November is Financial Literacy Month! That’s right a whole month dedicated to educating and helping Canadians to become more financially independent, and more aware of their finances. I was asked last month if I would like to participate in this national media campaign, spearheaded by Glenn Cooke, and present my best financial tip to readers. Of course I said yes!
As a financial blogger, helping to educate Canadians about their finances is one of the reasons why I write. Many Canadians are not prepared for their golden years. Many are spending beyond their means, and many are carrying huge amounts of mortgage and personal debt into retirement. On top of that, many Canadians are intimidated by investing, have not even considered an investment strategy, nor even understand the options available to them other than actively managed mutual funds.
In this article I hope to convince you that you should start investing now, how easy it is, and how you can use the TD e-Series funds (instead of actively managed mutual funds) to get started. At $25 per month per fund, with no commissions and rock-bottom management fees around 0.33% or less, there is simply no excuse not to start investing using the inexpensive TD e-Series Funds.
Note: If you have a large chunk of credit card debt, at a high rate of 14% to 19%, then it really makes no sense at all to start investing. Paying off your debt is your single best investment! I urge you to put your credit cards in the safety deposit box and work to paying off that high interest debt, even if it takes 3 or 4 years to do so. This is simply the best use of your available resources.
If you have your credit card and consumer debt well under control, then you really can start investing! Although it’s an issue that is debatable for hours, I believe even if you have a mortgage consider investing and building up your retirement equity sooner than later. I think in most cases, looking back you will be glad you did. Not only will you have your mortgage paid off, but you will have a nice little investment portfolio spinning off some income as well.
$25 per Week Pays Big Gains
Most people live to their income and beyond their means. Very few people have money left at the end of the month, and that just seems to be an economic reality in our society. Not everyone is frugal, life throws curves, and not everyone manages their finances well. However, having $25 taken out of your bank account every week, before you spend it is completely realistic. If it isn’t, then I believe you need to take a serious look at your cash-flow.
So how does $25 per week really stack up? Assuming you automatically pay yourself first, that $25 per week is a contribution of $1,300 per year. After 10 years you’ve contributed $13,000! If you project a total return per year of 5%, which is completely realistic, your total portfolio would be worth $17,168 after 10 years. If your annual total return is 7.5%, then your total portfolio would be worth $19,770 after 10 years. All this for only $25 per week! How cool is that?
The bottom line is you can easily find the extra $25 per week, pay yourself first, and start investing for big gains! I also want to show you how you can use the TD e-series funds instead of actively managed mutual funds, and save yourself a fortune in fees and commissions. Although most people invest in actively managed mutual funds, it’s completely negating their returns, through fees and commissions. I covered this topic over on the Dividend Pig, in Why You Should Avoid Mutual Funds.
Back in July 2011, I chopped through all the complexities of mutual funds, index funds, and ETFs (Exchange Traded Funds) in Would The Real “Fund” Please Stand Up! If you aren’t up on the terminology, nor understand the difference between index funds, ETFs, or mutual funds, then be sure to check out this post. It’s a back to basics for any investor.
Why e-Series Funds Are the Best Choice
The low-cost TD e-Series funds managed by TD Asset Management, and distributed through TD Bank, are simply the best option around for Canadian investors, with a smaller portfolio. For one thing they are not actively managed, and simply follow various S&P benchmark indices. This is why they are referred to as index funds. Although they are still mutual funds, that’s where the similarity ends. They are passively managed as they follow an index, rather than actively managed. That results in lower fees for investors.
The biggest reason to invest in the TD e-Series index funds is because of the low cost. Unlike actively managed mutual funds, there are no commissions to buy or sell e-Series funds (as long as you hold for 90 days), and the annual MER (Management Expense Ratio) fees are very low. The TD Canadian Index Fund for example has an annual MER of only 0.33%. Compare that to the average Canadian Equity mutual fund with its MER of 2.4%, as discussed in this 2011 Globe and Mail article by Rob Carrick.
While mutual funds are a win for the companies who manage them and the brokers who sell them, most investors are paying a premium for under-performance. According to the 2011 ETF Landscape Review, only 15.1% of actively managed mutual funds in the Canadian Equity category were able to outperform the S&P/TSX Composite Index according to S&P. When you consider the large annual MER (Management Expense Ratio) fees, trailer fees, front-end or back-end commissions mutual fund companies charge, there is simply no excuse for paying for under-performance.
So why not invest in the index itself, and be on the 85% winning side?
The TD e-Series funds only cost you a minimum of $25 per fund, through a pre-authorized purchase plan (PPP). There are currently twelve TD e-Series Funds available, ranging from Canadian bond, Canadian equity, U.S. equity, to various international equity index funds. It’s a simple case of visiting your local TD branch, and telling them you want to invest in the e-Series funds.
The e-Series Model Portfolio
As a Canadian Investor you could build yourself a complete international portfolio with four TD e-Series index funds, for as little as $100 per month. That’s $25 per week in each of the four funds listed below. If you are just beginning your investing journey, here is a model portfolio using TD e-Series Index Funds:
- $25 – TD Canadian Bond Index – TDB909
- $25 – TD Canadian Index – TDB900
- $25 – TD U.S. Index Fund – TDB902
- $25 – TD International Index – TDB911
Tax optimization without the help of personal tax prep software isn’t easy material for any investor to grasp. But for more information on which e-Series fund should go into which account (i.e. TFSA, RRSP, or non-registered), please refer to a couple of Canadian Couch Potato posts, Foreign Withholding Tax Explained, and Which Fund Goes Where?
Many people simply don’t start investing for any number of reasons. The bottom line is you can easily find the extra $25 per week, pay yourself first, and start investing for big gains over the long term!
Investing in the low-cost e-Series index funds from TD, will give you a higher return over costly mutual funds, with all their fees and commissions. At a $25 minimum purchase per e-Series fund, with no commissions and rock-bottom management fees, TD e-series funds are a good deal. There is simply no excuse not to start investing, and using the inexpensive TD e-Series Funds to build your portfolio.
Readers, what’s your take? Are you new to investing? Do you use the TD e-Series funds to invest?
Disclaimer: I have received no compensation from TD or TD Asset Management to endorse their e-Series funds.I have used e-series funds and will continue to use them in the near future.