How A Software Engineer Invests His Savings in Canada
Obligatory legalese: this post is about my own personal finance in Canada, not general financial advice. There’s always risk in investments, and they’re done at your own risk.
Backstory
As I graduated from grad school and my paycheques started exceeding my expenses, I realized I have a new grown-up issue to deal with; not too bad for an issue! I wasn’t very comfortable with buying invisible assets that constantly fluctuated in price. When I cut through common human irrationality and realized saving my surplus income in a savings account is a sure-fire way to decay my assets, I started looking into buying shares in funds.
As a rather young software developer without much responsibility, I should be more risk seeking. As much as gambling with individual stocks is tempting, I decided against it; there’s a high risk there and high upkeep for staying current with financial news. Composite funds, with their broad range of risk profile from aggressive leveraged funds to those tied to non-Greece government bonds, provide a low-maintenance, low-risk investment vehicle.
What
Mutual funds are typically very convenient to buy. They’re usually offered in employees’ benefits for RRSP matching or automated withdrawals. The downside is that they take away a big chunk of your money every year. It’s common for them to rake in 2-3% of your savings, even in years when they lose 20-30% of it investing in volatile securities. Exchange-traded funds (ETFs), on the other hand, provide a much cheaper option (usually less than 1% management fee), have higher liquidity, and have been proven to be as effective as actively-managed funds. You’re basically betting on the whole civilization to stay in place, and slowly move forward as it has so far.
Canadian Couch Potato had a good model portfolio back then. I started putting my money in 3 ETFs: 40% trusting governments and companies to pay off their bonds (XBB.TO), 40% trusting the world is moving forward (XWD.TO), and 20% in betting that conservatives in Canada will make their social backwardness worth it (ZCN.TO). This portfolio has a very low management fee, and is traded in Toronto Stock Exchange, so no money is lost in exchange rates.
Where
I opened 3 accounts with Questrade: TFSA, RRSP, and a margin account that holds the rest. They don’t have well-lubricated processes, have subpar customer support, and won’t just stop spamming you, but they have something unique; it’s free to buy ETFs with them. The spread of buy and sell prices is very low, and they don’t have any hidden fees, so it makes dealing with them worth it.
As a sidenote, if you’re going to start saving with them, you can use their referral program to earn $25-250 in cash when opening a new account. They also gives the referrer a $25-50 bonus, so if you don’t know anyone with a Questrade account, feel free to use my QPass key: 486304026379159
How
The first thing I accomplished was to max out my TFSA account. TFSA is a great Canadian program that allows you to earn investment income tax-free. At this time, assuming annual 10% gain from the ETFs, Canadians can save up to ~$1000 a year in taxes. The growing limit of TFSAs and the magic of compound interest will make them a bigger deal in the future. After maxing out the TFSA, I started contributing to my margin and retirement accounts. You can use up to $25K of your RRSP in buying your first home, but anything beyond that is about how much you value your future self.
It’s important to keep your portfolio as balanced as possible (40-40-20 in my case). Selling ETFs on Questrade costs money ($5-10 per trade), so I avoid re-balancing the portfolio unless the gap is too large and new contributions can’t close it. I also try to move funds to TFSA as soon as the limit grows (usually January 2nd), and to RRSP once I decide how much I’m saving this year in my retirement account. This helps keep the taxes low, and sometimes helps with rebalancing. A spreadsheet is all I need to determine how to do the re-balancing.
What Else?
The housing market in Vancouver is overvalued according to unbiased experts. I don’t want to lock all of my past and future savings in a single asset that can dip in value at anytime. Buying a house also eliminates some of your options, and makes your unexpected expenses much more volatile. Real estate is therefore out of question, and that doesn’t leave anything else that can meet my criteria of low-effort, low-risk investment.
Good luck with your investments!