This post is the second in a mini-series on investment for millenials by Bridget Casey of Money after Graduation. Read the first one here.
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, and 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 five 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 from 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!
1. Blue chip dividend payers. These are some of my favorite 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. An REIT is a great way to own property before you can afford a down payment on a home, and 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 lets 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.
Image via Flickr