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5 reasons mutual funds might work for you.
Mike is a busy guy. Working 45 hours per week as a welder and playing recreation hockey three nights a week means a lot of his time is occupied.
While sitting in the dressing room one night after hockey, Mike's buddy, Paul, was telling him about how his wife had pushed him to start looking into saving some money for their child's education. Paul said while speaking with a financial planner, they had also begun to start putting away some money into retirement. Mike rolled his eyes initially, assuming it was a time-consuming process. "Not exactly," said Paul. "It was just one appointment and getting set up for automatic payments."
Mike thought it sounded like a good idea. He booked an appointment with a wealth consultant for the next week. Jillian led Mike through a number of options, taking into account Mike's initial goals and the fact he didn't have a lot of time. Mike liked the idea of RRSPs because of the immediate tax benefits he would receive. She also suggested mutual funds*, which is a popular choice for relatively new investors because it pools the money from a number of investors and spreads it out across a number of industries. That way, the risk is minimized because even if one industry struggles, there should still be growth because of the diversified portfolio.
Mike liked the idea of pooling his money with a number of different people instead of putting all his eggs in one basket. He saw the benefit in the diverse way the combined money was spread around. He was also attracted to the potential saving benefits (he didn’t know mutual funds were offered as an option under the RRSP).
Jillian also pointed out that he could be set up so automatic payments could be taken out his account whenever it lined up with his pay period. That was a feature Mike appreciated because he wasn't sure if he could always make the payments on time.
Here are 5 reasons Jillian explained mutual funds can be beneficial:
1. It's easy
You complete a simple form that authorizes the mutual fund company or financial institution to withdraw a set amount from your bank account to match your pay period and use this money to buy units of one or more funds. Automatic purchase plans run on autopilot without having to do any work.
2. It's affordable
For a one-time, lump-sum purchase, mutual fund companies sometimes require a minimum purchase of $500 or $1,000.
When someone like Mike signs up for regular purchases, the minimum is usually much lower - possibly as low as $25 a month for mutual funds held within an RRSP.
3. It allows you to benefit from market volatility
When you invest the same amount every month, you automatically buy more units when prices are down and fewer when they are up, compared to if a lump sum contribution coincided with when prices were high. This strategy, known as dollar-cost averaging, can lower your average cost per unit over time. By investing throughout the year, it also reduces risk and maximizes growth over a longer time period compared to paying a lump sum.
4. It curbs the desire to try to ‘time the market’
Most investors are naturally inclined to pour money into hot markets - the very time when astute investors are pulling back. When the market "corrects," there's a tendency to ride to the bottom and then bail out - the very time when astute investors are starting to buy because they can purchase funds that are now trading at a significantly lower price prior to the market correction. There is also the risk of "investing paralysis" for those who keep waiting for the right time to commit money, earning little or no return in the meantime.
When you invest automatically, you're far less likely to react emotionally if the markets become volatile.
5. Helps maximize tax savings
Many Canadians will aim to pay as much as they can into RRSPs annually because of the tax savings or some have just started and didn't realize the impact RRSPs have on their tax savings (Mike was able to save a little to put away for his warm getaway). Most often, they lack cash when the deadline rolls around - the very time when they face bills from the holiday season or a mid-winter getaway. It's much easier to make 12 smaller, monthly contributions than one big one.
You might even be able to enjoy the benefit of your contribution throughout the year, instead of having to wait until you file your return, by requesting that the Canada Revenue Agency reduce tax deductions at source.
Mike was glad that his financial advisor, Jillian, developed a customized plan for him that saved him time and money.
*Please read the Credential disclosure and mutual funds disclaimer.