Starting Small, Investing Smart
Learning how to do anything the smart way is beneficial, and when it comes to investing, this stands especially true. Many people have tried their hand at investing everything from stock and bonds to real estate and other such illiquid assets.
Index or passive investing as it is sometimes referred to, is not necessarily a new way to invest, but it does seem to be more of an effortless way to invest. The general idea of it requires investors to invest in a few (three, four or five) low-cost mutual funds or exchange-traded funds also known as EFTs. The term ‘index funds’ are referred to this way because they are funds that are intended for wide diversification, which, if all goes well, means you as the investor will earn higher returns than others who spend their days seeking hot-stocks.
This way of investing, however, is not necessarily less expensive. It still requires a financial advisor, for which you will be required to pay an annual fee on top of the management fee (usually around 2.5 per cent). Indexing is by no means a ‘get rich quick’ scheme.
The concept is that inexpensive index funds have the potential to out-earn larger money managers. Over the last five years, Standard & Poor’s have continually concluded that approximately 89 per cent of actively managed large US funds didn’t make the mark on their S&P 500 index, while in Canada, 93 per cent of the equity funds did not keep up with S&P’s index. For this reason, many would agree that the proof is in the numbers.
Many investors feel that it is a waste of money to simply pay someone else to watch and chose mutual funds and stocks for you, especially as this is something you can do yourself. Many do not believe that investment advisors can beat the markets with any more (or less) luck than you can. It’s like hiring a plumber to turn on the tap and then paying him the extra fees for the water it allows the spigot to disperse. This process can go on year after year.
Switching over to index funds as a way of investing may be a better choice for those who want to start smaller or even for those who are open to a new way of investing. It takes time, but those who do their investing this way swear by the results, and the savings.
Less Risk and More Savings at Canadian Banks
Canadian banks may be the ones benefiting from the savings safety net many people have put their money into. A growing trend has seen Canadians putting their money into checking and saving accounts rather than high-risk investments. Banks have reported a 20 percent increase in the last year, which is up considerably from the normal 3 or 5 percent they saw the year before.
Financial services consultant David McVay explains, “Canadians are more conservative than they were in 2007, adding that “more consumers are paying off debt, opening RRSPs and tax-free savings accounts than they were a year ago. We’re seeing a shift from stock investing into keeping more money in savings accounts because of the financial crisis,” he said.
“The banks are marketing to the uncertainty that Canadians have about their savings and retirement plans caused by the financial crisis,” McVay said. This comes as banks see many baby boomers putting their money in safer places after declining stocks had a large impact on their retirement savings. Another equivalent loss could see them possibly working for another 10 years.
The recent 20 percent increase in the banks checking and saving accounts will add up to about $100 billion in business as banks can easily make more money from consumers with savings accounts instead of customers who pile their cash into stocks and bonds.
A recent Scotiabank survey done by Harris / Decima, found that almost one-third of Canadians do not have any savings accounts even though 94 percent of those surveyed said they feel better having a saving safety net. Gillian Riley, Scotiabank senior vice-president of retail deposits, payment and lending noted, “We did have a tough period in the last few years and I think now is a great time to really focus on this and get people thinking about how they can save. Over the last year we certainly have seen some movement towards savings as a flight to safety,” Riley added.
It was also found that 55 percent of those surveyed said they do save money on a regular basis but yet, one-in-five Canadians confess they do not have any savings at all. It was also noted that the debt to income ratio has risen dramatically and is currently around the 147 percent mark. That means for every dollar a person makes, they owe $1.47. These numbers are proof that it’s important to save more than we did before the recession.
Move Over TSX, There’s a New Option in Town
For 157 years the TSX has enjoyed the near monopoly status as the place to buy and sell stocks in Canada as it currently sits as the sixth largest in the world. Lately, there have been options moving in, eroding the TSX’s monopoly. These alternative trading systems such as MATCH Now, Chi-X, Omega, Pure Trading, Instinet and Alpha Group have arrived on the scene with varying degrees of success. In some markets, these new players make up more than 40 percent of all trading activity in Canada.
Currently, Alpha Group seems to be the biggest threat to the existing TSX. In February, the TSX’s market share of all trading in Canada decline to 71.9 per cent compared to 93.1 per cent at this time last year. Alpha, on the other hand, has seen its share increase to 21 percent from 3.3 per cent during this same period. Major Canadian banks and other large financial institutions formed alpha in 2007. They’ve been successful in obtaining a large part of the market due mostly to decreased fees.
The TSX is parented by TMX Group Inc. who essentially has three businesses. The listings business where companies who want to have access to investors pay TMX fees to have their companies listed. They also provide trading data and historical marketing activity data to clients who, in turn, pay subscriptions fees for this information. As well, they are in the trading business, where brokerages pay fees to buy and sell securities.
For now, Alpha does not have much interaction with individual consumers. However, on April 22, Alpha filed papers with the Ontario Securities Commission to become a listings exchange. If approved, this would make them a full competitor to the TMX Group who has always competed with new entrants across each of its business units. Major companies trade on the main market that is reflected in the S&P/TSX composite index, while smaller start-ups are typically listed on the TSX Venture Exchange, which TMX also owns.
Alpha is owned in part by Canaccord Capital as well as the investment branches of Canada’s six largest banks. Having multiple stock exchanges would move Canada closer to the U.S. system where as many as seven separate stock markets are available for listings. The two giant New York based traders the Nasdaq and New York Stock Exchange still dominate the market. Having money to invest in the stock markets is a great way to secure a future nest egg. It often does not take a lot to make a lot.