(Photo courtesy of Pexels) This was the fourth column in my series for Grainews. There are many reasons to diversify outside of the country. My first three columns have covered a lot of ground, but there is more to cover. The stock market presents endless […]
My book, STOCKS for FUN and PROFIT ~ Adventures of an Amateur Investor, has been out since early November and I thought it would be great to hear from readers, your thoughts of the book and blogs so far. It has at times been the […]
I recently became a contributing columnist for Grainews, a leading agricultural magazine. My profession is agriculture, so it is an honour to be able to write a column on off-farm investing for the agricultural community. I thought I would share the first article here. Tax-Free […]
I am about to once again question one of the sacred beliefs of many market participants and pundits. It is my belief that market level is not important to our success investing in it. What? That doesn’t make any sense, does it?
Here is my simple thought process, which I have followed through the years. If:
- Nobody can predict when a change in market direction will occur, with any level of consistency (please review blog titled “Making Money is More Important than Making Predictions”), and
- The market returns on average 10% per year, then…
WHY would one not always stay fully invested? I have always been fully invested, letting dividends accumulate and buying extra stock with them, often after a dip such as recently occurred. I don’t try to predict when those dips might occur, but take advantage of them when they do. Being fully invested has earned me almost 12% annual growth rate for 25 years. It also saves me the sport of constantly second guessing previous decisions and leads to higher and more stress free returns.
It is my premise that there is always value, somewhere in the market. When overall market levels are high there are more over-valued stocks than under-valued ones, and when markets are low there are more under-valued than over-valued, but there is always some of each.
Let me illustrate. From 1995 to 1999 the market was in the grips of the dot.com speculative era. The US market in particular became extremely distorted with speculative stocks appreciating astronomically, while real companies making real profits languished. The US S&P 500 index was up 37.5% in 1995, 22.9% in 1996, 33.3% in 1997, 28.6% in 1998 and 21.0% in 1999. This ushered in the 2000-2002 bear market, and dot.com crash. In 2000 the US market was down 9.1% and the Canadian market (TSX) was up 9.3%. My RRSP, which is a combination of CAD and USD, was up 18.1%. In 2001, the US market was down 11.8% and the TSX was down 15.1%, yet my RRSP was up 4.2%, and in the last year of that long difficult bear market, the US market was down 22.1% while the TSX was down 13.7%. My RRSP portfolio finally succumbed to the bear, but was down a very modest 3.4%.
How did I do so much better than the market during this difficult period? As mentioned, the market was taken over by speculators, and speculative companies went parabolic. I am an investor, not a speculator, and found lots of real companies making real money that were undervalued. This era was prior to watching 24/7 updates on websites. We relied on the evening news and the morning newspaper stock charts. When the evening news had headlines that NORTEL (the most infamous Canadian speculative company) was down another five percent, and the US Nasdaq technology index was down, I grew excited as normally that meant I had a good day. The next morning stock charts usually confirmed my suspicions. When speculators got tired of losing money on their speculations, they would switch to true investments (real companies making real money) and these companies would go up.
Today’s market doesn’t come close to the distortions of that era, but I still find decent value amongst the solid money making companies like our banks and the other companies mentioned in “Start Small, Gain Confidence and Prosper.”
What I am writing would be quite controversial but in reality, overall market level will have very little to do with our success as an investor in it. The newswires are constantly talking about the endless bull market, and how high stocks are. While the US market has done well the Canadian market has not, which will be discussed in a future blog. While market levels may be a bit high there are still areas of value. When you have a good course it’s best to STAY THE COURSE!
Market volatility has returned with a vengeance. The markets had been unusually stable throughout 2017. It was actually record breaking stability, with the fewest number of days with one percent or more daily changes. Said another way it had the most days with small daily […]
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.
Are cryptocurrencies and marijuana stocks investments? I can’t seem to have a conversation on my book, without being asked about these two hot areas. Chapter #7 of the book is titled “Investment, Expense or Speculation: Which is it?” All three of these items are often […]