One of the most frequent questions, aside from bitcoin and marijuana addressed in last week’s blog, is how to get started with a small portfolio. In the CBC Radio interview I referred to the success of our two sons, who started back in 2010 at the ages of 13 and 16, with the princely sums of $1,953 and $4,933. They had earned most of this money from refereeing both lacrosse and hockey, which they also played. As an aside, refereeing is a great way for kids to learn responsibility and earns them a nice paycheck too. Prior to starting stock accounts we were in the habit of going to the bank on a yearly basis and re-signing their Guaranteed Investment Certificates (GICs) with the paltry 0.5 or 1.0 percent interest. In 2010 I asked them if they wanted to switch to stocks, earn a much better return, and learn a lot about business along the way. They both agreed. Initially these were set up as in-trust accounts, but switched to Tax Free Savings Accounts (TFSAs) when they turned 18.
What is the best way to invest these smaller amounts with an eye to building significant portfolios over time? I think the best way to start is with larger conservative companies. Conventional wisdom (something I often consider an oxymoron) would suggest that younger investors have lots of time to recover lost funds and should take a very aggressive approach with higher risk, higher growth (almost speculative) companies. I disagree. Regardless of the age of investor, I think any new stock investor should start with the highest quality companies. One of the most important things when starting out is to gain confidence and knowledge. When someone starts with high risk stocks and loses, they often give up on the market altogether. The markets tremendous wealth creation capabilities with average annual returns of 10%, is not something to give up on. It is best to start with stocks that have a high probability of success, and watch the dividends roll in. With success come’s confidence and the potential of adding more adventure at a later date.
How should these smaller portfolios be structured? I will make the following suggestions for small portfolios based on their size. These suggestions could be applicable for TFSA, RRSP (Registered Retirement Saving’s Plan) or a taxable account. As portfolios get larger, I suggest managing them differently in light of differing tax considerations, but to start there is less need for these nuances. (To save space I will use the ticker symbol for company’s name and we own all the companies noted)
For Portfolios from $2,000 to $5,000
- Canadian Bank: 40% of portfolio. TD, RY and BNS have been my longest holdings and CM is currently the best value. There isn’t much difference so pick your favorite, maybe whichever one you bank at. The large Canadian banks have been very reliable performers, with good dividends.
- Telecom: 30% of portfolio. The big three in Canada are BCE, RCI.B and T (TELUS). I own all three in different portfolios.
- Electric Utility: 30% of portfolio. My two favorite in Canada are ACO.X and FTS, and again I own both so just pick one. ACO.X has broader diversification.
For Portfolios from $5,000 to $15,000, layer in Pipeline, Insurance and Transportation
- Canadian Bank: 25%
- Telecom: 15%
- Electric Utility: 15%
- Pipeline: 15% of portfolio. The biggest in Canada are TRP and ENB. Their prices have come down lately and look like pretty good value. Again, I own both in different portfolios so don’t really have a bias to which is better.
- Transportation: 15% of portfolio. Canada has two big railroads, CN and CP. I own CN and not CP, but there’s not much to split the difference.
- Insurance Company: 15% of portfolio. The big three in Canada are SLF, MFC and POW. I own all three in different portfolios and think POW is currently the best value but again, it doesn’t matter too much which one you pick.
For Portfolios from $15,000 to $50,000, layer in Foreign through Health, Consumer, Technology and Manufacturing
- Canadian Bank: 15%
- Telecom: 11%
- Electric Utility: 8%
- Pipeline: 8%
- Transportation: 8%
- Insurance: 8%
- Foreign Health: 8% of portfolio. The most blue chip health care company is US based JNJ, with consumer brands, prescription medicine and medical devices.
- Foreign Technology: 8% of portfolio. GOOGL is US based and could be a good choice.
- Foreign Consumer: 8% of portfolio. UL (Unilever) is UK based. It owns many well-known consumer brands, and derives a lot of business from developing countries.
- Foreign Manufacturing: 8% of portfolio. PNR (Pentair) is a UK based, water focused industrial company.
As the portfolio builds you continue to add diversification from other sectors and internationally. My book details a full TFSA model, RRSP model and an actual regular taxable portfolio. As portfolios grow, smaller companies and other sectors continue to be integrated.
I can’t emphasize enough the ability to start small and build over time. The annual gains of our youngest son have been: 10.1%, 7.1%, 5.2%, 8.7%, 18.5%, 11.1%, 18.2% and 11.3%. Today at 21, he has a TFSA of $32,000, almost double the invested capital. We paid for the essential parts of his education while he foots the bill for extra-curricular activities, so has been able to save a lot of his summer earnings to add to the TFSA. Our eldest, at 24, has a TFSA worth $70,000. Investing in stocks is not a rich persons game, but if done correctly will help anyone build financial security.