The investment landscape and investing opportunities for young Canadians over the last 20 years has been consistent: open a TFSA at 18 years old, invest in a mutual fund based on a quiz determining your risk tolerance and wait. Mutual funds, GICs and high-interest savings accounts have been used by generations of Canadians as safe haven investments; these strategies have worked well and continue to work well for many investors today. More recently, investors can benefit from exchange traded funds (ETFs), the newest and public market vehicle within the pool of turnkey investments for Canadians, although additional options do remain limited.
Finding and selecting additional options remains difficult particularly for Canadian retail investors who do not qualify as Accredited investors (AIs). Very few Canadians under the age of 30 will amass the financial assets or elevated salary needed to qualify as an Accredited Investor and gain access to longer-term higher risk investments. As capital markets modernize, so should investment options for young people.
The need for alternative investment options for young Canadians has never been greater with the current turmoil in public markets. Young retail investors have unique investment characteristics: with generally fewer commitments, responsibilities, and longer investment horizons, their risk profile is generally higher. These investors are not established professionals looking to primarily beat inflation or newly retired individuals who will liquidate assets in the near future; they are building their net worth for a far away future. Younger investors may be willing to explore additional investment options in order to target long-term returns and diversify their portfolio risk during bear markets.
The accessibility and innovation of the internet has led to great innovation in financial products and your access to investment opportunities. Namely, cryptocurrency and NFTs have become a constant topic of debate on early morning business talk shows. The arguments surrounding financial innovation can be tricky; spend one evening watching The Big Short detailing the destructive path of Collateralized Debt Obligations (CDOs) during the 2007-08 financial crisis to understand more. Despite these debates, one thing is certain: investors can finally benefit from new investment vehicles when selecting their investment strategy, as outlined below:
Non-fungible Tokens (NFTs)
The use of non-fungible tokens, better known as NFTs, has grown exponentially in the last few years. NFTs are proofs of ownership of digital assets, for example, the NBA TopShot collection are digital sports cards with embedded highlights that investors own the rights to. Access to NFT investments is quite easy since the asset class has been built upon the idea of digitization with access to the internet being the key resource needed.
NFT valuation is dependent on several factors that affect the asset’s volatility, which can cause severe price swings in short periods of time. As a result, NFT investments are considered to be high-risk, high reward. Similar to owning physical assets like pieces of art, NFTs can be both short or long term investments, depending on the investor’s strategy. Investors may be looking to quickly “flip” the assets for a return, or hold the NFTs long-term to not only enjoy the asset but also seek a long-term capital appreciation of it.
As the technology continues to develop, we may see an improved marketplace that offers investors a greater sense of stability with their assets and more investment opportunities to choose from.
Cryptocurrency, digital currency traded on online platforms, has piqued the interest of many young investors as they see the potential of a modern digital economy. This newfound interest does not always translate to real dollars being invested, as a recent survey found that only 13% of Canadians in the sample group own crypto assets despite 38% believing they play a key role in our economy (OSC, 2022). Accessibility to crypto investments may be difficult since investors may be worried about selecting a platform to make their investments, given the fact FTX, which handled over 1 billion dollars in transactions each day, recently collapsed (The Times, 2022).
Similar to NFTs, investments in the space offer younger generations a sense of instant gratification as returns can come quickly, as well as potential long-term gains as the asset class is still in its infancy. Although, with any conversation on cryptocurrency comes the plethora of concerns regarding extreme volatility and fraud. As a result, cryptocurrency is still considered to be a high risk asset.
The potential is there but will we see positive results for investors with new investment opportunities? Only time will tell.
Enter the private markets and invest in startups! Private market investments can include investments in private REITs, venture funds and investing in startups. The two former options are often reserved for Accredited Investors, making their accessibility difficult for young investors. Their management is often handled by experienced individuals, thus lowering risk levels and increasing the size of potential returns. Although, what good do they serve for young investors if many cannot gain access to them?
investing in startups allows investors to fund and become part owners in a company that holds the same values as them. Whether it be a firm aiming to reduce environmental impact, looking to solve our energy crisis or simply bettering a long-standing inefficient industry, private market investments allow investors to tangibly impact areas they want to see improvements in. Previously reserved for high net-worth individuals, this section of the private markets is now becoming accessible to all Canadians due to platforms like FrontFundr.
Canadians are offered the ability to fund exciting and innovative Canadian start-ups, who’s valuation is not directly tied to price sentiment and trading volume, like companies listed on public stock exchanges. Also, unlike traditional mutual fund investments, investments in the private market can generate potential high returns with much smaller investment amounts. With a long-term investment horizon and elevated risk appetites, investors may be able to grow their wealth with a new strategy. As Randy Kelly, the well-known CEO of the Montreal-based investment fund Formula Growth, once said, “Risk is low if you’ve done your work and you lengthen your time horizon.”
Exchange-Traded Funds (ETFs)
ETFs, often viewed as the rival to mutual funds, are pooled funds that are either actively managed to target specific returns or passively tracking indexes, industries or other assets. ETFs can be researched and purchased using practically any brokerage platform or application, making the asset class extremely easy to invest in.
Like mutual funds, ETFs offer young Canadians with long-term investment horizons the opportunity to grow their wealth over time with diversified and balanced holdings. The key difference between the two assets is the impressive cost savings achieved by ETFs, which was popularized in recent times by several Questrade commercials. As previously mentioned, ETFs remain the riskiest assets within the category of safe haven investments, making them an attractive option for young Canadians.
By eliminating the risk of investing in a single stock and lowering investor fees, ETFs are certainly becoming an important investment vehicle for younger generations.
As financial innovation and the democratization of private markets is achieved, new investment opportunity of additional diversification for retail Canadian investors is created. A well-balanced portfolio, spread across different industries, as well as different markets, both public and private, is an achievable target all young Canadians should seek to reach. Investors may finally have a solution to the dilemma of achieving adequate returns and lowering portfolio risk during market downturns.