Investing money in the stock markets may sound like a scary thing for students, but it might not be such a bad idea especially if it can pay for their schooling.
By investing his few thousand dollars, 21-year-old Carleton University student, Alan, has been able to support himself through dividend withdrawals and a bit of casual work at the university.
With the banks currently offering next-to-nothing interest rates on bank deposits and the Canadian inflation rate – a decrease in purchasing value of the dollar – pegged at two per cent, the only way to keep the value of your money is to invest it, according to a BMO financial services manager, Jason Cohen.
“No matter what, your money is going down every year,” he said. “If we take a look at $100 in the 1950s in Canada, it would be worth $982 today. That means you’re basically in the hole for the $882 if you tuck that under your mattress.”
In fact, Alan has managed to increase his investments from four figures to five figures in just two years and his portfolio continues to grow today.
Taking a break from school, Alan worked full-time and ended up with a few thousand dollars he didn’t use. His father, who is also an investor, encouraged and helped him get into the investment game.
Alan attributes the growth of his portfolio to his aggressive approach; he bought risky penny stocks and monitored his purchase very closely at first, and luck, as Alan began his university career and could no longer watch his investments on a regular basis.
Using a new strategy, a quarter of his portfolio is now in ‘safe’ places as bank stocks that pay dividends, while the rest is in medium to high risk stocks such as junior mining companies.
As confusing as this may sound for novices, financial advisors are available at most banks to help those eager to start.
“First of all, we normally interview customers,” said Rita LI, a financial advisor at TD. “We need to know some things about their background.”
RISKS AND OBJECTIVES
The investment objective, and risk tolerance are all key elements in building a suitable portfolio that matches the investor, she added.
“If a customer wants a 30 per cent return, then they must have a risk tolerance of 30 per cent,” explained Li, meaning any potential gain must be matched by the possibility of losing the same amount.
But there are capital guaranteed options such as Guaranteed Investment Certificates for those who do not want lose any money, meaning investors would never lose the principal amount they put down to invest. But then again, there will be a much lower guaranteed return.
According to Li, most investors play at the mild level, with medium to high risk investments, putting 60 per cent in medium risk investments such as blue chip companies which pay dividends and the rest in aggressive high-risk stocks to give it a balance.
Both experts stressed the need for a diverse and balanced approach to an investor’s portfolio for maximum returns, just like Alan’s portfolio today.
According to Cohen, working people should have an emergency fund of three months’ salary and a “back up” with regards to safe investments and long-term investments.
“The vehicle they decide to put those in could always be different depending on the tax efficiency we’re talking about,” he said, tax efficiency meaning the measure of how much an investment’s gain remains after taxes.
Although Registered Retirement Savings Plans (RRSP) are popular today, other than those who are planning on retiring, going back to school or first-time home buyers should put the majority of their money elsewhere, added Cohen.
“The bigger risk you take, the higher returns you can get,” continued Cohen. “You should be in high risk investments if you can stomach it,” meaning equities and stocks.
As Alan continues to watch his money grow, he’s not quite sure what he wants to do with it when, and if, grows to significant amount.
“I’m not too risk adverse at this point of my life,” he said, noting that he still has another two years to complete in school. “I’ve convinced myself no matter what, I’ll take out a loan before I touch this money because I made it grow and I’d rather it stay there.”