I read a lot of finance blogs. Like, a lot. You might say I’m a finance blog junkie. I need my fix, each and every day. I’m half expecting all my friends and family to show up at my house and have an intervention, in an attempt to get my love of finance blogs under control.
Until that happens, let’s talk about a weakness I’ve found in a lot of finance blogs. They’re great at giving advice on stuff like frugality, extra income, budgets and emergency funds, but most lack in the area of investments.
The stock market is, at first glance, an intimidating place. As an active participant, I can tell you that it can be incredibly complicated. But, the good news for everyone reading is that products exist that make investing incredibly easy. In fact, I can tell you how you can outperform most investors, all while only spending 5 minutes a year on your investments. Yes, it really is possible. And, I can explain how to do it in just a short blog post. Let’s go.
The first thing you’re going to want to do is figure out what percentage of your portfolio you want in stocks and what percentage you want in bonds. There’s a simple rule, all you do is subtract your age from 100, and that’s the percentage of your portfolio that should be in bonds. Since I’m pretty much 30 now (so old!) I would have 70% of my portfolio in stocks and 30% in bonds.
Considering that I’m a Canadian writer, (eh) I’m going to focus the rest of the post on Canadian products and from a Canadian perspective. If any Americans have questions about specific products, I’ll answer them in the comments.
What To Buy?
Depending on how much money you have, you’ll either want to use mutual funds or exchange traded funds. Let’s start with mutual funds.
Most Canadian mutual funds have high fees, which all but guarantee that these funds will lag the market. You’ll want to avoid just about all of them, with the exception of mutual funds from TD Bank, called E-Series funds. These funds allow you to begin investing with just $100, with subsequent investments of $100 at a time required.
Let’s assume I’m starting a new account with TD. Remembering I’d want 30% of my portfolio in bonds, I’d use the following breakdown:
30% – Canadian Bond Index
25% – Canadian Stock Index
25% – U.S. Stock Index
20% – International Stock Index
This portfolio offers exposure to stock markets both in North America and the rest of the world. It’s simple, and anyone can set it up in just a few minutes, once they actually open up the account with TD.
After a year, some of the stocks will do better than the other ones. All you need to do each year is have a look at your asset allocation, and only make a change if one sector moves by at least 5%. If bonds become 35% of your portfolio after a year, then you’ll want to contribute 25% of next year’s contribution towards them. You’ll then take the extra 5% and add it to whatever performed the worst, since we’re all told to buy low and whatnot.
Exchange Traded Funds
If you’ve got more than a few hundred dollars to invest at a time, you’ll want to use exchange traded funds (ETFs) to accomplish pretty much the same thing we did above. Instead of using TD products like a trading ISA, we’re going to look at ETFs issued by a company called Ishares. These are traded on the stock exchange, are the biggest ETF family in Canada, and are the most liquid. (meaning there’s more shares traded each day, making it easier to buy and sell)
Buying ETFs online is a cinch. You just input the ticker symbol into the webpage, the number of shares you’d like, and what price you’re willing to pay, which is usually the market price. The whole process takes but a minute.
How would my portfolio look using iShares ETFs? Pretty much the same as the TD one.
30% – Canadian Universal Bond Index (Ticker symbol XBB)
25% – TSX Composite Index Fund (Ticker symbol XIC)
25% – S&P 500 Index Fund (Ticker symbol XSP)
20% – MSCI International Index Fund (Ticker symbol XIN)
As with the TD funds, rebalancing is as simple as just buying more of the worst performing fund once a year.
It’s Really That Simple
For Canadian investors, this is all you need to know to build a solid, diversified portfolio. Since these products are among the lowest cost ways to invest, that means more dollars in your pocket and less for the fund companies.
Can you spare 5 minutes a year to become a good investor? That wasn’t so bad, now was it?
This post was written by Nelson.