Just starting out

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   By Guest Blogger Ryan Lewenza

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During a portfolio review/update, a client asked me what advice I would give to his nephew who has a bit of cash and is just starting to invest. He said his nephew was just going to invest it in Bitcoin and roll the dice. That, I said, is a terrible idea and that he should consider a different path. So, today’s blog is for the nephew and all you young padawans  just starting to invest.

By the way, here’s a personal story about my first experience investing in the stock market.

In my early 20s, fresh out of business school, I landed my first job in the industry working the phones for a discount brokerage. It was during a time when tech stocks were taking off and investors were flooding into discount brokerages to open trading accounts, hoping to day trade into millionaires. It was an exciting time for sure!

Well, as a somewhat cocky young punk with an overly-inflated view of my own investment acumen, I bought into the craze and invested what little money I had into some technology darlings like Worldcom. This was in 1999, just before the hyped Y2K meltdown and the end of the tech bubble. Worldcom, and my portfolio deflated faster than the Hindenburg. While it hurt at the time, it proved to be one of the most important lessons of my life.

The lessons from this tale are: 1) know what you’re doing and have a plan, 2) invest in diversified investment vehicles like ETFs and index-funds, and 3) if you have to, invest in high-quality dividend paying stocks. It’s not sexy, but it’ll get the job done.

How do you start?

First, open an investment account with a discount broker or robo-advisor. Here you can buy stocks, ETFs, mutual funds, options etc. Or you can open an account at a bank, but it will likely push its own investment products/funds, which come with higher management expense ratios. And your options are more limited with a bank investment account.

When completing the paperwork open three main accounts – a TFSA, an RRSP and a cash account. If you want to purchase a home or condo in the future then open an FHSA account as well. Even if you’re not using them, and there are no fees associated with keeping these open (check for account fees), then open them now as you’ll likely use them in the future.

Once accounts are opened and transfers completed, you’re ready to start investing and hitting the buy button.

Now what?

I would recommend investing in a small number of ETFs with a mix of stock and bond ETFs. You’ll need three different ETFs to get some Canadian, US and international equity exposure. Maybe four if you want some emerging markets exposure. I would pop in a Canadian dividend ETF and REITs as I see these rallying once the Bank of Canada starts cutting rates. Then include one bond and preferred share ETF.

Alternatively, you could go with a ‘one ticket solution’ which is an ETF or product that invests in a mix of different equity and bond ETFs. You can then select the one with the asset mix that aligns with your return expectations and risk level.

The key is to determine the level of risk that you can/want to take and that then translates into the asset mix, which will largely dictate your return and risk profile. You know our long-held preference for the balanced 60/40 portfolio, which provides a reasonable rate of return but with lower volatility. If you seek higher returns and risk then you would tweak up the equity weight, and I would suggest a maximum of 80% in stocks and 20% in fixed income.

If a desire to purchase individual stocks I would suggest focusing on high-quality dividend paying stocks like banks, telecom and railways, which can provide great long-term compounding returns. But stock picking can be very difficult as all the data shows.

Finally, if even this is too boring for you and you really feel compelled to invest in high-risk investments or lottery tickets, then limit these investments to no more than 10-20% of the overall portfolio.

I have no idea where bitcoin prices are going. In fact, I could build a case that it could go to $100,000 and I can build a case for it to go to zero. No one really knows, so why would you invest all your savings in one highly speculative ‘investment’, whether it be bitcoin, a pot stock or a speculative mining company.

Then let compounding returns do its thing!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.