The shift to self-directed investing is a tidal wave. The pandemic accelerated many trends that were already well under way. In the stay at home and work from home reality of 2020, more Canadians moved their investments online. And so many more Canadians took control of those investments. The rate of new account sign ups at the discount brokerages such as Wealthsimple, Questrade, TD Direct and the other big bank brokerages has been overwhelming. And the new sign ups skews to younger investors. We all know that investing is a challenge without the benefit of experience. With this post I will provide some steps for building the simple stock portfolio.
In preparation for my weekly MoneySense post I had a chat with the Chief Operating Officer of Questrade, Stephen Graham. It was more than insightful. Stephen offered a glimpse of what is going on within these incredible trends, and how investors are behaving.
As you may know the rate of new client sign ups at the leading discount brokerages has been a blessing and a challenge. The companies simply cannot keep up with demand. Rob Carrick in the Globe and Mail has been reporting on the customer service challenges these brokerages face. Questrade recently hired another 100 associates. I’m guessing that they’ll be looking for 100 more.
The move to self directing and to the brokerages is accelerating.
Building the investment portfolio.
From that MoneySense post …
All said, there can be incredible risks and dangers when less experienced investors move to trading platforms and become seduced by quick gains and fast-moving stocks. They might even get sucked into trends or mania, such as the recent Redditors take on Wall Street movement.
It is my opinion that many of those Redditors will be on the losing end when all is said and done. The professional traders and hedge funds will take their lunch money, and more.
It is my hope that younger investors will turn more to investing over trading. It can be more of a challenge to build a properly diversified portfolio by way of individual stocks, but it’s not an impossible task.
Start with ETFs, perhaps.
I’d certainly suggest that younger investors start with ETFs – Exchange Traded Funds. At Questrade investors might decide to start out with the managed Questwealth Portfolios. That is the lowest fee Canadian Robo Advisor option – for portfolios up to about $350,000 in value. They will build and manage a portfolio for you with total fees in the range of 0.45%. It is a great option to get started.
As Yogi Berra quipped …
You can observe a lot by watching.
That said, the reality is that most investors who head to discount brokerages are buying individual stocks. While I am a proponent of ETF Model Portfolios, I never discount the fact that one can build and manage a very simple and effective stock portfolio. But you do need to have enough money to buy enough stocks in Canada and the US to gain that much-needed diversification.
There can be incredible concentration risk if you only own a handful of stocks. But when your number of holdings is on the low side, it can help to choose higher quality companies.
Here is an interesting post that looks at the TULT Portfolio popularized by the legendary Canadian newsletter – The Connolly Report. From that post on Dividends In Hand …
Tom Connolly, he published The Connolly Report investment newsletter for over 30 years, and is one of the best known Canadian dividend growth advocates. Mr. Connolly set out the idea of the four stock TULF portfolio, with “T” standing for telecommunication companies, “U” for utilities, “L” for low-yielding dividend growth stocks with growth potential, and “F” for financials. To ensure high quality companies, Mr. Connolly suggested investors limit themselves to the S&P/TSX Dividend Aristocrats Index.
That portfolio is designed to stay out of trouble. And many of those sectors are wide moat or in oligopoly situations.
Here’s an example of what might be held in a TULF portfolio.
- Telecoms – BCE, Rogers and Telus
- Utilities – Fortis, Emera and Canadian Utilities Ltd.
- Low-yielders – Canadian National Railway Co. and Metro Inc.
- Financials – The big 6 Canadian banks (RY, TD, BMO, BNS, CM and NA)
For utilities/pipelines one might also consider Enbridge and TC Energy. One can also look to the insurance companies and BAM Brookfield Asset Management in the Financials.
I personally hold my own concentrated TUF Portfolio (no L) that holds telcos, banks, plus Enbridge and TC Energy. In writings for Seeking Alpha, I had suggested that investors look to other sectors with the wider moat portfolio. It is very similar to the TULF model, and would have a history of beating the market with better returns and much better risk adjusted returns.
Beat the TSX with 10 stocks.
Another interest and simple market-beating portfolio is the Beat The TSX Portfolio. It has a hypothetical ticker of BTSX, there is no ETF, you’d have to go buy the 10 stocks. Simple and effective it is, you would buy the top 10 yielding stocks on the TSX 60 each year.
Here’s an update post on that approach .
The US stocks.
I created my own index. You can call it index skimming. I bought enough of the largest cap stocks within the US Dividend Achievers Index. It’s very simple. It has worked very well. The key (again) is quality. Dividend Achievers have a history of increasing their dividend every year for at least 10 years running. That said, many of my holdings are Dividend Aristocrats. That index also applies financial health screens.
I also have few picks by way of Apple, BlackRock and Berkshire Hathaway. Those picks (mostly Apple and BlackRock) have contributed to generous market-beating returns. Especially in 2020.
Here’s my recent post that looks at returns for 2020.
Simple stuff. The portfolios take just a few minutes each month to manage. One can be passive with a stock portfolio.
You can begin with indices for stock ideas. You might skim from the lists, or use them as a starting point, adding in additional research.
Tools and services for building the stock portfolio.
And here’s a very robust research and portfolio modelling offering from BMO that has doubled in size over the last year.
Investors can check in with bloggers who are doing it right by building hybrid portfolios of individual stocks and ETFs. Check out the appropriately named My Own Advisor and Bob at TawCan. They share their portfolio holdings, returns and experience on those wonderful blogs.
Of course, none of the above is advice, but this is.
If you don’t know what you’re doing, don’t do it.Dale – Cut The Crap Investing
We all make mistakes, but try as best you can limit risks, those mistakes, and enjoy the educational journey. Investing can and should be one of the easiest and most rewarding things we do in life.
Taking control of your own financial life – it’s a wonderful thing.
As Questrade offers, you certainly don’t have to invest with Mom and Dad’s guy. 🙂
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