Investing for beginners

September 22 2007 by Ellen Roseman

Take 60 people and teach them all they want to know about investing, from mutual funds to stocks to portfolio building, in three sessions of two hours apiece. Some want to know how to retire early and how to talk to their investment advisers without sounding stupid. And a few are keen to start trading options and get in on all the hot IPOs, such as Lululemon, without getting squeezed out by bigger clients.

That’s my class, Investing for Beginners, which kicked off this week at University of Toronto’s school of continuing studies. It’s a challenge with so many people and knowledge levels and so short a time to work together. So, I’m using this blog to expand on what I can tell them and what they can learn.

Does anyone know of a really terrific, easy to understand introductory book on investing? I recommended three, Investing for Canadians for Dummies, Rob Carrick’s consumer guide to banking and investing and Derek Foster’s The Lazy Investor. Love to get more picks.

Is it better to send beginners to websites, like InvestorED and Morningstar, rather than books? Maybe the Internet works better than books since it’s interactive. Which websites would others recommend?

Here are some points I made in the first class. Don’t feel pressured to invest in stocks or equity funds. Start with safe GICs or high-interest savings accounts and use the interest to invest in more risky stuff. It’s like setting up your own principal-protected note, without the high fees.

Mutual funds used to be easy to pick, but they’ve become a nightmare of consumer choice. If you can’t make any sense of what to buy, go to your bank and ask for help. They have certified financial planners on staff and they sell other mutual funds besides their own. There still may be high-pressure sales and conflicts of interest, but not as much as with commission-paid fund dealers.

Don’t believe predictions. No one can forecast where the economy and stock markets are going with any degree of accuracy. Don’t make any buy or sell decisions based on one day’s trading action and the prognostications from media commentators.

Costs matter, especially when it comes to mutual funds. Management expense ratios are high and not coming down as fund sizes balloon. Always check the MER and recognize how much goes to the investment adviser. Demand service for money paid. Wouldn’t it be great if you could see a dollar figure for the amount going to your adviser each year on your fund statements?

I once sent a couple for a portfolio review with Warren Mackenzie at Second Opinion Investor Services. They owned 47 mutual funds, when all you need is about 10 to be diversified. The average MER was 2.41 per cent and they were paying $22,148 a year to their adviser for this overdiversification. The worst thing was that with their $900,000 portfolio, they could have gone to an investment counsellor and paid less than 1 per cent a year. I checked with them later and they were still with the same adviser, but trying to restructure and slim down the portfolio.

Muutal funds are like clothes in your closet. If you keep buying new ones and don’t clear out the old ones, you end up with clutter. Some advisers encourage this bad behaviour by always asking you to buy something and never suggesting you sell anything.

10 comments

  1. mariam

    Sep 23 2007

    Egads, that is absolutely unconscionable for that adviser to milk them for 22k a year…

    Recently, someone posted Warren Buffett’s speech to MBA students on YouTube. In Part 8, he talks about index funds for the regular investor, but I’d listen to all parts as he’s personable, witty and is a man of integrity. Just search for Warren Buffett on YouTube. How can you go wrong with a financial genius?

  2. FourPillars

    Sep 23 2007

    Interesting post.

    I don’t know if there is any one book that fits your description but I haven’t read enough of them to say for sure.

    It sounds like your course should do as the “introduction” and you can always recommend more advanced books (Four Pillars, Random Walk etc) at the end of the course for those who are more keen.

    Mike

  3. brad

    Sep 23 2007

    An excellent new site is Transparent Investing, created by Patrick Geddes of Aperio Investing. The site “aims to empower investors of all wealth levels to avoid getting duped by hidden fees and unjustified claims.” The “Whole Story” PDF is available for free download and definitely worth reading.

  4. Peter

    Sep 24 2007

    “Wouldn’t it be great if you could see a dollar figure for the amount going to your adviser each year on your fund statements?”

    Well, there is such a company, and it’s called Steadyhand. They are run out of Vancouver, and provide nice breakdowns of the fees that you pay to them, both in percentage terms and in dollar terms.

    They’re a great outfit, and folks should give them a look!

  5. chris

    Sep 24 2007

    Letting your students know mutual funds aren’t easy to pick, that predicting market movements is next to impossible (even for those on TV) and that costs matter is invaluable teaching.

    Maybe a checklist for how to pick a suitable mutual fund and a chart showing the meaningful impact costs have on long terms returns would be beneficial as well.

    With regards to your comment about the clients who “owned 47 mutual funds, when all you need is about 10 to be diversified,” I think this still could potentially be too many funds. When a number of Canadian Equity Funds hold over 100 securities, and Foreign Funds regularly over 150, it is not unreasonable for an equity oriented portfolio with 10 funds to hold upwards of 1000 securities. Academic studies indicate that after 20-25 securities over 8 industry groups, there is little added benefit from further diversification.

  6. Quentin D’Souza

    Sep 25 2007

    I would consider myself a newbie myself, although I’m in my mid-thirties. I took my head out of the sand at the end of June and have started reading every personal finance book I could/can get my hands on. I have a binder where I keep notes on all the books I read and an action journal where I keep track of action items based on the books and any money saved or wealth building initiatives that our family started. I think (with books anyway) you start off broad and then start to focus on your needs/interests. Okay – so they are not all investing books, but a dollar saved is a dollar fifty earned.

    These are the books I have read since the end of June:

    Money 101 : every Canadian’s guide to personal finance by Roseman, Ellen

    Money 201 : more personal finance advice for every Canadian by Roseman, Ellen (this was a signed copy  )

    Investing for Canadians for dummies by Tyson, Eric (Eric Kevin), Martin, Tony, (Tony M.)

    How to pay less– and keep more for yourself : the essential consumer guide to Canadian banking and investing by Carrick, Rob

    Stop working, here’s how you can : using the strategy of Canada’s youngest retiree by Foster, Derek

    Alan Silverstein’s Hidden profits in your mortgage : the smart-money guide to Canadian home ownership. by Silverstein, Alan Gary

    The automatic millionaire: a powerful one-step plan to live and finish rich by Bach, David.

    Tax tips … for Canadians for dummies. –

    Winning the tax game : a year-round tax and investment guide for Canadians by Cestnick, Timothy

    The insurance book : what Canadians really need to know before buying insurance by Praskey, Sally., Moncrieff, Helena

    Couple I bought:

    Financial Freedom – Talbot Stevens (This is worth its weight in gold)
    Spend Smart – Save Bigger – Margot Bai
    Millionaire Next Door – Stanley and Danko (Good for role modeling)

    Process of Reading:

    The money adviser : the Canadian guide to successful financial planning by Cohen, Bruce

    The power of index funds by Cadsby, Ted

    The DRIP strategy : building your wealth one share at a time with dividend reinvestment plans by Decter, Michael B.

    The 10 biggest investment mistakes Canadians make: and how to avoid them by Cadsby, Ted

    I also rediscovered my local library in Ajax. I can order/search for all my books online. When the books come into my local branch they call me. I then go to the Self-Serve holds and pickup my books and check them out. I’m in and out of the library in two minutes. The above list was also created by library website where I can store my book list and then request books when I want them.

  7. Michael Kelly

    Oct 11 2007

    RICH DAD, POOR DAD – by Robert Kiyosaki
    – Not about investing as such, and gives little “practical” advice, and must be taken with a grain of salt here & there; however, for those with ears to hear, he is great at helping you change your mindset about money. The key to moving forward is to change your thinking and his advice can help push you in that direction.

    ONE UP ON WALL STREET – Peter Lynch
    – Lynch writes in an unpretentious, friendly and VERY easy to understand style and has extremely helpful and realistic advice about investing directly in the stock market. This is not a “get rich quick” book and less sensational in style than Kiyosaki – but neither is it a “how to” – he offers basic principles in order to get you on your way.

    UNDERSTANDING STOCKS – by Michael Sincere
    – Basic intro, containing all the “nuts & bolts” information. I was looking for a short, basic, boring book on the jist of how investing in stocks works, and this book is it. The only caution is that he is obviously biased toward short-term trading in various forms, which for many (including Peter Lynch) is simply too risky and daunting.

  8. Robert Genaille

    Mar 13 2010

    thanks for the advise

  9. Mawazo

    Sep 7 2011

    I have no particular book in mind to recommend, usually prefer reading a bit here and there.

    My thoughts: I think mutual funds a good place to start for someone with limited disposable income. When they’ve accumulated a lump-sum including whatever they will have earned in interest, they can always move to investing directly in whatever assets they find suitable for their appetite for risk and investment goals.
    Savings are easily eroded by inflation every time especially in volatile markets.

  10. Lorne

    Apr 24 2014

    An idea for those who’d rather WATCH than read…

    Fair Share Plan is an entertaining, video-based course that delivers sound ideas in an understandable way, while revealing some ugly secrets of the financial industry that cost the average person dearly (me included, before taking it).

    I wish it was available 20 years ago to get me on the right track!