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Maximize your Wealth: Investment Advice for Canadians

Updated on September 11, 2010

Your choice of investments can lead to a prosperous future or a disastrous one. Sure, the amount of earnings you allocate to mutual funds or stocks makes a big impact. It’s a fact however that the investment tools employed are more important than the weight of your contributions. The key is to tap into the power of exponential growth by maximizing returns.

Capital gains can easily be eaten up by management fees, taxes, advisors, trading, buying and selling as well as inflation. Decisions based on emotions and over activity will cause you to tread water financially, as will mediocre investment tools. Take the time to weigh your options wisely.

We will be focusing on mutual funds as this is the investment tool most Canadians can benefit the most from. First RRSPs are compared with TFSAs to ensure your funds are going into the right place. Next, some light is shed on the mysterious low-cost funds investment magazines never talk about. Finally, the top five Canadian discount brokers are compared.

RRSP vs TFSA

The first step is to protect your investments from being sponged by the tax man. The Canadian government takes enough of your income as it is. Don’t add to the problem by investing outside of registered accounts. Any discount broker or big bank that offers mutual funds can set you up with a RRSP or TFSA account.

So what is the superior method to create a tax shelter: RRSPs or TFSAs? For the majority of Canadians that make less than $40k annually, TFSAs are a better choice. If you spend your tax refund, then the TFSA wins on all fronts. The only disadvantage is you are limited to contributing $5,000 or less per year.

If you go beyond $5,000 in investments for the year, it is time to put the rest into RRSPs. Ideally, you want to have both types of accounts but the sad reality is that most people don’t make enough to take advantage of both. Those that benefit from RRSPs make over $120,000 per year.

With index funds you can't think long-term and ignore temporary ups and downs.
With index funds you can't think long-term and ignore temporary ups and downs.

Index Funds: The Hidden Hero

Everyone knows what a mutual fund is but not enough beginning investors know about a specialized type that promises solid returns and the lowest fees: index funds.

Firstly, 70% of managed funds can’t beat the index for more than 10 years. A fund may be “hot” when you buy it, then can very well drop like a rock in upcoming years. Most managers are nothing more than glorified gamblers. The difference is they play with other people’s money, not their own. Secondly, whether the manager performs or not the MER fees take a surprisingly high slice of your returns. It seems like a mere 2-3% on paper and that is how so many are deceived.

In the long-term index funds perform better than managed funds. It is a “set it and forget it” option for Canadians that have better things to do than eyeball market trends. In interviews, billionaire Warren Buffet often recommended index funds as the best option for the average investor.

Recommended Picks: TD e-Series, Altamira Precision Series, iShares EFTs, ING Streetwise Funds

The good-looking folks at TD.
The good-looking folks at TD.

Top Five Discount Brokers / Fund Sources

TD e-series: This type of account gives you access to TDs super low-cost index funds and nothing else. With no fees to speak of for managing your account, it’s limited but offers a great value. Unfortunately TD doesn’t offer support because it since it isn’t a money maker for the company.

ING Direct: Streetwise funds aren’t quite as cheap as TD’s e-series; however these funds are rebalanced for you automatically. If you don’t know what rebalancing is and don’t care to find out, ING Direct is probably for you. It’s a good choice for the investment account with less than $10,000 since there are no fees of any kind, even when you buy and sell.

QTrade: Private firm with a good balance between reasonable fees and a quality platform. It has been voted number one by the Globe & Mail for several years running. Beware of hidden ECN fees if you buy stocks; Penny stock purchases can create a dent in your balance.

TD Waterhouse: The strongest discount broker affiliated with a major Canadian bank. TD Waterhouse has been the big cheese for years now, and has gotten a little too comfortable because of it. Look out for the $100 annual fee if you have less than $25,000 to invest.

QuestTrade: Claim to fame here are the lowest fees in the industry. Trade stocks from $4.95 to $9.95 maximum. The platform is primitive compared to bigger brokerage firms, and not as secure. Still, if you are the type that must get the best deal possible it is worth investigating.

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