The 5 Stocks Every Millennial Needs To Have In Their Portfolio

I’m a big advocate of investing in your 20′s. It is not nearly as scary or challenging as people make it out to be. Signing up for an online brokerage account (I use Questrade) takes only a few minutes and requires just $1,000 to get started. When it comes to building your portfolio, there are 3 main goals:

Income: investments that produce money for you in the form of interest or a dividend on a monthly, quarterly, semi-annual or annual basis.

Growth: investments that will grow in value over time, so that you can reap capital gains when you sell.

Security: investments that are safe and won’t lose your money in the long run.

See? Very simple stuff! As for how to select stocks, the best resource I’ve ever found on investing is The Intelligent Investor: The Definitive Book on Value Investing (even Warren Buffet, a student of Graham, credits him for his investment success! Don’t you want to learn from the investor that taught Buffet everything he knows?)
I STRONGLY RECOMMEND that if you want to get into the stock market, you purchase a copy. It’s available for only $13 on Amazon — and it will be the best investment you ever make. Nothing will net you more money than knowing what you’re doing when it comes to investing in the stock market! Once you’ve picked up your copy, you’re ready to start building your portfolio. For that, I’ve assembled a list of 5 investments every 20-something needs to have in their portfolio. I usually suggest when you purchase a stock or investment, you buy at least $1,000 (preferably $2,000). If you’re about to tell me you don’t have $10,000+ laying around to get into the stock market, no worries! You can start with any point 1 through 4 on this list, and then buy the next one when you have more cash. Leave #5 until the very last — you’ll see why!

The Five Stocks Every Millennial Needs To Have In Their Portfolio

1. Blue chip dividend payers. These are some of my favourite stocks because they are reliable, well-established companies that have been paying dividends for decades — some over a century! What’s more, they regularly increase their dividend, which means you make an initial investment and ever year you will be paid more for holding that stock. When you look at these companies, it’s more likely than not you’ll recognize the names: Johnson & Johnson, Proctor & Gamble, and AT&T. In Canada, your blue-chip stocks are ones like Trans Canada, BMO, TD, and Sunlife. While holding individual common stocks are still a riskier investment than holding an index fund, blue-chips are about as safe as you can get. That said, one of the reasons I’m an advocate of grabbing individual stocks is because you do stand to gain more than holding a fund. If you invest in an index mutual fund, your return will be that of the index, but if you hold an individual stock, you stand to gain a lot more (you can also lose more, but with these companies that have stood the test of time, it’s less likely).

2. REITs. While Real Estate Investment Trusts rarely pass the Benjamin Graham litmus test, I still feel they’re an integral part of a Millennial portfolio. As a generation that seems obsessed with home ownership, a REIT is a great way to own property before you can afford a down payment on a home. Furthermore, REITs are great for protecting your portfolio against inflation. Lastly, REITs frequently pay out a monthly dividend, which means they’re a great income generator. You can buy REITs individually or buy a REIT ETF or mutual fund depending on your interest and risk tolerance. As a Calgarian, I’m partial to the H&R Real Estate Investment Trust (HR-UN.TO) which includes Calgary’s beautiful Bow building:

3. ETFs. I’ve blogged about how to buy Exchange Traded Funds before, and they’re still one of my favourites, especially since Questrade doesn’t charge to purchase them, which let’s me buy a handful (or even as little as one) unit at a time without paying a trading fee. ETFs are a great way to diversify your portfolio while minimizing risk and generating income. You can choose ETFs by industry — like utilities, banking, etc — to keep your portfolio balanced and profitable. I try not to replicate my common stock holdings within ETFs because then you’re not diversifying. For example, if you already own a few bank stocks individually, do not buy an ETF of bank stocks!

4. A bond fund. It’s always good to be boring and buy some tried & true government and corporate bonds. I suggest a bond fund (either as a mutual fund or ETF) rather than buying individual bonds. Bonds typically move in the direction opposite of current interest rates. That means you want to buy when interest rates are high and refrain from buying when interest rates are low. I rebalance my portfolio only once per year, moving cash from stocks to bonds or vice versa, but for the most part I’m committed to dollar-cost-averaging. This is the practice of buying a little bit on a regular basis. In terms of my bond buying, I buy a handful of units of a bond ETF once a month in my RRSP. I haven’t accumulated much in way of bonds (because interest rates are so low! I’m favouring stocks) but I like having just a little bit for a balanced approach.

5. A few wildcards. One of the most fun aspects of investing is taking a chance on an investment and making a killing. It can hurt when you lose, but that’s why I suggested points 1 through 4 to set up a robust, safe portfolio leaving you a little bit of wiggle room to take a gamble. As a rule of thumb, I never risk more than 3% of my total portfolio — I do this because then if I were to lose all my money, 97% of my portfolio would remain in tact. One of my favourite gambles was on Netflix (bought at $220, sold at $350 per share) but I’ve had some losers as well. I like to play the stock market a bit, but if you’re a more conservative investor you can skip adding wildcards to your portfolio and stick to the tried & true suggestions 1 through 4 above.

Happy investing!

Why You Shouldn’t Borrow To Invest In Your TFSA & RRSP

*Note: I’ve updated some of the wording in this post since it went live to replace the places where I said “borrowing on a margin” to say “borrowing to invest”. I was using the terms interchangeably when they’re not for these types of accounts: “Government regulations prevent you from trading with margin in registered accounts like RRSPs, TFSAs and LIRAs.” (because it’s dumb, as you will see in the post below). Sorry for the confusion! I had also typed ‘ever’ as ‘every’ so this definitely needed a proofread ;)

You can and should open brokerage accounts within both your TFSA and RRSP. I suggest the TFSA first, because if you’re a new grad just starting out, it’s unlikely your income is high enough to justify aggressively contributing to an RRSP — particularly if you paid for your education yourself and have tuition credits you can claim. For an understanding of how an RRSP and TFSA differ, here’s a quick cheat sheet:

The TFSA vs. RRSP

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 The main difference between a TFSA and RRSP is how the funds in each account are taxed, particularly in a brokerage account. In a TFSA brokerage account, all dividends, interest and capital gains you earn on your investments is tax free. This is a huge advantage in this account because if you continue to reinvest dividends and interest, the compounding income will also be tax-free. In your RRSP, you’ll also benefit from compounding, however you will be taxed on all these gains when you withdraw the funds with the exception of borrowing under the first-time Home Buyer’s Plan or the Lifelong Learning Plan. To learn more about withdrawing from your RRSP, check out this post: Ways To Use Your RRSP For Things Other Than Retirement.

A seasoned investor might understand that using leverage like cash borrowed on a margin for trading is a quick way to grow you money. After all, if your investments increase in value, the more you’ve put in, the more you’ll get out. However, if your investments lose money,  twice because you still have to pay back what you borrowed. Taking this risk on accounts that have contribution limits is idiotic. If you lose even part of your investment, you never get that contribution room in your TFSA or RRSP back. Which is why I suggest…

Don’t borrow to invest in your registered accounts!

Borrowing to invest can turn very expensive, very fast. Depending on where you get the funds to invest, the total borrowing cost could vary from 3% on a line of credit to 18%+ if your funding it with a credit card (I don’t even want to go into how stupid that is).

This means that when you borrow to invest, you need the stock to earn at least 3% to 18% just to break even, and even more if you want to make a profit!

I don’t think it’s unreasonable to earn 3%+ on a stock, but shooting for 18%+ is a little more challenging.

and what if you lose?

This is where it gets nasty. For example, someone borrows $5,000 to invest in a hot stock in their TFSA. They borrow this at 6% so in a year’s time they will have to pay back $5,300. They dump all $5,000 plus an additional $5,000 of their own money for a total of $10,000 into one stock and watch it for 12 months. It falls, and then falls agin, finally plummeting down 20% to $8,000 by year end. Finally ready to call it quits, the investor withdraws their money and pays off the $5,300 they owe the brokerage, leaving only $2,700 for themselves. This means of the $5,000 of their own money they initially invested, they lost nearly 50%. Ouch!

They also lost the contribution room in their TFSA.

That’s $2,300 that could be safely earning interest in a savings account. If you’re thinking buying stocks in your TFSA at all is risky because a loss will always translate into a loss of contribution room, you’re right. And that’s why investing in stocks is riskier than keeping your money in a simple savings account. But what’s most important to note is this:

borrowing to invest unnecessarily magnifies risk. 

If the person had invested only $5,000 of their own money, they would have suffered a loss of only $1,000 instead of $2,300. If they had saved up the extra $5,000 they needed and gone all in for $10,000 just like in the example, they’d only be down $2,000 instead of $2,300. It’d still be a loss, but at least they’d have an extra few hundred dollars. They’d only realize a loss of 20% instead of 46%. That’s a HUGE difference!

The scenario plays out the same way in your RRSP. If you borrow and lose, the RRSP contribution room is gone forever. If you’re serious about building wealth, you know that investing in stocks in a registered account is risky enough and you don’t want to magnify that risk with borrowed money.

Is it ever ok to trade on a margin in your TFSA and RRSP?

Honestly, it’s up to you! I’m too risk-averse to gamble with fire in my registered accounts but some investors might really feel confident borrowing to invest in their TFSA or RRSP. As a seasoned investor with maxed out registered accounts that have already returned some extra money for you, you might feel comfortable taking the plunge and buying on a margin. Ultimately, it comes down to what kind of investor you are. But if you’re like me and still managing small investments (less than $50,000) and still learning the ropes of the stock market, buying on a margin is simply too much risk for too little reward.

What are your thoughts? Is borrowing on a margin in your registered accounts a great way to build up your long term savings or too scary to play with contribution room you can’t recover?

The Best Websites & Apps To Manage Your Money

Pay off debt and accumulate assets ASAP should be everyone’s goal, and one of the things that makes the whole process bearable (and dare I say fun) is having the right software to measure our progress.

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Ready For Zero 

By the time word of Ready For Zero finally got to me, I was nearly debt-free. I remember hearing about the program before, but I think I misunderstood what it was or how it worked. Much to my surprise, when I checked it out recently I noticed it was FREE and had a really nice interface for tracking and managing your banking. The site boasts they’ve helped users pay down $150 million dollars in debt. They provide you with a personal plan that helps you get your finances in order and allows you to track everyone on your computer and through a mobile app.

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Money 4

I’ve been singing the praises of Money 4 for years, and it’s still the app I use for myself. Not only does it offer money tracking and budgeting tools, you can put in the holdings of your stock portfolio and it will update those values in real time. I LOVE seeing my entire financial picture in one place! You might be staring at the pricetag and thinking nearly $40 is too expensive for an app (especially when all the other options on this post are completely free!), but when it comes to managing your money, the one-time investment in solid software is worth it.  But if you’re still hesitant, there is the option to try before you buy: you can download a free trial. The downside? Unlike Ready For Zero which pulls from your bank accounts like Mint, Money requires you to enter spending manually. You can set up regular bills and paycheques in the scheduler, but otherwise you’re on the hook for remembering to enter in how much you spent at the grocery store.

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I regularly receive emails asking for investing advice, which tells me that many people don’t know what the good investing resources are. I’m still learning the ropes of the stock market, so I don’t offer too much investing advice on MAG. LearnVest fills the gap. This site does offer debt repayment help and budgeting advice, but it takes it one step further than Ready For Zero and Money 4 by offering investing plans. LearnVest pairs you with a Certified Financial Planner who walks you through setting up a portfolio and helps you monitor your investments. I haven’t tried this site yet myself but I really dig the idea of an online helping hand when it comes to investing.

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NetWorth IQ

One of the main attractions of personal finance blogs is seeing how someone else spends and saves their money. If you really want to scratch your voyeuristic itch, NetWorth IQ is the perfect site to creep on other people’s financial progress. Most of the profiles are anonymous (with the exception of some that link back to various personal blogs) and list all assets and debts of that individual overtime. Some people are uber-rich, some people may never recover from financial ruin, some people are lying. Regardless, one of the funnest things you can do is use the comparison tools to see where you stand relative to others in your age group, income range, or profession. I don’t use NetWorth IQ anymore, but sometimes I still like to peek in to see what other people have as far as personal wealth goes.

Any more best-of apps I should add to the list? Let me know in the comments below!

How to build an investment portfolio with ETFs

There’s a lot of clamour for more investing posts on MAG, so I think it’s time I gave in.Many readers are curious about how I’m managing my money, since so much has changed since I went from indebted undergrad to finance-savvy (maybe?) almost-MBA.

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A quick recap of my personal investment history:

I bought my first mutual fund in 2009 and started contributing $50 each month plus any extra money I had. Diligent investing and market recovery ensured this investment grew at a quick clip. I was blissfully ignorant of exactly how good my gains were because I had no frame of reference. In my mind, investing was supposed to be the best way to grow money, so my little mutual fund was doing exactly what it was supposed to do. (I would later cash this out after graduation to make a $5,000 payment on my student debt, eliminating my federal loan entirely.)

Fast forward to 2011 and I bought my first common stock. I was already blogging by this time and felt over-confident about money. Throughout 2012 and 2013, I profited big time on safe picks like General Electric and AT&T. My portfolio grew and spit out regular dividends, which I reinvested in more stocks. By the end of 2013, the once $20,000-in-debt-girl was now $20,000-stock-portfolio-girl. Talk about a turn-around! I would like to claim investing savvy for all my portfolio gains, but it was a matter of slow & steady contributions, market recovery, reinvestment of dividends, and the occasional lucky pop (like the time I bought shares Netflix under $220 and sold at $350). I still hold my original stable stocks, but in the second half of 2013, I started directing money away from common stocks and into ETFs.

Can you replicate my portfolio and its performance? 

NO!

The gains of my portfolio depend as much as when holdings were bought as what it was that I purchased. It’s a mixed product of my own management and market performance — this is why investing in stocks is risky.

But that doesn’t mean you can’t create a robust, profitable stock portfolio of your own.

When I started investing with Questrade, ETFs weren’t available the way they are now — otherwise I should have been all over them.

What is an ETF?

“an ETF is an investment fund that holds a collection of investments, such as stocks or bonds. It trades like a stock on a stock exchange.” – The Financial Post

A quick comparison of stocks vs. ETFs:

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Looking at that table, two of my favourite things about ETFs is 1) no fees to buy through Questrade and 2) receiving a monthly dividend. The combination of these two things is something awesome: as you receive dividend payouts from ETFs and stocks, you can reinvest them back into the ETF, even if you can only afford to buy one unit at a time. As a general rule, I don’t like to invest in stocks unless I have at least $1,000, but if I have $20 lying around in my brokerage account, I’m buying another unit in an ETF!

How to get started buying ETFs 

Firstly, you need to open a brokerage account. You can do this through any big bank or through an online brokerage like Questrade. You will generally need $1,000 to $5,000 to open the account. If you don’t have $1,000 lying around, start saving. Putting aside a few hundred dollar every month will give you time to research the ETFs you might be interested in, which brings me to the next point.

How to select an ETF

The easiest way to choose your ETFs is to review them online on a site like iShares. You’ll see something like this:

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this is NOT a recommendation to buy! I simply selected the first ETF on the list!

 This gives you the basic overview of the fund: when it was started, how its been performing, the value of the assets are under management, the number of holdings (thats the number of companies in the fund), and the fees. Note with ETFs the management fees are built into the fund — you won’t get a bill for them or anything! This is a great summary of the ETF, but all the information is in the prospectus, which you an receive as a PDF through the in the upper right corner there.

The next thing you want to look at is Holdings. This is what stocks are held in the fund and how much each stock makes up of the total fund value.

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You can see approximately 7% of this fund is made up of Royal Bank of Canada stock

As you can see, the ETF contains a lot of different holdings — in this case, from different industries. This is another reason ETFs are so great: they allow you to diversify your investments without you having to manage a number of different stocks.

Look at the holdings to see if the ETF contains companies and sectors you want to invest in. Note that ETFs are “exchange trade funds” which means they’re traded on the exchange — this means the percentage of each holding can and does change.

Receiving income from an ETF

If you click on Distributions, you will get a record of dividend payouts for the fund that looks like this:

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Note that this fund pays out quarterly, but there are many that pay out monthly. Others pay out annually or semi-annually.

There’s a bit of terminology on this page that you should be familiar with:

  • The Ex-date is the date after which, if you sell your ETF holding, you will still receive the payout for that month.
  • The Record date is the date by which you must purchase the fund in order to receive the payout for it that month.
  • The Payable date is the day you will receive your dividend payout.
  • The DRIP price is the Dividend Re-Investment Plan price – the cost to buy one unit automatically with the dividends being paid out to you. Using this method, instead of receiving cash, you will receive more shares in the ETF (this is set up through your brokerage and you can select how much you want to DRIP).
  • The PACC price is the Pre-Authorized Cash Contribution price – like the DRIP price, it is the cost to buy one unit automatically, but this uses cash in your account rather than dividends they just paid you.

Look at the dates to determine how often the fund pays out. Many ETFs are monthly, but others are quarterly, semi-annually, or annually.

To calculate the payout you will receive:

# shares you hold x cash payment declared = income 

The payout varies based on the holdings in the ETF. Some ETFs will be more consistent than others and always pay the same, others might vary. The best part?

You can hold ETFs in tax-friendly accounts like RRSPs and TFSAs. 

ETFs are a great way to get a lot of exposure to a number of different stocks, even if you only have a small amount to invest. Furthermore, receiving a regular payout from your investments that you continuously reinvest is a great way to build wealth.

For more information about buying ETFs, Rob Carrick did a great series on the topic for the Globe & Mail.

US Versus UK Stock Markets – What Are The Differences?

There are several different stock exchanges, and each market has its own benefits and downsides. The most well-known UK market is the London Stock Exchange. Meanwhile, the Nasdaq and the New York Stock Exchange are the biggest markets in North America. The key differences between those markets are their location (and therefore their trading hours), and the way the markets operate.

Understanding the London Stock Exchange

The London Stock Exchange consists of two core markets. The Main Market is made up of established companies, while the Alternative Investment Market consists of younger small-cap firms. Trades on the LSE use something called a Contract for Difference. This system was created in the 1990s as a form of equity swap that is traded on margin.

To trade using CFDs, a buyer opens a position on a stock and makes a deposit, the amount of which depends on the margin the broker offers. CFDs can be held for an unlimited length of time, but any profit or loss is calculated at 10pm UK time, so if the value of the stock falls significantly, the buyer may need to deposit more funds into their account to continue to hold the position. If the value of the stock rises, then when the buyer closes the position they will be paid the profits, minus any finance fees. If you want to start trading using CFDs, the best option would be to take look at online trading communities such as Interactive Investor.

US Markets

The Nasdaq is a virtual market. All trades take place via a complex telecommunications network. The New York Stock Exchange, on the other hand, is a traditional stock exchange, and all trades take place on a physical trading floor. The Nasdaq is a dealer’s market. Buyers contact a dealer to make their purchases. The NYSE is an auction market. A seller puts up stock for sale, and they will be matched with a buyer directly. Trading on margins is possible on US markets.

Trading on the LSE from Abroad

There are several ways to trade on the London Stock Exchange as a foreign investor. The easiest way is to contact a local broker that offers international trading services. Usually, these brokers act as an intermediary for a firm based in the UK. Another option is to open a brokerage account with a UK-based firm. If you choose to do this, you should familiarize yourself with tax laws relating to international investments, and don’t forget to factor in foreign currency exchange rates when you trade.