So you have a little money to invest....

A few weeks ago, I got a great question from a young man who has a little money saved from his summer job and he was wondering what were his best options in investing this tidy sum (about $1500).

Now typically we see this kind of question posed to a mutual funds salesperson, broker or the "girl at the bank" and they immediately launch into what the "best" investment product is at that moment. By sheer co-incidence, the best investment is usually the one the "advisor" happens to be selling, either an exotically named global fund, a hot stock or a dressed up fancy but still plain old guaranteed investment certificate (GIC). ALL OF THIS ADVICE IS WRONG,WRONG, WRONG.

Why? Because none of them of asked what the money is to be used for. That is the first question you must ask yourself before proceeding with any investment plan. For example, if the money is to be used in the next 12-24 months, but you are not sure when, put the funds in a "no-load" (i.e. your bank's house brand which should not have a sales fee attached) T-bill mutual fund for safety of principal, market interest rates and ease of withdrawal. You can guarantee your rate of return by buying a GIC, but I would only suggest this if you knew exactly when you needed the money and could time the maturity of the GIC accordingly, otherwise it is cumbersome and can be costly to cash in a GIC before expiry.

But if you think you will only need the money in 3-5 years, say to help pay for university tuition, then you have a sufficient time horizon to invest in a "no-load" (again no sales fee) Canadian equity index mutual fund and be able to earn a greater rate of return (Ask about the Management Expense Ratio, MER, it should be less than 1% on an index fund). Your investment will go up and down over the next 60 months but resist the urge to buy and sell in response to the market. Establish a reasonable target return (say that the $1500 grows to $2000) and if you reach this target within the 6 months before you need the funds, sell your units and transfer the cash to a T-bill fund. Sure, maybe the Canadian index fund you sold will go up further, but you have made over 30% on the capital already and are you willing to risk losing on the $2000?

If you do not intend to use this money for many years, consider putting it in the same CDN equity index fund but in a registered retirement savings plan (RRSP). You may not need an RRSP deduction yet to get back income tax but you can save the deduction for a future year (when you have a lot more income) and your earnings will be tax sheltered until you are ready to withdraw the funds).

Lastly, if you want to learn more about investing and have some fun, you could try your hand at buying individual stocks. Start reading the business pages, read a few books (anything by Warren Buffet or his mentor, Benjamin Graham) and look up investment advice websites, (i.e. www.investorED.ca by the Ontario Securities Commission) in order to familiarize yourself with the basics of buying securities. Open your own discount brokerage account (shop around for the cheapest transaction fees you can find), buy a few stocks and see what they do. You may hit on a great buy or two but I promise you, you will lose money at some point. That's ok, because you will gain a wealth of hands-on knowledge about how the market really works and what your own risk tolerance really is. If you are truly interested in investing, there is nothing like experiencing this for yourself with a little money at a young age in order to save yourself a lot of grief later on with a lot of money at an older age.

So now that you know that the "best investment" is the one that best meets your need for safety of principal, liquidity and growth, not someone else's need for a commission. Don't fall for the latest "hot stock", make the right choice for you.