Wednesday, April 2, 2014

Index Fund Investing

There are a lot of options out there when it comes to investing your money. The RRSP deadline has recently passed and those of us who have contributed to our RRSP's were probably bombarded by a ton of choices. Index funds are your best choice when it comes to keeping investment costs and portfolio turnover low, which is the key to investment success.

 A good example of an index fund portfolio is to own three indices:
  1. Candian Bond Index
  2. TSX Composite Index
  3. Dow Jones Industrial Index
The amount you allocate to each will depend on a few factors such as your risk tolerance and your time horizon for your investment. More weight should be towards bonds and less to equities (stocks) if you are risk adverse or if the money is needed relatively soon. A rule of thumb is to use your age as the percent allocated to bonds, i.e. the younger you are the more you should have invested in riskier (potentially more rewarding) equities.

The key is once you've chosen your allocation, you rebalance your portfolio no more than once a year to maintain the same allocation (thus forcing you to buy low and sell high). As your portfolio grows in size it may be advisable to add a few more indices such as a European Index or Japanese Index, this will add another level of diversification to your portfolio and a few more asset classes to rebalance.

Just watch this short video and hopefully you'll agree that index funds are the way to go: