So we've discussed index funds and the tax free-savings account, but here is where the magic comes together - you can combine them!
The easiest way of doing so will be by opening a TFSA with TD Canada Trust and purchasing e-series yourself directly online. The slightly more complicated way of doing so will be opening an account with a discount broker and purchasing ETFs (if you haven't read our post on comparing these two options, click here). For youth investors, the best option will likely be the TD route - and we recommend it for its simplicity and effectiveness. Let's discuss how you can go about doing so and what the benefits are.
How to open a TD Canada Trust e-series account
To open an investment account you will need to meet with a TD representative. To do this, you can call or visit your local branch and set up a meeting time (don't worry this is all free, and so is opening the account). You will simply need to explain to the TD representative that you wish to open a TFSA for purchasing Index funds. It is quite likely that they may advise you to purchase other products such as much more expensive mutual funds. Don't be put off by this they are simply doing their job of trying to get customers to buy more expensive products and are not insistent. It's very possible your TD representative may never have even heard of e-series! This is because in order to keep the costs (MER) of e-series low, investment advisors will typically not be trained to sell e-series (training costs money). This is also why you can only purchase e-series online (no phone service option). Don’t worry though, purchasing these online is very easy.
When you open an account, you will need to make your initial deposit of $100 minimum. If you can afford it, I would recommend making a deposit of $1,000 or more for the sake of purchasing multiple e-series. This is because the minimum purchase amount for an e-series fund is $100. Remember that this is a TFSA so you are capped as to how much you contribute to this account! If you already have a checking account with TD, they will be able to make an easy direct transfer for you. If this is the first account you open with TD, the easiest ways to make your deposit can be either by cash or by writing a cheque to yourself (from some other bank account). Once your account is opened, it may take a few days for your funds to be available to trade, then you will be ready to begin investing!
Steps overview:
1. Set up a meeting with TD representative to open a TFSA for purchasing e-series
2. Open your account
3. Transfer funds
4. Decide how you wish to balance your investments
5. Place orders
It used to be much more of a hassle to open an account to purchase e-series but with the implementation of TFSAs in the last few years, it's never been easier.
Advantages of using a TD TFSA with e-series
- Easy to open an account
- Easy to manage an account
- No fees for purchasing or selling e-series
- Minimum deposit of only $100 to open an account
- Cheapest index funds directly available to Canadians
- Pre-authorize payment plan option
- Easy way to have very strong diversification in investments
- DRIP program available
The reason why I find combining a TFSA and e-series to be optimal for youth is that it's simple and effective. It is the cheapest way for youth to get into the market with an opportunity to achieve better returns than fix investments while having much lower variance, risk and work requirement than investing in individual stocks. Ideally with an index portfolio, you are continually adding to your investments allowing them to compound. This is very difficult to do if you have a small sum to invest and must pay hefty transaction fees. Furthermore, investing in indexes takes very little time and effort. If you so wish, you could simply add money to your TFSA once a year and rebalance your portfolio - more on what this means down below!
Note that there is a minimum holding period of 30 days with e-series, if you sell before the end of this period you will receive a penalty. One the other hand, if you had 50 units of some e-series for over 3 months and had bought 5 more units last month, you would still be able to sell off 50 units with no penalty.
To expand on the DRIP program, in another post when discussing common stocks (link), we mentioned some companies pay dividends (direct sharing of profit with investors). When you purchase an index, the fund receives dividends from some of the companies it holds. For example, TDB 900 - Canadian Stock Index, currently has top holdings of three major Canadian banks: RBC, TD and Scotia Bank which all pay dividends (4.6%, 3.94 and 5.16% respectively, at the time of this writing). As an owner of an index fund you get to share in these dividends as a function of how much of the fund you own. DRIP stands for Dividend ReInvestment Plan and means that when you receive dividends, they are automatically reinvested into more index units (post on dividends and DRIPs coming soon!). In terms of the pre-authorize payment plan, TD allows automatic purchasing of Index with a minimum amount of $25, making it even easier to continually contribute to your investment account. While this service may be less relevant to youth investors, it's still a great option to have.
How to begin investing in e-series
Great, you now have an account with TD and are ready to begin investing! so what now? It's time to discuss balancing. You will need to decide which e-series you wish to purchase and in what quantities. This can be as simple as you wish. Here is a list of all the e-series available:
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| TD e-series (link) |
To get started you can begin with a portfolio that consists of 1) Canadian stocks, 2) Canadian bonds, 3) U.S. Stocks and 4) International stocks (Non-North American). This would provide with a very diversified portfolio. This would also be one of the more common index strategies to take, if you wish to follow it, here are the potential corresponding tickers:
TD Canada Bond Index - e (TDB909)
TD Canadian Index - e (TDB900)
TD International Index (TDB905)
TD U.S. Index - e (TDB902)
The U.S. Index (TDB902) here tracks the S&P 500, if you wished to purchase one that tracks Nasdaq (TDB908) that would also be an option.
Now that we've decided which indexes to wish to purchase, we need to know how much of each. This again comes down to a personal option. Having greater ownership in stock indexes is associated with greater variance (higher risk, but greater potential rewards) than bond indexes (lower risk, but less potential rewards). Generally speaking, the younger you are, the more aggressive you should be with your index portfolio as you can stand to take a slightly greatest risk for more reward since your investments are likely not your complete retirement fund (you have time to ride out market lows).
Recommendation for portfolio allocation for an investor in their 20s*:
10-25% - Canadian Bond Index
25-30% - Canadian Stock Index
25-30% - U.S. Stock Index
25-30% - International stock Index
Every year you can rebalance your portfolio to your original percentage allocation. If you're contributing fresh money to your investments, that money can be used to rebalance. If that is not the case, or the amount you are adding is not enough, you can sell from the best-performing index to purchase more of the worst-performing (following the buy-low, sell-high principle).
The purpose of diversification is to lower variance. By investing in Index funds as opposed to individual stocks, you are already massively reducing variance. So how much does your allocation really matter? We will discuss portfolio performance in an upcoming article. The take away message about balancing is that over a large enough sample size (many years) your allocations will likely not make a huge difference. On the other hand, having a greater bond exposure will reduce the volatility of extreme lows and highs. Therefore you will have fewer swings on a shorter sample size and at the end will likely experience slightly lower returns (at least this is what has been seen so far).
Ideally when approaching index investing, you have little care to what is actually happening in the market day-to-day. Given how highly diversified you are, short-term market swings will have little impacts on your portfolio. This also highlights a benefit of investing in indexes, you are never trying to predict market trends. By always purchasing/rebalancing, you remain versatile and flexible to external market dynamics that you simply cannot account for. This is a major benefit as opposed to investing in individual stocks where you typically have to do a lot of research and up-keeping work to keep an eye out on your investments. Furthermore, because the swings are lower in an index portfolio (and you are heavily diversified), it is easy to have little emotions towards your investments. It is easy to panic and sell off a stock at a loss after seeing it drop double digit percentages in just a few days. If anything hearing of market crashes is beneficial to long term index investors as it allows to buy more at a lower price! Also note that by having a DRIP program in place, you are automatically purchasing some small amount every year. The three stock indexes mentioned (Canadian, American, international) pay dividends out yearly, while the Bond index pays out monthly.
Lots more articles coming soon expanding on these topics!
Here are some of our other articles on similar topics:
Choosing an Index Portfolio Model
The Power of Time (and why you should start investing now)
The Tax-Free Savings Account (TFSA)
-Yinvestors.
For more information regarding e-series, here is the link to TD's e-series page. Please note I do not work for nor do I receive anything from TD for recommending their product. I recommend e-series purely because they are currently the cheapest Indexes in Canada and I find TD provides a trading and managing platform that is very user-friendly.
keywords: tfsa, tax-free savings account, index investing, e-series, stock index, bond index, DRIP, dividend reinvestment plan, best Canadian index, index funds Canada, tfsa advantages, index funds benefits
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