Biro

The student's guide to investing

Financial Forum

With so many different investments options for students, it can be difficult to understand market timing. Here are the basics.

By Knowlton Thomas

he market’s up, the market’s
| down. Analysts are bullish in
their forecasts; economists are
bearish in their predictions. How’s a
student to know what to do?

The market and the economy love
to put investors through roller coaster
rides with wild, jolting fluctuations.
But as a student, you want to keep it
simple, and you definitely don’t want
to Jose money.

By keeping it simple, you’re
able to not only track your portfolio
easily, but you’ ll also find yourself
avoiding the pitfall of panic investing
or over-analysis investing — that is,
trying to accomplish the impossible
by predicting and beating the market
(this is the single best way to waste
your time and money investing).
Remember: if you could do it, the
pros could do it, and there’d be a
million best-selling books on it. This
article wouldn’t exist.

The trick to keeping it simple is
diversifying on a minimalist basis.
You never want to put all your eggs
into one basket, because if the market
changes, you could be left in the dust

ea wh

financially. But what student wants
to monitor six mutual funds, three
market-linked GICs, two RSPs and
fifteen growth stocks every day?

A basic investment portfolio for
a relatively poor student is going
to consist of cash, a GIC or two, a
mutual fund or two, and an RRSP
(in which one of the mutual funds
will be held). If you’re working with
$15,000 or less, and you probably
are, you’re actually going to be able
to put all of this inside a Tax-Free
Savings Account (with a $15,000
contribution limit as of January 1“,
2011). That’s going to make you
sweat a lot less when it comes to the
bitch of investing: taxes on interest
and withdrawals.

GICs are linked directly to
Canada’s prime rate, similar to
mortgages. When the prime rate is
low, so are GIC rates (a bad thing)
and so are mortgage rates (a good
thing). A low rate encourages the
country’s consumers to spend
and doesn’t reward them as much
for saving. A high prime rate
accomplishes the opposite. The Bank
of Canada ultimately determines the
prime rate.

Right now, the prime rate is
very low, because we’re coming out
of a recession and spenders need to
pump money into the economy. It’s
a good time to a buy a house, and a
terrible time to lock a lot of money
into a GIC. Savings accounts are
also linked to the prime rate, so this
means that both the GIC and cash
portions of your portfolio should not
be large in this market scenario. I
would recommend 5 to 10 percent
in cash, and around 15 to 20 percent
in two to five small, laddering GICs.
(Laddering means they mature at
different points in time. This balances
out market fluctuations)

If the prime rate, which currently
sits at one percent, climbed to say,
three percent, banks will shoot their
GIC and savings account rates up,
and you’d want to expand your cash
holdings by about five percent and
your GIC holdings by at least 10
percent.

Next, retirement savings.

Your RRSP will likely consist of
just one mutual fund, which is an
appropriately simple approach. And
for diversification, you should also
have another mutual fund, separate

of your RRSP (but still within your
TSFA). These mutual funds should
not follow the same indexes; that is,
they should be comprised of different
bonds and equities. It’s up to you if
you want to balance a conservative
fund with an aggressive fund, or stick
to two differently built conservative
funds. (You can typically find this
within one financial institution, but I
would recommend using two different
institutions for proper diversification.
Seek low portfolio management rates,
typically found in smaller institutions)
Your two mutual funds should be
split fairly equally, and should add
up to a solid 50 to 70 percent of your
portfolio.

If you have some left over
after this, both GICs and savings
accounts are safe—though minimally
rewarding — ways for you to handle
excess money. But you could also
consider dedicating five to 10
percent of your investment money
into experiments, like the complex,
volatile stock market. It’s risky, but
hey, mistakes are one of the best ways
to learn—especially when they cost
you your hard-earned money.
Good luck and get saving!