Young clients have long time horizons. So they’re prime candidates for a set-it-and-forget-it investment model.
Here’s an example of that in action. In 1986, one of my mother’s clients had a bit of extra money. So my mother advised her to buy 100 shares of a Canadian bank stock, and reinvest the dividend. As this client earned more, she added to her position and took advantage of warrants offered during stock splits. Her total investment: $7,000.
In 2011, she brought in the share certificates. The position was worth $123,000.
I frequently share this story with young clients who need motivation to save, or who feel their investmentsDynamic (Investments) are small potatoes. If someone has at least 30 years until retirement, the earlier she starts investing, the more the money will grow and compound. Sometimes, it really is that simple.
Both mutual funds and individual stock positions can offer great returns, but I prefer the latter for set-it-and-forget-it plans. In my experience, younger people want to own companies they like because they’re often customers themselves. For example, Canadians know Tim Hortons—they understand people buy coffee every day and therefore don’t perceive its stock as risky.
Meanwhile, mutual funds (or ETFs) are good choices for many reasons, including low fees; diversification, which mitigates risk tolerance issues; professional portfolio management; and access to specific markets or asset classes.
Larger investment firms have higher management and administration fees, but there are ways to get around them if you use tools like proprietary fund offerings. This lets you work within the system until younger clients get to a level where individual securities make more sense.
The costs to the client differ depending on what solution you’re using. If you’re fee-based, funds will work. But if you have a young client with $3,000 who’s just starting to build assets, a transactional account might make more sense. Our team is working toward a fee platform, but we take smaller clients on a transactional basis. As their assets rise to a certain level—say, $100,000—we move them to fees.
Read: How to frame fees
Set-and-forget models are well suited for both RRSPs and TFSAs. In his latest book, The Wealthy Barber Returns, David Chilton explains if clients don’t invest their RRSP tax refunds, the TFSA actually has a larger benefit since they’ll never pay tax down the road.
So I often recommend TFSAs, depending on a young client’s tax bracket and level of saving discipline.
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Originally published in Advisor's Edge
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