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Paying off your debt is important. Having a solid budget is important too. However, if you don’t invest a part of your money, you will always be chasing your tail to manage your budget and pay off those debts. Why? Because investments have the capacity to grow much faster than your debt repayment schedule or your savings ability. Why is that? Call it the power of compounding interest!
I’ll actually discuss the power of compounding interest in another article as this is a little bit more complex to explain. However, just keep in mind that your investments have the ability to grow much faster than anything else you can own when it comes to personal finance. This is why it is so important to start investing at a early age.
Knowing that you have to invest at a young age is good, but knowing which investment type to start with is much better! So how do you start investing? Which investment products are best? I made a quick reference table to help you determine which kind of investment products you should buy:
Mutual Fund Exchange Traded Fund (ETF) Stocks
Management fees Deadly Minimal None!?!
Ease of trading on a short term notice Good luck Fast as a flash In a heartbeat
Level of diversification Amazing Alice in Wonderland Concentrated as orange juice
Level of knowledge required For newbies You better know what you are doing, son Warren Buffett level ;-)
Ease of evaluating your yield Are you crazy? As clear as spring water If you know how a calculator works, yes
Yield potential Linked to global market Linked to a sector Linked to a single company
Ease to invest a small amount of money Anyone can participate Fees will eat up your yield! 1 share of Google cost more than $500, any other questions?
In this table, I have outlined 3 types of investments; mutual funds, ETF’s and pure stocks. As you can see, they each have their strengths and weaknesses.
In my opinion, beginner investors should start with mutual funds. They are more costly in term of fees but they surely are more diversified and easier to trade than ETFs and stocks which are traded directly on the stock market.
Mutual funds are usually sold by financial advisor who should help beginner investors make the right decisions and will also make sure they are diversified enough.
Even though I am not a beginner investor, I still have mutual funds in my portfolio. I choose to trade index mutual funds because they are low in fees and can be traded with a smaller amount of money. Since I am investing periodically, this is the only way I can invest directly in the market without being eaten alive by trading fees.
On the other hand, I also trade a few stocks for pleasure. I have always liked trading and I am doing all right so far 
.
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There is one more option that allow an investor to invest smaller amounts regularly at no fees. Derek Foster discusses it in his Lazy Investor book. Basically, you buy a share of a company you want to invest in; usually a solid blue chip company like a Bank. You will need to get a share certificate and register it with the transfer agent. Once you are all setup, you can send post-dated cheques to the transfer agent on a monthly or quaterly basis. Most of these companies pay dividends and also track your shares as fractions (just like mutual funds).
It’s actually quite powerful as you get regular investment for a dollar cost averaging of your investment and you get compound growth through re-invested dividend. All of it for a total fee of practically zero (only fee is getting the share certificate).
There are actually groups that will exchange shares to accelerate the setup and reduce the entry costs.
@ Passive Income Earner,
It is true that you can buy share certificate. However, the cost of transaction is bigger than you may think and will hurt since your share doesn’t worth much.
Don’t forget that you will have entry cost but also selling cost. Also, you better have a safe because if you lose your certificate, it will be quite an adventure to get it back!
Therefore, you will have to keep your certificate for a very long time in order to make money.