youre probably not in a position to invest quite yet. First, do everything you can do to erase that debt, because no investment youll find will consistently outperform the 14% or so APR that youre likely forking over to a credit card company to service your debt. Heres a good place to start plotting your debts annihilation.
2. Do you have an emergency fund?
In polite terms, poop happens. Layoffs, natural disasters, sicknesses let us count the ways in which your life can be turned upside down. Any financial advisor will tell you that in order to avoid total ruin you should have between six months and a year of total living expenses in cash, or in a savings account should the unthinkable happen. If you dont, bookmark this article, start saving, and come back just as soon as youve got that emergency fund squared away.