Reader Mail: Early 20’s, How Do I Invest $20k or Less?

After the last post on helping a reader on how to invest $30,000, I’ve received a number of emails asking for advice on investing.  The reader mail that I’m going to answer today is along the same theme as the last, but this time the age range is on the younger side, and also a little more open-ended.

Reader Mail

Here is the question from a father on behalf of his two adult children who are looking to start their investing journey.

First off, you’re a godsend!

Now then, I have two adult children, one 23 and the other 19. Both students @ Univ.

The older daughter, has 23k in a super saver, and the rest in chequing (7k) – doing nothing. My son just started accumulating monies and now stands at 7k in chequing.

They both want to invest badly. I’d suggested ETF/DIVIDEND type investing. GIC as well.

To keep this short, what say you, sir?

Compound Interest

Have I ever told you that I love hearing from young people who want to start investing?  They have the power of time which is one of the magical ingredients behind compounding returns.

Helping young people with finances is one of my favorites because they have the huge advantage of time.

If you read my “Power of Compounding Returns” article, the article demonstrates that the serious investment returns occur not only with the right strategy, but also the amount of time that you stay invested. When they say “stay invested for the long term”, the reason is that compound interest really kicks in by the 20-year mark.

Assuming 7% returns, by year 20, annual market returns start to overtake the total cumulative TFSA contribution amounts (yes all contributions over the 20 years). By year 30, annual market returns are double total contributions. By year 40, market returns are 4x contributions. By year 50, market returns are 7x contributions and year 60, 12x contributions. Compounding really takes off with an exponential curve that will look like a vertical slope if you give it enough time.

The greater your market return, the greater the power of compound interest. If you manage to increase your return by a percentage point (think lowering your MER), your compound interest works harder and will show significant results after 20-30 years. See this post for more details.

All about Risk

In the last article, I started off with talking about risk.  Since the two adult children have a very long investment time frame, I’m going to go out on a limb and assume that they are ok taking a bit more risk because they have the luxury of time to make up for any bear markets.

As a backgrounder, let’s define risk:

The market defines risk as volatility in the market, in other words, how much returns go up and down every year.  Some years can be up (like since 2009), or you could get some years that can be down (like in 2008).  However, that is short-term thinking.  Over the long-term, or any 20 year period, the stock market has gone up.

So in knowing that the market goes up over the long-term, is there any real risk over the short term?  With the long-term in mind, corrections and bear markets are now an opportunity to buy assets at a lower price.  Seeing an opportunity when everyone else is running for the hills (ie. selling) can be a real paradigm shift for some, even for some of the most seasoned investors.

Having said that, there is a risk to investors with shorter timelines to retirement where they will need to start spending from their investments.  In this case, volatility matters because withdrawing large amounts during a bear market can be harmful to a portfolio.  As investors get closer to retirement, asset allocation matters.

Taking on more risk from an investment perspective means taking on a higher percentage of equities in your portfolio.  For very young people, like people in their early 20’s, I’d suggest either 100% equities or a 75% equities/25% bonds portfolio.  More on the investments below.

Investment Options

As you can see from the email, the daughter has about $23k in her savings account and is considered a super saver. The son, who is four years younger, already has $7k saved.  I can tell already that both children will accumulate significant assets if they maintain these savings habits throughout their life.

Look at us, we graduated university with tens of thousands in debt combined. Whoosh – 15 years later (it goes by quickly!) we now have over $1M invested in the stock market.  All of this through the simple strategy of saving and investing with a focus on the long-term.

In this case,

  • First, I would suggest opening a TFSA investment account (a comparison of TFSA discount brokers).  I treat TFSAs as long-term investment accounts due to the ability to grow your investments tax-free.  Compounding can really help a portfolio take off when it doesn’t have a tax drag.  Also, being so young in their careers, they have plenty of time to start an RRSP at a later time when their income and income taxes increase.
  • Second, I recommend an easy indexed portfolio with an asset allocation that fits their risk profile (easy ways to index your portfolio).  More on this below.

The Investments

The reader mentions that he would like to use ETFs which I think is a great idea.  They are the lowest cost option out there, especially if you open a TFSA with a discount broker that offers commission-free ETFs.  That way, you can buy ETFs over the long-term with new savings without paying any trading commissions (we do this with my wife’s portfolio).

There are a number of ways to build a diversified index ETF portfolio, but I like to keep it simple.

If the young investor is comfortable with risk and willing to go 100% equities, I would build something like this:

  • Canadian Equity: iShares Core S&P/TSX Capped Composite Index ETF (XIC): 25%
  • US/International Equity:  iShares Core MSCI All Country World ex Canada Index ETF (XAW): 75%

With new savings every year, you would rebalance back to the percentages indicated above.

A two ETF solution is pretty simple, but what if it could get even simpler?  Vanguard has introduced all-in-one ETFs that give Canadian investors global diversification for a relatively low management expense ratio.  There are three options:

  1. VCNS – 40% equity/ 60% fixed income
  2. VBAL – 60% equity/ 40% fixed income
  3. VGRO – 80% equity / 20% fixed income

The only thing is that these ETFs do not have a 100% equities option, so a young investor would have to make due with 80% equities and 20% bonds.  VGRO offers proper global diversification and some fixed income to help smooth out the market volatility.

Vanguard Growth ETF Portfolio (VGRO – 80% equity/ 20% fixed income)

  • 29.9% Vanguard US Total Market Index ETF
  • 23.8% Vanguard FTSE Canada All Cap Index ETF
  • 19.9% Vanguard FTSE Developed All Cap EX North America Index ETF
  • 11.9% Vanguard Canadian Aggregate Bond Index ETF
  • 6.1% Vanguard FTSE Emerging Markets All Cap Index ETF
  • 4.8% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
  • 3.6% Vanguard US Aggregate Bond Index ETF CAD-hedged

The biggest upside is that the investor does not need to rebalance – ever!  Simply keep buying the ETF with new money, and Vanguard will take care of the rest.  Heck, you won’t even need to pay a trading commission if you pick the right discount broker.  The more robotic and boring you make investing, the more success you will likely have.

Final Thoughts

There you have it a fairly straightforward way for young people to build wealth over the long-term. The earlier you start, the more you harness the magical power of compounding.

In addition to keeping an eye on the long-term, investing can be simple!  You can essentially build a globally diversified portfolio with a single ETF.

It’s as easy as 1-2-3:

  1. Open a discount brokerage account that allows for commission-free ETF trading (TFSA or RRSP or other tax-deferred account).
  2. Purchase one of the Vanguard all-in-one ETFs that suit your risk profile.
  3. Keep buying that ETF with new savings (hint: try to max out your TFSA annually).

Give yourself 15-20 years and you’re well on your way to a comfortable (possibly early) retirement.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Emma S
3 years ago

Balancing risk and return on investment can be daunting; especially when one is relatively new to investing.

Interesting read.

3 years ago

If someone is in their 20s, why not take some additional risk and buy some individual stocks?

Linda Rocco
3 years ago

Horizon is jumping in the “all-in-one” ETF bandwagon with HCNS and HBAL (

HCNS is 50% FI – 50% Eq while HBAL is 30% FI – 70% Eq. A worthwhile different to Vangard’s is the tax efficiency is taxable accounts, the lack of distributions to reinvest and the smaller allocation of Canadian Equity.

David Marsden
3 years ago

I am a great fan of ETF’s. A question: the Canadian market is only 5% of the world economy so why invest 35% in Canadian products as per VRGO?
Many advisors point out the fact that Canadians tend to over-invest in Canada. Your thoughts?

3 years ago
Reply to  David Marsden

I agree. Wanted to do VGRO (TFSA) but more US involved and less Canada.

Anything like a VGRO all in one, but less Canada?

Not really feeling Horizon.

3 years ago

Great advice. Since they are so young and have already invested in their education I would consider doing 100% equities. If they don’t need their money for the next five years historical yields would suggest investing in equity.
Congratulations guys! Keep up the saving rate