# Young Investor



## dwt2525 (Mar 6, 2012)

I'm a young professional, recently out of school, and I'm finding myself with more money than I know what to do with. I'm just wondering if I'm on the right track here as far as investments go, or if I should be making some changes.

I have no debt, and my expenses are fairly low.

1) I have RRSP matching through work, so I've been putting the maximum 2% into that. This is through Manulife. I've diversified this as 25% bond fund, and 75% Canada and US Index funds.

2) I've been contributing to a self-directed TFSA with BMO (most of my finances are with BMO), which should be maxed out by the end of the year. So far I have about 25% in the BMO Bond Fund, and I'm struggling to decide how to allocate the rest, but I'm considering the Vanguard Canada Index ETF, and possibly one of the other Vanguard ETFs as well. I just have to buy in such a volume as to not get hurt too badly by the commissions.

3) I still have yet to open up an external RRSP to contribute the allotted remainder. Any advice here would be appreciated.

4) I have an emergency fund in cash just in case.

I'm about 5 years away from making any large purchases, so my horizon is at least that long.

Any feedback/thoughts/advice is appreciated.


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## KaeJS (Sep 28, 2010)

1) Good.

2) It's great that you realize commissions kill your portfolio. Try to go with something on the riskier side. You said you're a young professional with more money than you know what to do with. I feel like you should take some risk. No more bonds. You have enough bonds. Plus, bonds haven't been acting as an appropriate hedge like they usually do/previously have done.

3) Don't worry about this until your TFSA is maxed at $20k.

4) What does your emergency fund provide? 1 month expenses? 3 months? 6 months?


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## twowheeled (Jan 15, 2011)

Curious why you suggest he max out his TFSA first? If he is earning a good income and paying quite a bit on taxes, yet has only been contributing 2% into a matched RRSP plan, there could be some easy tax breaks to be had by contributing to a RRSP first.


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## Causalien (Apr 4, 2009)

I second kae's motion. TFSA first.
Why? Because tax in the future will be higher than now.


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## Oldroe (Sep 18, 2009)

I'd check on the mer for those ML funds.


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## KaeJS (Sep 28, 2010)

Causalien said:


> I second kae's motion. TFSA first.
> Why? Because tax in the future will be higher than now.


Bingo.

He said he is a young professional, not a senior professional, which means his income will be higher later once he learns the ropes and gains experience/clients.

As well, he more than likely does not own a home, so if he stuffed all of his money into an RRSP, he might be forced to use it in a HBP - which he may not want to do.


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## CanadianCapitalist (Mar 31, 2009)

I disagree with the take that TFSA is demonstrably better than a RRSP. It's true that tax rates can change in the future. It's also true that withdrawals from the TFSA could be changed in the future. The point is: either view point is speculation at this point. With the facts that we do have today, those in the middle- and upper- tax brackets will likely be better off contributing to a RRSP first. 

If the debate confuses the average person, not to worry. Pick either a RRSP or a TFSA and contribute to it. Both are excellent choices. Only time will tell which one turns out to be a better choice.


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## humble_pie (Jun 7, 2009)

it's true that tfsa/rrsp benefits far in the future are unknown, therefore an investor can only forecast at this point in time. Would certainly not say speculate.

however i for one think that existing tfsas will be grandfathered if the program changes. I doubt that future withdrawals of $$ already grandfathered in tfsas will be taxed. Min of fin would be more likely to limit or cancel new contributions.

as a sidebar, i've noticed that most of the smart youngish brokers i know - in their 30s, late 30s, already prosperous from investments - are saying that their tfsas are their priority. They keep these maxed to the limit.

only after that do they turn to rrsp contributions. They're fairly sure that they will be rich at retirement. Some are rich already. Their tax bracket will not drop after retirement. Their rrsps will be fully taxable. Viewed from 2012, this makes the rrsp slightly less desirable.


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## Four Pillars (Apr 5, 2009)

What I find odd about this thread is that some posters can recommend TFSA vs RRSP without knowing that the marginal tax rate of the OP is. 

Yes, he said he young but he also says he has more money than he knows what to do with. Does that sound like someone in a low tax bracket?

Maybe it is, maybe it isn't. None of us know.


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## Toronto.gal (Jan 8, 2010)

humble_pie said:


> i for one think that existing tfsas will be grandfathered if the program changes.


No doubt that there would have to be some kind of grandfathering in such a case, so I completely agree.

Here is another view:

"You may have a $110,000 RRSP but you also have a partner – the government – waiting patiently for its share. Annoying, but true." 

http://www.theglobeandmail.com/glob...r-explains-tfsa-or-rrsp/article2197460/page1/

Welcome to the forum Dwt!


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> it's true that tfsa/rrsp benefits far in the future are unknown, therefore an investor can only forecast at this point in time. Would certainly not say speculate.
> 
> however i for one think that existing tfsas will be grandfathered if the program changes. I doubt that future withdrawals of $$ already grandfathered in tfsas will be taxed. Min of fin would be more likely to limit or cancel new contributions.
> 
> ...


I'm not sure "forecast" or "speculate" matters much. Both indicate there is uncertainty. 

As for grandfathering existing TFSAs, if changes are made - I'm more jaded. If the gov't of the day is that desperate to change it, they can just as easily make wholesale changes. I remember a timeline for the trust tax changes to take effect but nothing about grandfathering ... 


As for the rich who won't have their tax bracket drop in retirement, I wonder at what point investing the full dollar to grow tax free becomes worth it. I can see where for a year or two of growth, likely the extra tax isn't worth it. But for say twenty years of growth that is compounding - I'm not so sure the RRSP is that much of a problem.


Cheers


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## Lephturn (Aug 31, 2009)

The answer will depend on your situation. Personally I'd like to have a nice chunk of change in both. But at this point I'll take more money now (RRSP) and hope I have the problem where I have too much taxable income.

Which problem would you rather have, that you pay too much tax in retirement or you pay too much tax now? I would much rather risk having too much taxable income in retirement. Talk about a first world problem!


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## GOB (Feb 15, 2011)

Good point. Also consider points of time in the future when you might not be working (further education, maternity/paternity leave, job loss, etc). Having money in your RRSP that you can withdraw at a very low marginal rate (because you have little or no income) proves to be handy and extremely tax-efficient.


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## KaeJS (Sep 28, 2010)

Four Pillars said:


> What I find odd about this thread is that some posters can recommend TFSA vs RRSP without knowing that the marginal tax rate of the OP is.
> 
> Yes, he said he young but he also says he has more money than he knows what to do with. Does that sound like someone in a low tax bracket?
> 
> Maybe it is, maybe it isn't. None of us know.


Judging by his use of the English language and his current situation, it sounds like he doesn't make an extremely high salary. See below:



dwt2525 said:


> I'm a young professional,* recently out of school, *and I'm finding myself with more money than I know what to do with. I'm just wondering if I'm on the right track here as far as investments go, or if I should be making some changes.
> 
> *2) I've been contributing to a self-directed TFSA with BMO (most of my finances are with BMO),* - This means he hasn't even maxed this out yet, so he can't be making too much money.
> 
> ...


Sounds to me like the guy was in school full time and wasn't working. Now he's out, making $50k a year and he's got money everywhere.

Anyway - I could be totally wrong, but that's the way I perceived his post.


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## Causalien (Apr 4, 2009)

To each their own.

My finances are built around mobility that's why I prefer TFSA. In the question of whether I am more afraid of losing money or losing a chance to lose money. My answer would be losing the chance to make money.

I speculate that rising tax is a certainty due to the ballooning debt. At least when they announce a change in TFSA, I should have a chance to withdraw it all and restructure my strategy. But there is that chance they'll enact some tax on TFSA withdrawal without consulting the citizens for a vote. That should be the time I go John Galt.


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## dwt2525 (Mar 6, 2012)

Thanks for all of the advice so far.

I'll focus on maxing out the TFSA for now, which shouldn't take too much longer. Should I be keeping my bond holdings to maybe 15% instead? Less? In terms of riskier over the next 5 years (which is really just an arbitrary number at this point.), any suggestions?

I've held emerging markets, precious metals, etc.. since 2007, and I've averaged about 2.5% annual growth over that time period. That being said, the last 5 years have been interesting.

Thanks again for the advice.


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## KaeJS (Sep 28, 2010)

I personally don't have any bonds.

I rather have blue-chips with stable dividends that are cash cows constantly producing positive cash flow.

You're young. Throw some risk around.


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## dwt2525 (Mar 6, 2012)

KaeJS said:


> I personally don't have any bonds.
> 
> I rather have blue-chips with stable dividends that are cash cows constantly producing positive cash flow.
> 
> You're young. Throw some risk around.


I'd like to take this approach, but I feel that at this volume (specifically in my TFSA) the commissions/fees will kill my returns if I want to diversify.

Is an ETF maybe a better route? Thoughts?


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## Patience (Mar 8, 2012)

Four Pillars said:


> What I find odd about this thread is that some posters can recommend TFSA vs RRSP without knowing that the marginal tax rate of the OP is.
> 
> Yes, he said he young but he also says he has more money than he knows what to do with. Does that sound like someone in a low tax bracket?
> 
> Maybe it is, maybe it isn't. None of us know.



It's probably a fair assumption to say his tax rate isn't at the top bracket if "more money than he knows what to do with" requires a full year to keep up with an annual TFSA contribution. 

From what I can see, my gut is TFSA for him. But you are right, it's possible RRSPs may be better in his situation.


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## Four Pillars (Apr 5, 2009)

Patience said:


> It's probably a fair assumption to say his tax rate isn't at the top bracket if "more money than he knows what to do with" requires a full year to keep up with an annual TFSA contribution.
> 
> From what I can see, my gut is TFSA for him. But you are right, it's possible RRSPs may be better in his situation.


I think you are right. However, he didn't provide that bit of information until after I posted.

He also hasn't answered any questions, so I'm not sure how much help he can get from the thread. Hopefully some.


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## dwt2525 (Mar 6, 2012)

Four Pillars said:


> I think you are right. However, he didn't provide that bit of information until after I posted.
> 
> He also hasn't answered any questions, so I'm not sure how much help he can get from the thread. Hopefully some.


Hi,

Thanks for the help so far. My marginal tax rate is 31.15% for 2012.

I haven't made any contributions to my TFSA prior to 2012, so I have quite a bit of room left.


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## KaeJS (Sep 28, 2010)

dwt2525 said:


> Hi,
> 
> Thanks for the help so far. My marginal tax rate is 31.15% for 2012


So, the poster lives in Ontario and makes between $42,700 and $68,700/year. 

TFSA it is.


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## dwt2525 (Mar 6, 2012)

KaeJS said:


> So, the poster lives in Ontario and makes between $42,700 and $68,700/year.
> 
> TFSA it is.


I'd like to take your approach of getting a few blue chips, but do you think this is wise at that volume? I'm currently going to get hit with $29 trading fees. Should I take the hit in the sort-term?


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## Eclectic12 (Oct 20, 2010)

KaeJS said:


> Judging by his use of the English language and his current situation, it sounds like he doesn't make an extremely high salary.
> 
> [ ... ]
> 
> ...


*shrug* - maybe, maybe not.

I went to university with both an actuary and two engineers (software and civil) who used similar wording, did not have an RRSP as "retirement is too far off compared to a good stereo" and if they told the truth - their first jobs were pay $80K.


Cheers


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## londoncalling (Sep 17, 2011)

Why pay $29.00 when you can easily pay $4.95 plus ECN at Questrade? That is a big savings. (Insert TRM Questrade bash here)  Regardless, there are many options to reduce trade fees at other brokers. Do not let your current broker take more of your money than need be if there are other options.

Cheers


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## KaeJS (Sep 28, 2010)

londoncalling said:


> Why pay $29.00 when you can easily pay $4.95 plus ECN at Questrade?


^ Exactly.

I wouldn't worry about the volume too much. As long as you're not buying dividend payers that are smoking all time highs. Try to be a bit picky with the blue chips that you buy. Don't buy anything overpriced or dependent on low interest rates.

I may even say something like taking a position in SLF could be a good move. Once interest rates go up and the company becomes stable again, you know your $20/share will be worth $25/share at least.


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