“What should I invest my money in?”
If you’re a newbie investor, you’ve probably found yourself asking this question with some frequency.
You may have some companies that you admire, but if you’ve read your Finance 101 material, you’ll know that admiring a company is not reason enough to invest in it. You need to not only “like” a company you invest in, but thoroughly understand its financials before you can really be said to be making an “informed” investment in it.
Does that mean you can’t invest at all? Certainly not. While buying individual stocks is probably not the best idea for non-professional investors, you can still invest in pooled investment vehicles such as index funds. These funds have extremely low fees, and they have plenty of diversification built-in, so the risk is dramatically reduced. With such funds, you can get great runs at not too great a cost. In this article, I will explore one such fund that would be a very suitable investment for many Canadian investors.
The iShares TSX Composite Index Fund
The iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) is a Canadian Index Fund that tracks the S&P/TSX Capped Composite Index, an index of Canadian stocks that has about 250 names in it. The index includes tech stocks, bank stocks, energy stocks, and the list just goes on and on. By buying it, you are essentially staying neutral on every sector out there, and just buying the market. This approach requires very minimal research, and it allows you to outperform the vast majority of fund managers over time.
Why it’s such a good investment
Having looked at the basics of the iShares S&P/TSX Capped Composite index fund, it’s time to examine why it’s a good investment (for some people).
First, as already mentioned, the massive amount of diversification in the fund reduces risk when compared to an individual stock.
Second, the fund is cheap (cheap as in low fees not ‘cheap’ valuation), with the MER coming in at 0.06%. Unless you actually bust out a calculator and scrutinize your every brokerage statement, you won’t notice the managers’ small fees coming out.
Finally, the fund is run by Blackrock, a very professional group of investors who manage some of the world’s best loved funds.
It all adds up to a very compelling package, and a great investment for beginners.
These funds are also worth looking at
Before concluding, I should add that most financial advisors do not recommend putting all your money into Canadian stocks. In addition to diversifying within Canada, you should also diversify internationally. Some funds that help you do this include:
- The Vanguard S&P 500 Index Fund.
- The Vanguard FTSE All-World Ex-U.S. Fund.
- Various funds for specific foreign countries.
With the three funds mentioned in this article, you pretty much have the equities portion of your portfolio covered. All that’s left to do is to determine what weighting you want to give bonds, and you’re set up and ready to go with your first ever portfolio, as good a portfolio as you’ll find anywhere.
