ASK THE EXPERT: DAN BORTOLOTTI
QMy daughter, Alie, turns 18 this year and I plan to have her open a TFSA so she can start to invest. We will match whatever she puts in her TFSA annually for at least the next 20 years. Should she be looking at an aggressive portfolio of low-fee ETFs? I would prefer that she manage her own portfolio so she develops an interest in investing and building up her savings. — Sam
AKudos to you, Sam, for encouraging your daughter to save and invest at such a young age. Saving can be frustrating when you’re starting from zero, because your account balance can seem like it’s barely growing, even during years when returns are solid. Giving her TFSA a jump-start will help build some valuable momentum.
Before we talk about investing, though, it’s worth making the point that teenagers don’t necessarily need to concentrate on building a long-term portfolio. Over the next 10 years or so, Alie might have some more immediate needs. She might be offered a great job that requires her to buy a car, or she may want to take a specialized course related to her employment. She may even want to start saving for a down payment. At this stage of her life, these are reasonable priorities over investing for retirement.
That said, if she is looking to invest, I’d recommend a very simple approach for at least the first few years. Since the TFSA contribution limit is just $5,500 annually, her balance will be modest for the foreseeable future, so a portfolio of multiple ETFs is probably not the best fit.
One option is the Tangerine Investment Funds. This family of balanced index mutual funds allows you to own a diversified portfolio of stocks and bonds with almost no maintenance. The Tangerine Balanced Growth Portfolio is 25 per cent bonds and 75 per cent equities, which may be suitable for a young investor. The annual fee of 1.07 per cent is high compared with ETFs, but this is less of an issue with small accounts; it’s less than $5 a month on a $5,500 investment.
Another option is to use a roboadviser. These online services are the easiest route to an ETF portfolio, since they choose the funds, place the trades, and do all the rebalancing. The fee structure varies, but expect to pay about 0.7 per cent, including about 0.2 per cent for the ETFs and an additional 0.5 per cent to the robo-adviser.
Finally, if Alie is keen to be a hands-on investor, you might consider opening an account at a discount brokerage, where she can learn to trade ETFs. With a small account, she would need to pay close attention to costs. She should choose a brokerage such as Questrade, which allows you to buy ETFs for free (commissions apply when selling). A one-fund solution like the new Vanguard asset allocation ETFs would be ideal, since she can build a diversified portfolio with a single trade. The Vanguard Growth ETF Portfolio (VGRO) holds seven underlying ETFs with a mix of 20 per cent bonds and 80 per cent stocks, for example. One day, when the portfolio grows larger, she might consider building a portfolio of multiple ETFs, so this will allow her to dip a toe in the water.