Where to invest $100,000
Standing in front of a giant glassed in freezer at the sweet shop in Tobermory, Ont., I was faced with a plethora of choices. Which sinful ice cream should I indulge in on a fine summer day? The selection of flavours, toppings, and cones was daunting. Thankfully, I had time to consider the fattening possibilities because the wee nippers in front of me were similarly perplexed. And, as important a choice as it may be, it was only ice cream.
But when it comes to investing, the possibilities are vast once your portfolio grows beyond $100,000. Problem is, much like Bertie Bott's Every Flavour Beans (a devilish Harry Potter confection) the investing flavour you choose might wind up tasting like earwax. Alas!
That's why the advice I dished out in How to invest $10,000 still applies. If you aren't intensely interested in the markets, you should probably stick with a good low-fee balanced fund. After all, much like grilling a nice steak, if you poke and prod your portfolio too much then you're likely to obtain less than desirable results while expending a great amount of time and effort.
But if vanilla really isn't for you, let's check out some other tasty ways to invest now that you have a more sizeable portfolio.
The lazy way to riches.
Back in the 'How to invest $1,000' section, we introduced the idea of investing using passive index mutual funds, which rise and fall in tandem with the large market indexes. Long-time MoneySense readers will know that we call this a Couch Potato portfolio, as it's so easy to execute you rarely have to haul yourself up from your comfy couch to tend to your investments. The goal is to take the returns the markets give you while keeping your investing costs as low as possible. This allows you to enjoy a big advantage versus high-priced fund managers who, far too often, fail to earn back the fees they charge investors.
Now that your portfolio is larger, you can execute the exact same strategy with a new type of fund that has even lower costs: the exchange-traded fund or ETF. These funds are much like index mutual funds in that they passively follow an index such as the S&P 500, but instead of being sold through the banks or advisers like mutual funds, you buy them on the markets, just like a stock. The ETFs you choose depend on your investment goals, your time horizon and your tolerance for risk, but we find that plonking 40% of your money into a good bond fund, and spreading the remaining 60% among Canadian and U.S. stock funds is the simplest way to start. If you do it through ETFs, you can reduce your fees to very low levels. For example, if you use the iShares S&P/TSX60 ETF (XIU), the Vangaurd Total Stock Market ETF (VTI), and the iShares DEX Universe Bond ETF (XBB) for the Canadian stock, U.S. stock, and Canadian bond components respectively, then the annual fee on your portfolio will be a minuscule 0.19% a year.
Just remember, because ETFs are traded like stocks, that means you get dinged with a brokerage commission when you buy and sell them. The commissions can really add up for small portfolios but, by $100,000, the big Canadian discount brokers usually offer online trades for less than $10 a pop. As a result, they shouldn't be a big factor as long as you trade infrequently.
You can also move into more complicated Potato portfolios which offer greater levels of customisation. But, frankly, I wouldn't get too much more complicated. I've seen portfolios with a huge number of ETFs that provide more confusion than clarity. This is particularly true for some new ETFs with much higher fees and others that follow highly speculative slices of the market.
However, expanding the classic potato beyond just U.S. and Canadian stocks is a sensible thing to do. As a result, I suggest the Global Potato variant with international stocks added in via the Vanguard FTSE All-World ex-US ETF (VEU). Here you'd put 40% of your portfolio in the XBB Bond ETF, 20% in Canadian stocks via XIU, 20% in U.S. stocks via VTI, and the final 20% in international stocks via VEU.
You can also tilt a Potato portfolio a little more to bonds or a little more to stocks if you want to be more cautious or more aggressive.
Don't want to go it alone?
If the thought of opening a discount brokerage account and buying ETFs fills you with fear and trepidation, don't worry. You wouldn't be the first to feel daunted by the task. I still remember that my first trade, back in the day when you had to phone a real trader, was rather nerve-wracking. Maybe you need a little advice to help you along?
You're in luck because when your portfolio moves above $100,000 advisors will start to take an interest. Problem is, the advice often comes at a steep price, which usually only falls to more reasonable levels when your portfolio grows even larger. To help you out, I've sleuthed out a few ways you can get the basics without spending an arm and a leg. You might not get expensive wine and cheese service but you will get core asset allocation advice and a friendly hand to help you build a customised portfolio.
One good choice is to enlist the services of investment management firm Phillips, Hager & North. PH&N is the granddaddy in the field and it still represents good value (it was taken over by Royal Bank a few years ago). The firm offers a very broad line up of low-fee funds and when you sign up directly with them, you can get a dedicated advisor, portfolio planning, and a long-term investment strategy. All of which is included in the already low cost of their funds.
Another option is Steadyhand, a new entrant run by PH&N alumni Tom Bradley. You get the benefits of his experience, but you also get advisors who are still hungry and are likely to work harder for you than others who may have had a few too many ice-cream cones. Portfolio strategy is included with the low cost of their funds, and Steadyhand's fees fall as your portfolio grows. At $100,000 you already get a discount and there are more discounts to be had at higher levels. In a break from usual practice, their fees also decline based on how long you've held their funds. You get a nice break after both 5 and 10 years, which encourages long-term thinking.
So, don't be swayed by fancy advisors offering brie and Merlot. Get the basics right with low-fee advisors, grow your portfolio, and invest your savings instead.
Getting started with stocks.
At the other end of the spectrum, you might want to take a more active approach and start picking your own stocks. While it might not be the right thing to do for many investors, it would be hypocritical of me if I didn't say that it can be great for some.
If you're just starting to buy your own stocks, I suggest moving slowly and in a modest way for the first few years. The experience will likely to be educational and you don't want to make mistakes with the bulk of your portfolio.
To get going, you should keep the core part of your portfolio in a good low-fee balanced fund, or Couch Potato portfolio, and then supplement that with a handful of stocks. Say at least 80% of your money in the core and at most 20% in individual stocks. At $100,000 that'd be about $80,000 in a low-fee balanced fund or portfolio of index funds, and about $20,000 in stocks.
A great way to start is to select five large Canadian dividend stocks, preferably in different industries. While you can go wrong with big dividend stocks - I'm looking at you Yellow Media - they're generally less volatile than their smaller brethren. Large businesses with good credit ratings also tend to have more staying power than smaller outfits. To whet your appetite, I've highlighted five, in the table below, which show promise at the moment.
Start slowly when learning the ropes to figure out if buying individual stocks is something you really want to do. As your portfolio and experience level increases, allocating more money directly to stocks becomes reasonable. Just be warned, successfully picking your own stocks is harder that it looks and requires a great deal of patience and discipline.
No matter which option you choose, growing your portfolio is an achievement. While larger portfolios open up more possibilities, the simple vanilla options are often the best. Keep costs low and, if you insist, add only a little chocolate on top of your cone.
+ First Published: MoneySense magazine, September 2011
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