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Maybe you’ve just moved to Canada, or just turned 18, and you can now start a Tax Free Savings Account.
Maybe you’ve just got your first full-time job and are looking at a Registered Retirement Savings Scheme to save on taxes.
Or perhaps you are considering buying a home and using the First Home Savings Account. Either way, you may be wondering how to start investing.
Understandably, it can be difficult to know what to buy when you’re new to investing. This is my favorite index fund that makes it easy for anyone, even if you have no investment experience, to get started.
Why an index fund?
Your main aim should be to grow your wealth gradually over time, aiming to keep up with the market rather than trying to outdo it. It is essential that your investments are well diversified, which means spreading them across different areas:
- 11 sectors: Your investments should cover a range of sectors, such as technology, healthcare, finance, consumer goods, and energy. This ensures that you don’t put all your eggs in one basket, as different sectors react differently to changes in the market.
- Geographical regions: A mix of investments from the US, developed countries (such as Germany, Australia and Japan), and emerging markets (such as China, India and Brazil) can help balance your portfolio. Different regions can grow at different rates, offering protection against local decline.
- Market caps: Including companies of different sizes, from large-caps (large, stable companies) to mid-caps (medium-sized companies with growth potential) and small-caps (smaller companies with growth potential and higher risk), helps ensure that your portfolio contain a wide range. of investment opportunities.
- Weighting: Market cap weighting in an index fund means that larger companies have a greater impact on your investment’s performance, aligning your results more closely with broader market trends.
Trying to manually pick stocks that meet all these criteria can be time consuming and expensive. An index fund simplifies this process, offering a diversified portfolio with just one investment.
My favorite index fund
If you are just starting out, I suggest Vanguard FTSE Global All Cap ex Canada ETF Index (TSX: VXC) for starters. It’s an exchange-traded fund (ETF), which means you can buy its shares just like you would any company’s stock through your brokerage app.
When you invest in VXC, your money goes into a mix of four Vanguard ETFs, giving you broad exposure to US stocks, developed markets outside the US, and emerging markets. Together, this fund provides access to more than 11,400 global stocks, offering a wide range of investment opportunities.
What is very appealing about VXC is its cost-effectiveness. The management expense ratio (MER) is only 0.22% per annum. To put it into perspective, investing $10,000 in VXC would result in annual fees of about $22.
However, VXC deliberately omits Canadian stocks. I think this is a good feature, as you can complement it with a few Canadian stock collections to scratch that itch. Consider making VXC, say, 90% of your portfolio while picking a few top Canadian dividend stocks (and the Fool has some excellent tips below!)
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