I had a conversation with my son in early January, just prior to him leaving for his five-month university exchange in Singapore. He was looking for some long term investing strategies.
We were speaking about how he should invest his savings, which is currently invested in a high-interest savings account. Here’s what I wrote in a blog post on January 9th, 2019 when the markets were just off their year-end lows:
I was speaking with my son the other day. He has some earnings from his summer job last summer that have remained in cash. He asked me at the end of last summer how he should invest his earnings, and I told him to hang on for the next few months, and I would tell him when the timing was better to enter the markets.
I told him a couple of weeks ago, with the markets down more than 15%, that the timing was now better to get into the equity markets, however, I suggested that he divide his cash as follows: 75% into equities and 25% in bonds (he’s still young) and that he should break his equity purchases into 4 equal buys over the course of the next year.
Regardless, there’s the old adage, it’s not timing the markets, it’s time in the markets. It’s very difficult to create wealth by buying and selling, in fact, if you try to time the markets, there’s a good chance that you’ll not only drive yourself crazy, but, worse, you’ll miss the market’s biggest up days, like the 1,086 advance on December 26th, 2018.
I took my own advice and bought back into the market in early January. With the markets at fresh highs once again, I’m now on the sidelines watching cautiously, and while I am not selling, I am also not buying.
My son didn’t make the buys I suggested in early January. He’s overseas on a semester exchange in Singapore and, for various reasons, is unable to access his online trading platform, so his funds are still all in a high-interest savings account.
My son gave me access to his online portal, username, and password and suggested that I invest for him.
So now with the markets at fresh highs, I’m considering how I should invest his dollars.
Last week I wrote a blog post titled, How I Protect and Grow My Wealth With These 8 Simple to Understand Concepts.
The blog post details 8 personal strategies I follow with my investments. I suggested in that post that I would cover each of the 8 strategies in greater detail.
Here is the 4th point I covered in the post:
My portfolio should produce a steady stream of dividend income, so I need to be cognizant of the dividend yield and not buy poor securities just because of the yield. I need to design a stock portfolio along the SWAN (sleep well at night) concept and own dividend aristocrat and dividend king stocks. My investment philosophy is that I am buying companies, not stocks. I am buying attractive businesses for the long-term, not playing the stock market.
My sentiment with regards to the market is to buy good blue-chip dividend-paying companies, ideally companies with a competitive advantage, a moat. As I mentioned, I prefer dividend king and aristocrat stocks.
I watch these stocks somewhat carefully, ensure they are still competitively positioned over time, and hang on for the long ride. I have a 20-year time horizon with regards to my stock portfolio, and although the markets will swing up and down over the next 20 years, there’s no reason to believe that, over the long-term, stocks won’t continue to produce in the future what they’ve delivered in the past.
As an FYI, a dividend aristocrat is a stock that has increased their dividends consecutively for 25 years or more, and a dividend king is a stock that has increased their dividends for 50 years or longer.
Some of my favorite long-term buy-and-hold Canadian and US dividend stocks and ETFs include stocks like Costco, Enbridge, Brookfield Asset Management, Fortis, Abbvie, Johnson & Johnson, AT&T, Goldman Sachs, BCE, TD Bank, Royal Bank, and Algonquin Power. Brookfield and some of their subsidiaries (Infrastructure, Renewables, Business Partners, Real Estate) are some of my favorite long term buy and hold companies. It also helps that most pay decent dividends ranging from 5% to 8%.
Enbridge pays a dividend of 5.93%, which means that for every $1 of stock that you own, Enbridge will pay you $0.059 a year just for owning the stock. So not only do you participate in the growth of the company through capital gains, but you also receive a healthy dividend for sticking around.
If you’re not as inclined to invest directly into single stocks, you can alternatively purchase one of the dividend ETFs.
For example, the iShares S&P/TSX Composite High Dividend Index ETF, symbol XEI, which pays a dividend of 4.72% and owns a collection of some of Canada’s best blue-chip companies. Or, iShares Select Dividend ETF, symbol DVY, which is a similar ETF focused in the US market and pays a dividend of 3.63%.
I should note that I have a very diversified portfolio that includes multiple utilities, REITs and international ETFs. My overall portfolio is very diversified across currencies, asset classes, real estate, and risk profiles, somewhat optimized for tax.
I am still very cash heavy, but I do dip into different opportunities as they arise. Overall, I believe the valuations across the board are high, so I am still cautious.
I will continue to provide updates on my allocation strategy in future blog posts, but now let’s get to my son’s allocation.
Since he’s fairly young, only 20, and has a long-term time horizon, I’m leaning toward an 80% equity, 20% fixed income portfolio.
Although I’m not convinced that now’s the best time to be getting into the markets, I’m going to suggest that my son stagger his timing into the markets over the next year in four equal installments.
There’s a relatively new all-in-one Vanguard ETF, VGRO, with an MER of 0.22% and a distribution yield (dividend) of 1.94%, that invests in over 12,000 stocks in markets around the world but also invests in the worldwide bond markets. The all-in-one balanced ETF invests at an 80% equity and 20% bond split.
If you’re looking for a less aggressive equity allocation, then they also have the Vanguard Conservative ETF Portfolio (VCNS) and the Balanced ETF Portfolio (VBAL).
Many people I spoke with in late December panicked and sold their equity positions. For those of you who did, hopefully, you didn’t miss the first quarter rally.
Either way, all of the volatility should remind you that you can’t time the markets. You need to understand your investment time horizon. If it’s long-term, then buy and hold is the best strategy, especially if you’re investing in solid blue-chip companies. If you change your perspective from “I’m playing the stock market”, to, “I’m investing in solid businesses that I have faith in for the long-term”, then you won’t be as bothered by the constant ebbs and flows of the markets.
Good luck with your long term investing strategies.
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