Good day;

Canadian here, 23.

I'm looking to place money (at a rate of 100$-200$ per month) into savings, for 5 years (locked or not).

I don't have a "specific" plan in 5 years. I just need to have this money do something and not sit around doing nothing.

  • What's most beneficial investment/placement I could consider placing this in?
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    This question is challenging to answer, since risk and reward are essentially linked (unless the market is inefficient and you have some sort of proprietary way to predict the future more accurately than anyone else). – dwizum Sep 20 '19 at 13:25
  • Could you elaborate on why '5 years' is your chosen timeline? – Grade 'Eh' Bacon Sep 20 '19 at 13:40
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    The problem with your question is that everyone is looking for low risk, high reward investments. – RonJohn Sep 20 '19 at 13:52
  • First, pick the risk level, then you can generally find a more useful list of options. For instance, if you want minimum possible risk of loss (insured in a way that no one or nearly no one has lost money from investing in it) you'll maybe get 2-3% annual returns, and that's it. You can only get more returns from accepting risk of potential losses - or, well, corrupt government policy, but you can't buy in to those kinds of things without many millions to invest :) – BrianH Sep 20 '19 at 14:40
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    The lowest risk is stuffing your cash into a mattress. The highest reward is going to the casino and betting everything on black. You can't optimize both simultaneously. – Nuclear Wang Sep 20 '19 at 14:57

You are asking two opposite things. You might as well ask to purchase a store's finest, cheapest cigars. Or to put it another way, the bluest-reddest car you can get, is purple. But is that what you want?

The question is, which do you care about? Low risk, or high reward? Be warned that anyone telling you you'll get both, is deceiving you.

First make sure you understand why you are saying 5 years - is that when you expect to, for example, buy a house, or pay for university? The more concrete your 5-years goal, the less risk you should take for your investments. Over that time frame, for example, I would not suggest you to invest in any equity / stocks, because a market dip could hurt your ability to do whatever it is that is going to happen in 5 years.

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    A purple car is neither blue nor red enough for me. How can I get a car that's more blue, but also more red? – Nat Sep 20 '19 at 22:25
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    @Nat one could imagine an anti-green car that would destructively interfere with any near-green wavelengths in its vicinity. – MooseBoys Sep 21 '19 at 0:43

Specific recommendations are off-topic, so I'll answer generally (your question will likely be closed unless you generalize it more).

Those goals are diametrically opposed. So which do you want more - low risk or high reward?

In general, the riskier the investment, the more investors want to be compensated for taking that risk, so the more return they expect. Conversely, the safer an investment, the more return investors are willing to give up. So individual investors generally find a level of risk that they are comfortable with, and find investments that give them the highest returns with that level of risk.

Diversification also lowers risk (but reduces reward), so investing in multiple things (not necessarily the one "best") can be effective as well. Index funds do this for you. But even index funds have various levels of risk and reward.

If you want the highest expected reward per unit of risk, then one measure to look at is the Sharpe Ratio. It's the ratio of expected market return (above risk-free) to the standard deviation of returns (risk). Some brokers will publish a number for you. which is handy. If they don't, then it's either up o you to calculate it (which is tedious but not hard) or to use other measures. Morningstar, for example, has sliders for both risk and return for many mutual funds. You can fairly easily compare two funds to see if one has a higher return, lower risk, or both.

Finally, if you have any debt to pay off, then you could look at paying off the debt as risk free return, since you save the interest rate going forward with no risk of it changing. So that is often the best trade-off of risk and reward that you can find, especially if you are risk-averse.

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Everyone is arguing that low risk/high reward is impossible, but that's not technically correct. It depends on what you mean by 'risk'.

I would define risk as being when your investment loses value and you never get that money back e.g. you invest in a company that goes out of business rendering your investment worthless. Conversely, if an investment goes down in value temporarily and then eventually recovers and ends up gaining in value I wouldn't refer to that as 'risk'. However, if you have a gun to your head at the end of 5 years where you absolutely have to pull your money out of your investment then the two types of risk essentially operate the same in that if the market is down and you pull your money out it doesn't matter to you whether your imaginary investment eventually recovers its value. However, if you have wiggle room and can leave your money invested if the market is down then you can invest in a low-risk (in that it will eventually gain in value), and high reward (in that it has beaten almost every managed fund over the long-term) investment. That investment is full stock market index funds (VTSAX or VTI) which have a track record of earning 10% on average and the only way for them to permanently go down is if the whole stock market collapses. Essentially what it means is you own a tiny piece of every US based company, so as the economy improves your investment grows.

If however, you are a nervous investor and absolutely have to pull your money out of your investment at the end of a 5 year period, or you panic every time the stock market takes a dip I'd recommend something like a Money Market fund. This will earn you 2-3% per year and it can never lose value. It's essentially just a super charged savings account.

For more information on index funds and investing I would recommend:

The Canadian Couch Potato Guide to Investing

Mr. Money Mustache

JL Collins stock series

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  • Well, to be clear, what is impossible is the 'lowest risk + highest reward'. One will need to be sacrificed for the other. – Grade 'Eh' Bacon Sep 20 '19 at 19:41
  • @Grade 'Eh' Bacon Sure, but it's not a 1:1 tradeoff between risk and reward. Index funds represent the best bet on average. If that wasn't the case then managed funds would routinely beat index funds, which they don't. youtube.com/watch?v=fvGLnthJDsg – Dugan Sep 21 '19 at 14:36

The obvious answer to a five-year time frame with a small amount of money is to buy five-year call options on a stock index. But in five years time the investment could see both a pull-back and a recovery so that is significant risk.

A better answer is to buy long-term call options on companies that have particular prospects. For instance, a pharmaceutical company waiting on a pharmaceutical approval has a particular prospect. But this situation is a diversification risk.

However, the options represent a fixed and limited amount of possible loss.

Another answer is to buy your own currency as leveraged against a near zero-yielding currency and earn carry-over interest on the leveraged amount. Obviously, there is significant risk but the carry-over interest will tend to mitigate the position fluctuation over long periods of time. Of course some amount of excess margin deposit is needed to completely cover position fluctuation.

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I just need to have this money do something and not sit around doing nothing.

Perfectly understandable. I'd consider a mutual fund with "low volatility, high dividend" stocks.

These were traditionally called Widows-and-Orphans stocks.

Naturally, any investment is subject to market forces, so if the market dives in four years, the value of your fund will sink. However, low volatility, high dividend stocks typically don't fall as far, and recover quicker. OTOH, your the prices don't increase as quickly in good times.

And, of course, there are always good old GICs. Google "high yield GICs".

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    One should keep in mind such funds look at the volatility and dividends of the past, not the future. There are a number of ways you can evaluate just those 2 factors of different stocks, and there are also many other factors which could tell you as much, or more, about future performance. Giving a blanket recommendation for such funds ignores many of the nuances and risks of investing. – NotThatGuy Sep 20 '19 at 21:53
  • @NotThatGuy "ignores many of the nuances and risks of investing" such as "Naturally, any investment is subject to market forces"? The guy's a young newbie who doesn't look like he wants to become an expert. – RonJohn Sep 20 '19 at 22:56
  • I'm not following. I said many nuances; what you mentioned is only one small part of that. There are different funds for different needs (OP didn't go into much detail about what they want). How competently a fund is managed and the fee structure significantly affects performance (more so with a mutual fund than an ETF, although "low volatility, high dividend" is probably more typically an ETF). More important than all of that is having a solid understanding of finances and doing financial planning. These things are not just for experts, but for everyone who ever gets any money. – NotThatGuy Sep 21 '19 at 1:53
  • @NotThatGuy if the goals are #1 better yields that a CD/GIC, #2 minimized -- but not eliminated -- risk, and #3 having other things to do in life, then the Standard Answer has always been Widows and Orphans Stocks, and that's what I suggested. – RonJohn Sep 21 '19 at 2:10

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