Perhaps you’ve just moved to Canada, or just turned 18, and can now start a Tax-Free Savings Account.
Maybe you’ve just gotten your first full-time job and are looking at a Registered Retirement Savings Plan to save on taxes.
Or maybe you are thinking about buying a home and using the First Home Savings Account. Either way, you might be wondering how to start investing.
Understandably, it can be hard to know what to buy when you’re new to investing. Here’s my favourite index fund that makes it easy for anyone, even if you have no experience with investing, to get started.
Why an index fund?
Your main goal should be to grow your wealth steadily over time, aiming to keep up with the market rather than trying to outdo it. It’s crucial that your investments are well-diversified, which means spreading them across different areas:
- 11 sectors: Your investments should cover a range of sectors, such as technology, healthcare, finance, consumer goods, and energy. This ensures you’re not putting all your eggs in one basket, as different sectors react differently to market changes.
- Geographical regions: A mix of investments from the U.S., developed countries (like Germany, Australia, and Japan), and emerging markets (such as China, India, and Brazil) can help balance your portfolio. Different regions may grow at different rates, offering a safeguard against local downturns.
- Market caps: Including companies of various sizes, from large caps (big, stable companies) to mid-caps (medium-sized companies with growth potential) and small caps (smaller companies with higher growth and risk potential), helps ensure your portfolio captures a broad range of investment opportunities.
- Weighting: Market cap weighting in an index fund means larger companies have a bigger impact on your investment’s performance, aligning your results more closely with the broader market trends.
Attempting to manually pick stocks that meet all these criteria can be time-consuming and costly. An index fund simplifies this process, offering a diversified portfolio with just one investment.
My favourite index fund
If you’re just starting out, I suggest Vanguard FTSE Global All Cap ex Canada Index ETF (TSX:VXC) for beginners. It’s an exchange-traded fund (ETF), which means you can purchase its shares just like you would with any company’s stock through your brokerage app.
When you invest in VXC, your money goes into a mix of four Vanguard ETFs, giving you broad exposure to stocks from the U.S., developed markets outside the U.S., and emerging markets. Altogether, this fund provides access to more than 11,400 global stocks, offering a wide range of investment opportunities.
What’s really appealing about VXC is its cost-effectiveness. The management expense ratio (MER) is only 0.22% annually. To put it into perspective, investing $10,000 in VXC would result in yearly fees of approximately $22.
However, VXC purposely omits Canadian stocks. I think this is a good trait, as you can complement it with a few Canadian stock picks to scratch that itch. Consider making VXC, say, 90% of your portfolio while selecting a few blue-chip Canadian dividend stocks (and the Fool has some excellent suggestions down below!)
