One of the most common questions I receive on certain social media sites is: “Can you share your portfolio?” I don’t feel entirely comfortable sharing my portfolio yet, but I will share the process in which I constructed it.
1. Determine Your Investor Style
If you’re here, odds are you’re most likely interested in income stocks and dividends. Does this mean you should invest in nothing but dividend stocks? That’s something only you can answer and your answer will largely depend on your age and risk tolerance.
Some people want the capital gain from growth, others like the security of dividends. If you’re here, you’re probably more interested in dividends, income and dividend growth.
2. Diversify Your Portfolio
The S&P 500 is made up of 11 distinct sectors:
- Communication Services
- Consumer Discretionary
- Consumer Staples
- Energy
- Financials
- Health Care
- Industrials
- Materials
- Real Estate
- Technology
- Utilities
Within each of these sectors, you should look to hold at least a couple stocks for proper diversification. Why? Diversification reduces risks that may affect a single sector. If you’re fully invested in Tech (a fairly common practice today), you may have outsized gains, but also outsized risks (read: Dot-com bubble). This also goes for other sectors, such as the 2008 financial crisis which heavily affected real estate and financials, or the 2020 Russia-Saudi Arabia oil price war, which had its effects compounded by the global medical crisis, and sent oil prices negative.
3. Find Companies To Invest In
This part can be daunting, and it’s understandable why! This is where many retail investors will turn to common investment vehicles like mutual funds or ETFs. Remember that you’re not just buying “stock”, you’re investing in a company. As such, you should know the company you’re investing in, and this involves the financial statements. As you can imagine, this can be quickly become a very daunting process.
There are some methods to help guide you through this process, such as this portfolio strategy from the Globe and Mail (subscription required).
As you’re investing in these companies, you’ll want to be able to keep updated on the companies you invest in. Thus, having too many companies you’re investing in might be overwhelming, while having too few may expose you to unnecessary risks.
But here’s where things get interested – and where we transition to the next topic
Unbundling ETFs
ETFs (Exchange Traded Funds) are a very popular investment method! And for good reason too. They offer a simple, affordable way to track popular indexes or sectors, without the individual risk of a single stock. There are many benefits, but also many downsides to owning ETFs. The most immediate example is that while your downside risk is limited due to owning a broad basket, your upside potential is also limited due to the inevitable duds in index tracking ETFs.
I would say this makes a lot more sense in the US, where the business and investment landscape is very different from Canada. In Canada, our businesses are more of an oligopoly. In many cases, such as telecom or banking, they enjoy a significant level of protection.
On the other hand, how many banks do we have in Canada? How many telecom companies do we have? What about railways?
Want a better idea of what I’m talking about? Here’s the 10 the holdings of the popular XIU:
If you’re Canadian, odds are you know at least a few of those names, if not all of them. Next, let’s take a look at the popular XIC:
Notice something similar? Let’s take a look at VCN:
Using the knowledge of how the Canadian economy functions and operates vastly and looking at the top 10 holdings of these popular ETFs can help us with determining what stocks are likely to be strong holds in each sector. If nothing else, it provides us with a decent starting point for a starter portfolio.
