How to invest (without ever putting pants on)
You’ve cycled through three careers since you left college. Your current part-time, contract job doesn’t give dental benefits, let alone a pension plan. And you’re stuck choosing between paying off the last of your student loan, opening up a tax-free savings account, or finally buying a real bed frame.
If you’re like most young people in Canada, getting started with investing is probably the last thing on your mind.
That’s one of the reasons why robo-advisers are becoming so popular. These new financial technologies can design a personalized investment plan and manage your portfolio automatically—all on your smartphone, and within 15 minutes. If you’re able to look past the cringeworthy name, they can be really helpful when you first start out saving for the future.
Let’s cover the benefits:
The fact is, many investment advisors won’t even let you book an appointment without $250,000+ in savings. Since many robo-advisors don’t have minimum requirements, they’re great entry points if you want to start investing without waiting until those freelance cheques finally arrive. Or you turn 40, whichever comes first.
Sometimes you want to get your foot in the door, without actually using a door. Robo-advisors are completely digital, so you won’t need to rearrange your schedule to make appointments during banking hours. You won’t even need to put on pants.
It can be totally hands off (if you want).
Investing in individual stocks or mutual funds is great, if you know what you’re doing. But you’ll have to keep up with market trends and learn to make trades with a direct investing service if you choose to go it alone.
Robo-advisors maintain your portfolio for you, and they’ll consistently run check-ups to ensure your investments are performing how you need them to be. They won’t offer much in the way of long term or in-depth financial planning, but you can always supplement them with advice from a professional.
If ethical investing is your priority, robo-advising can also cut down on your research time. It’s nice to know that your money isn’t going to privatize a community’s water supply in Nicaragua, right? A few robo-advisors can suggest portfolios with good environmental, social, or corporate governance record. Heads up: not all products offer this service (and not all companies may be considered ethical to everyone) so it’s best to do your homework.
They really shorten the learning curve.
“Investing was a bit intimidating when I was first starting out,” admits Jeremy Biberdorf of the finance blog Modest Money. “I had no clue how to properly research investments or how to even get started. Robo-advising is a real game-changer in that regard.”
Of course, there are still risks involved with any entry into the stock market, but Biberdorf notes that they’re “much less than when trying to manage it all yourself.”
You can minimize the fees.
Financial advice does have a cost associated with it. Advisory fees can range between 2-5 percent off the top on anything you buy. Flat-fee advisors that gear their services towards lower-income people are a helpful alternative, but they can still make a pretty substantial dent in your savings when you’re first starting out.
The fees for using Canadian robo-advising services (which include the costs of making transactions) tend to be in the 0.25 to 1 percent range.
First, you’ll need to get your cash flow in check—your robo-advising program won’t know about your recurring habit of blowing half your rent on music equipment. Make sure you’ve got some small semblance of stability eked out, and pay off any outstanding debts before you start to invest.
“It’s easy to be optimistic about your investments assuming they will outperform the interest you are paying on your loans,” says Biberdorf. “Investments can be unpredictable though. Clearing your debt will give you both peace of mind and also much more flexibility with your finances”
Once you’re ready to start investing, setting up your portfolio is really straightforward. Just answer a few quick questions to determine your risk tolerance, financial goals, and desired timeframe, and they’ll suggest a personalized mix of exchange traded funds using whatever amount you’re able to contribute. Including any tweaks you choose to make, the whole process can take less than 15 minutes.
Over time, your portfolio will continue to be adjusted for you to make sure that your (realistic) financial goals are being met. Of course, if your financial circumstances change in a major way, like you get a giant inheritance, open a small business, or experience bankruptcy, you’re best off complementing your robo-advisor with the IRL, human version.