Stocks, Bonds etc. -> Recommended Investment Portfolio for Novice Investors
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Recommended Stocks (ETFs) for Your RRSP, RRIF, RESP, RDSP, TFSA or Non-Registered Portfolio
If you have read our Risk article, you will notice that cash and bonds are rated less risky than stocks. This is true in the short term, but if you look at our table of investment returns, you will see how stocks have greatly outperformed bonds over time. You won't see the volatility that happened along the way.
From our point of view, the asset which provides the best return over a long period of time is the least risky. Therefore, we consider a well diversified portfolio of exchange-traded funds (ETFs), which are funds which hold stocks) to be less risky than bonds. When you own stocks, you actually own part of a company. When you own bonds, you are lending money to a company or a government. Would you rather own a company, or lend money to it? We don't hold any bonds now, but we have held Canadian federal and provincial bonds in the past, when they were yielding over 9%. If their returns go that high in the future we may buy them again, but only inside RRSPs.
You can eliminate some of the volatility from stocks by following 4 simple guidelines.
Unfortunately, you can't eliminate all the volatility from your portfolio. The individual ETFs will rise and fall continually, and the whole portfolio will suffer a large drop (10% to 20%) approximately once a decade. Over a long period of time the ETFs will rise, because the stocks that make up the ETFs slowly increase in value. If the value of an individual stock falls continuously, it will gradually represent a lower percentage of the ETF, and eventually it will be replaced with another stock.
For your RRSP, RRIF, RESP or RDSP:
We recommend that you buy the following ETFs, in equal amounts (in Canadian $). The order in which you purchase them doesn't matter. Just buy at market (market order), because the spread between bid and ask is only pennies. We believe that this portfolio of investments will provide an average annual return of 9% or more. Regarding the holding of foreign stocks in your RRSP, see our articles on Washing Trades and Currency Risk.
You should rebalance your portfolio as you purchase more ETFs, so that you continue to own approximately the same market value in Canadian dollars in each ETF.
The table below shows how the ETFs are diversified by country:
As of July 27, 2015, all of the ETFs in the above table had management expense ratios (MERs) of 0.18% or less. However, these ratios change over time, so this is one of the things you should be checking prior to buying an ETF. See the links to fund information below the next table.
The table below shows how the ETFs are diversified by economic category, and the average % of your portfolio in each category when equal amounts of each of the ETFs are held. Again, these are percentages that can change over time.
- NYSE Euronext Exchange Traded Funds - search by ticker for any of the above funds except XIU
When we first started investing, there were no ETFs available. When we first compiled the above information, there were very few ETFs available, and at the time these were the lowest cost (MER) ETFs, and they are still among the lowest. This is meant as a guide for novice investors, or for people who have no interest in picking their own stocks. There are now many other choices available in ETFs, but the main point is to choose low cost, broadly based (diversified by country and economic category) ETFs which hold large, well-established corporations (less risk).
For Your Tax-Free Savings Account (TFSA)
Of the above ETFs, the best one to put into a TFSA would be one in which the return is mainly capital gains, not dividends. There is 15% withholding tax deducted from dividends paid into a TFSA from any of the above ETFs (because they are foreign) except for XIU. See our TFSA article on this for an explanation. If you are using your TFSA as an emergency fund, you may want to hold a certain amount of it in cash, T-bills, or GICs. However, ETFs are also okay for an emergency fund, because trades are settled 3 business days after the sale, so funds can still be obtained fairly quickly. The difference is that ETFs will vary in price, so it is best to plan to hold them for a long time.
Make sure that the foreign ETFs from the above table are held in a US$ brokerage account, so that there are no exchange premiums charged except when funds are deposited or withdrawn. Regarding the holding of foreign stocks, see our articles on Currency Risk, and Tax Treatment of Investments in Foreign Shares.
Use the same investments as for an RRSP, but replace the Select Sector SPDR Utilities (XLU) with Canadian dividend-paying stocks, to take advantage of the enhanced dividend tax credit. These stocks should be pipeline, utility, and telecommunications companies. There is no ETF for this category. The following are the largest of the Canadian companies that fit this category, with their ticker symbols on the Toronto Stock Exchange. If you are a novice investor, you should buy these large companies, and diversify among the three sub-categories.
If you're getting close to retirement or are worried about volatility, you may want to adjust your portfolio to the one below. The returns will probably not be quite as good as the one above. We've added more consumer staples, technology, telecom, healthcare, pipelines, utilities and Canadian financials. These sectors are less volatile than the others. The table below shows the % of the portfolio that should be invested in each ETF or stock.
The advantages of following any of the above plans are:
Tax Tip: Make your money work for you instead of you working for it.
Revised: September 19, 2017
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