Reader LR wants to know whether he should be buying index mutual funds or ETFs for his portfolio:
I am in my late twenties and after years of studies (engineering and masters), I try to follow most financial advice and good sense. My problem is investing. I tried unsuccessfully to find a good financial adviser and after being totally disappointed by advisers from banks who keep pushing their product without so much as acknowledging my own situation and independent advisers that simply do not seem to be competent, I am a bit pessimistic on what could be my next step. I would consider a lazy portfolio for the time being but with $30 commission it seems a bit pricey. In a recent post, you mention e-series funds. Would that be a less costly alternative for an overall portfolio of $25K? With not a huge amount of time to spend on following my investments, I am trying to figure out the best approach. What do you think?
You raise some interesting points: young people are told that they should start investing early but there is precious little guidance because independent financial advisors require a huge minimum portfolio and advisors who accept small accounts are simply salespeople interested in pushing product. Younger investors with small portfolios are essentially on their own.
As you do not want to spend a lot of time tending to your portfolio, an entirely passive portfolio would best suit your needs. First, you have to arrive at an asset allocation that is suitable for your circumstances and risk tolerance. Then, you simply have to buy index funds that provide you with exposure to different asset classes and rebalance occasionally. By keeping your costs down and letting your asset allocation (not emotions) drive your investing, you are well on the way to investment success.
There are two ways to invest in index funds: mutual funds and exchange-traded funds (ETFs). ETFs typically charge a lower fee but you have to pay a commission to buy or sell, which makes them more expensive to own for small portfolios or investing small amounts of money regularly. TD Bank’s e-Series index mutual funds are an excellent option for smaller portfolios like yours. The most expensive fund in the e-Series lineup will cost you 0.48% per year, which means that for a $25K portfolio, the maximum you will spend in expenses is $120 per year. You can also consider a broker who charges ultra-low commissions like Questrade and implement an all-ETF portfolio. If you implement a portfolio like the Sleepy Portfolio, you’ll only spend $35 in commissions every year and are likely to save money compared to TD e-Series funds.
