Mark Seed is one of Canada's leading personal finance and investing bloggers, who is saving and investing his way to financial freedom. You can join thousands of daily readers who subscribe to Mark's blog here at myownadvisor.ca

Mediaplanet: Is it necessary for every Canadian to be investing in some way, shape, or form?

Mark Seed: I don’t think so. I think it really depends on your situation. Let me explain.

Say you’re a 20-something student who just secured your first full time job.  You have $30,000 in student loan debt to payback.  I think you should focus on killing that debt before investing.  Why?  Although investing early and often is usually important, I don’t think it’s as important as digging yourself out of debt at a young age.  Paying off debt, faster, reduces the amount of interest you will pay.  Paying down debt reduces financial stress.  Paying down debt is a guaranteed rate of return.  Paying down debt gets you in the (good) habit of not carrying debt.  Once your student debt is gone, you’ll have more cash flow – and more cash flow is always good.  With debt just remember you pay other people first. 

Say you’re a 30-something established professional with a growing family.  You’ve probably been working for a few years.  You’re paying your mortgage or renting.  You’ve got other bills to pay.  I do think you should be investing by now.  Why?  Few jobs are for life.  At some point, you’ll want to retire or at least slow down a bit.  You’ll need money to live from when you do.  Where will that money come from if you don’t invest?  Investing money over long periods of time can take advantage of compounding; money that makes money can make more money.  Investing can be done in tax-deferred or tax-free accounts – take advantage of the taxman when you can.   

When it comes to deciding whether to invest or pay down debt, I believe there is no “one size fits all” recipe.  Factors such as job security, salary, age, health, family status and the aforementioned amount of debt you hold all play into the equation. 

If you’re really confused on what to do – go with this - start killing debt first.  There are not many people I know who regret being debt-free.

MP: What percentage of someone’s earnings should be invested?

MS: Your question is timely because I recently wrote on my site what I believe is the best and easiest budgeting rule of thumb – just save 10 percent of your net income.  Invest your 10 percent, keep investing that as a minimum and don’t look back.

http://www.myownadvisor.ca/the-best-budgeting-rule-of-thumb/

I like this rule because it’s simple.  You don’t need much work in the form of a spreadsheet to figure out your 10 percent.  As the years go on, bank any raises or bonuses from work – add to your 10 percent.  As soon as your mortgage is paid off, use that money to add to your 10 percent.

There are all these wacky savings rules of thumb, money jar experiments and money hacks you can consider to squirrel away savings for investment purposes but I believe if you take your net income, calculate 10 percent of that, and always use that money for investment purposes your future self will thank you decades from now. 

MP: If Canadians are to invest, how do they know what they are investing in and if their financial advisor is trustworthy?

MS: Smooth salesperson or sound advice?  It’s very hard for Canadians to know the difference.  I believe just like a good mechanic, a good doctor or a good tradesperson – you should strive to obtain unbiased, straightforward, practical advice for your situation from your financial advisor. I’ll take off my rose-coloured glasses now because I know it doesn’t always work that way. Here are a few questions you can ask your financial advisor to see how they respond:

  • How are you compensated? If they squirm on this one, that’s not a very good sign. Consider finding a new advisor.
  • Are you a fiduciary? This one is tough because to my knowledge, there is no standard in Canada for advisors to always act in the best interest of their clients.Sad isn’t it?Some do, many don’t.Hopefully our country won’t continue to lag behind countries like the United States and Australia that have a fiduciary standard already in place.

http://www.cnbc.com/2016/04/05/how-the-fiduciary-rule-works.html

  • How much do I pay you? Related to the compensation question, good advice comes at a price but I’ve learned through my own investing experiences – fees can be forever.Unless your advisor is helping you keep your investing costs low and diversified I’m afraid you’re not getting ahead.
  • What is my rate of return or am I on track? A good financial advisor will be able to tell you, with relative accuracy, without delay. You’ll probably have a written IPS or Investment Policy Statement with them governing how your portfolio should be managed. Don’t have an IPS or never heard of it from your advisor? Think smooth salesperson and not sound advice.
  • What is my tax situation? Integrating your investments with your overall tax situation is important. Your advisor should know and help you.

There are many other questions I could have listed but I think you get the idea.  A huge pool of financial advisors in Canada work on a commission basis; they are paid to sell products or receive compensation for transactions.  Selling you lots of products or getting you to trade often is great for the financial company.  It’s very bad for you.    

If Canadians are to invest with an advisor they should be looking for trustworthy advice related to the following:

  • Ensure you have a plan with your advisor before products. There is little value in selecting investment products if you don’t know what you are investing for.
  • Your plan should align with your customized objectives. Your advisor should be avoiding a “one size fits all” template.
  • As you select your products with your advisor strive to keep your investing costs as low as possible for as long as possible.
  • Most reasonable advisors will discuss index investing with you.If they do not, find someone else.
  • Most advisors will likely recommend you maximize your tax-free (TFSA) and/or tax-deferred (RRSP) investing accounts. If they do not, question it.
  • Trustworthy advisors should help you stay the course by tuning out market noise. Listen to them and go enjoy your life.

MP: Why have online investment platforms become so popular?

MS: I think we now have a generation of young adults that have grown up with the internet and mobile devices and social media at their fingertips – and it’s all they’ve ever really known.  I believe this has been a big driver – so thanks Millennials!

For example, it’s a foreign concept for most adults under the age of 30 to consider writing a cheque.  I suspect they couldn’t imagine a time when, I was young, I took my paycheque earned from my summer job to my brick-and-mortar bank branch to deposit my money. Now you can just take a picture and voila!

Technology has helped companies automate processes and services for decades. We’re simply seeing more of it now in the financial industry. Automation can make processes effective and efficient. That includes making things very transparent for the customer. Why bother with the brick-and-mortar bank teller? As a saver or investor why can’t I interact with my financial advisor online, with my investment portfolio online, available to me 24/7? Well, now you can.

I think the fintech (financial technology) revolution is great for Canadians and I’m looking forward to seeing where things go.

MP: Is there more or less transparency surrounding your investment when dealing with online investors?

MS: I believe there is likely more transparency online but it really shouldn’t matter.  Whether you are dealing with your trusted financial advisor in his/her office or online, transparency should always be paramount.

MP: Is there such a thing as a safe investment?

MS: I wish.  All types of investments have risk.  Heck, even keeping too much cash under your mattress has risks. Not that your house would be broken into what I mean is keeping lots of cash on hand is generally bad for growth because it’s a loser to inflation long-term. Bonds have risks because you have interest rates to worry about. Look at our current climate – bond yields are low and are likely to stay there for years but who really knows? Equities are no bargain in the short term because you have to learn to live with volatility. In the long-run however, over many years of investing, equities tend to generate solid returns. Those equity returns tend to be greater than bonds and bonds tend to generate returns greater than cash.  

So if you want growth over many years of investing you absolutely need equities in your portfolio.  I also wrote a post about that on my site – learn to live with stocks.

http://www.myownadvisor.ca/learning-to-live-with-stocks/

The key for your portfolio should be - whatever your mix of fixed income and equities is - make sure it’s aligned to your investment objectives. Smart investors don’t take on any unnecessary risks because investing in tough enough. Beyond your savings rate and managing your taxes, there are just too many factors that are totally out of your control. I suggest you focus on what you can control:

  • make a sound plan,
  • get good products to fit within your plan,
  • diversify,
  • keep your investing costs low, and last but not least,
  • think and act long-term.

In my opinion that’s about as safe as it gets.