Student Investment Guide
Part Ill: Beating the market

Saving money is a good first step. But the true feat con

     

Knowlton Thomas

ven with large, frequent
Heoics a savings

account isn’t something you
can retire on. Not with a bank, not
with a credit union, and certainly
not as a stack of cash beneath your
mattress.

The fact is savings accounts
typically lose you money. Wait,
what? Well, it’s true: if you keep your
money in a savings account (whether
it’s the highest or lowest rate in the
industry) you will see your money
outperformed by inflation over the
long term. So, in essence, you may
have saved up more and more dollars,
but the value of each dollar dwindled
with each passing year.

In order to truly save, you
actually need to profit. This means
beating the market. Beating the
market is when the average return rate
from your portfolio of investments
exceeds inflation, taxes, and fees
combined. This is no easy task, but
it’s definitely not impossible, not even
for a student or amateur investor.

Think of yourself inside a

gladiator arena. You’ ve got inflation,
the big bulky dude who swings slow
but steady. He can fight forever—and
will—but he’s easy to dodge with an
agile portfolio. Next, there’s taxes.
He’s sure to conquer the uneducated,
but a wise investor will deftly parry
his strikes. Finally, there’s fees. This
swift-striker is more apt to pelt you
with rocks from afar—one throw
may not seem like a big deal, but fifty
rocks later, you’ll be feeling the pain.

Now, yourself: your armour is
your net wealth, and your weapons
are your investments. Stuffing all
your cash into a generic savings
account is like slapping on a
cardboard shield and swinging a
banana in place of a cutlass. It might
work for a last-minute Halloween
outfit, but the market will destroy
you.

Now, add some stronger-
performing, but still secure,
investments like GICs. These are
much sturdier shields. Then add a
couple of stable mutual funds. These
may carry some volatility that savings
account don’t but it’s better to swing
with a sharp blade and have a chance
of landing the killing blow than
carrying no weapon at all.

Inflation
Inflation is a relatively static and

 

fairly transparent opponent. Static
because, while it will fluctuate from
year to year, it historically averages
around three percent. Transparent
because, while it can be hard to
decipher the exact inflation rate of
your economy at any given time, it’s
not hidden in complex contracts and
confusing clauses— it’s always out in
the open, rising the prices of goods.
There is no way to avoid it. You
simply must prepare your portfolio to
post an ROI exceeding three percent.
Taxes

Taxes, like death, seem to be
absolutely guaranteed. Well, a Tax-
Free Savings Account won’t make
you immortal, but it will remove

the other guarantee from your life.
The TSFA is essentially the perfect
account: it won’t tax you on income
you earn from investments, and there
are very few withdrawal limitations.
Its only drawback is that it limits
investors to a maximum annual
contribution of $5,000— but as a
student, this cap will be plenty high
enough. Shove as many of your
investments as you can into it, which
will probably be all. If you do have
more than your contribution amount,
put the most potent (AKA highest
return potential) investments in it, so
if they perform well, you earn more

 

tax-free income. Remember: outside
of this account, all money you earn
from investments, from interest to
dividends, will be taxed at some point
in some manner.
Fees
The devil of banking. It’s always
hard to profit if profiting costs
money. Fortunately, fees are mostly
just a target for the stupid; educated
investors will very rarely succumb to
paying these ludicrous mini-charges.
While you might use a Big Five
bank for its wide range of mutual
fund options, stick to credit unions
and other financial institutions such
as ING Direct for basic savings and
chequings accounts, as well as GICs.
Not only will they not charge you
fees to perform these simple banking
procedures with them but they usually
post better rates of return anyway.
Remember: Always read the fine
print, challenge any fee you see pop
up on a statement that shouldn’t be
there, and don’t remain loyal with any
money-gouger - if they are charging
you to save money, they don’t care
about your success as an investor.
Next edition of the Student
Investment Guide: An in-depth look at
mutual funds!

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