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November 7, 2017 | In the Beginning

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

In an underwhelming weekend post that actually hurt to read, I detailed why people don’t invest. At least, not enough of them. They can’t bring themselves to trust anyone with their money. They fear paying fees to get help. And markets freak them out.

As a piteous result, 70% own houses with epic debt while only 7% have maxed TFSAs (no debt). So now the second-greatest risk people face is a real estate correction. (The biggest risk has not changed: running out of money. Especially for the girls.)

For many, this will not end well. For others who learn (especially early), financial independence is totally within grasp. So, I got this note from Mike:

“I totally agree with your comments in that blog post and I am following your advice.  But I have a question for you, How does a young person (my son) with only $30,000 -$40,000 to invest go about it?  Most brokers don’t seem interested in small accounts like that and as you noted the commission based pushers of mutual funds are a poor choice. My son is thinking about buying a basket of ETFs via an online trading account.  Is that really his best bet?  With that little capital he won’t be able to build in much balance or diversification. What should he do?”

Good question. Simple answer.

First, stop looking for professional help. Sadly the financial industry is so focused on wealth creation (its own) that you get clown-advisors advertising that they’re “best suited to clients with $500,000 to invest.” Yeah, right. Buy another Porsche. I guess they don’t care about the kids, low-income earners or others seriously trying to succeed. As for the banks, they’ll gladly take the cash and stick it into mutual funds costing 2.5%, and never call. Robos are an option, but do really trust an algo more than yourself?

So, as stated, there’s a simple alternative. Open that online portfolio and start with just one account – the TFSA. As I’ve tried to show many times, it’s a money pig. Put $100 a week in there for 20 years at an average of 7% and end up with $227,000 or which $122,000 is taxless growth. Over three decades it will produce well over half a million, of which $376,000 is growth. The annual income from that TFSA alone would be about $35,000, and not a nickel in tax.

Jr-Mike cannot afford not to do this. C’mon. It’s a lousy $14 a day. That’s, like, two Pumpkin Spice Lattes at Sbux.

So how does you accomplish a 7% return over time without big, confidence-shaking gyrations? By having a reasonable mix of ETFs in a correct weighting which is rebalanced once a year with a few trades. Make deposits religiously – every pay period. Don’t consider the TFSA to be glorified savings account which can be raided to finance a holiday, and ignore all the geniuses on the Internet telling you to load up on goal, cryptocurrencies or (shudder) an investment condo.

Always remember the basics: a balanced portfolio has safe stuff and growth assets at the same time to mitigate volatility. Yes, young people shouldn’t care about being on a roller-coaster ride because they have decades of time. But, seriously, today’s moisters are as risk-averse as 80-year-old wrinklines with walkers and oxygen cylinders. So if you can smooth out the ride with balance, why not?

And don’t forget diversification – holding ETFs, which own large baskets of stocks, instead of individual stocks, for example. Plus ensure you have a global portfolio, not just a Canadian one, since there are far more opportunities outside this country than within. Inexperienced investors always exaggerate market swings, fall victim to recency bias (what just happened will happen forever) and think ‘investing’ means ‘gambling.’ In reality, buying a condo unit with 5% down and 95% debt is a massively greater risk.

So let’s review/revise the Millennial Portfolio. As I said the last time this was published: “It will take guts. I can assure you when the market sheds 15% this blog will be brimming with dour dinks telling you 2008 is just around the corner and stocks are on their way to zero. But it won’t happen. There’s no crash rerun coming, no financial crisis, no bank failures, no bond default, no reason to hide in cash. If you believe otherwise, I don’t expect you to buy a house or have children.”

So, suck it up Jr-Mike, and invest.

Here are the asset types, and the weightings for a balanced, diversified portfolio. Once again, don’t ask me to spell out individual ETFs, as it would be improper to do so. I’m not in the business of promoting or selling any individual securities.

Fixed income portion (40% of total): Government bonds 11%; corporate bonds & high-yield bonds 9%; cash 2%; & preferred shares 18%.

Equity (growth) portion (60% of total): Canadian equity 21% (expanding potential). US equity 16% (getting toppy), International; & emerging markets 23% (the future).

More money to invest means more positions, adding mid-cap US companies, for example, as well as having a 20% overall weighting in US-denominated funds. And once you set this portfolio up you must routinely (annually) rebalance it. That means selling off the excess amounts of those assets which had increased in value and spreading it among the poorer performers.

When you hit $500,000, call me. You can buy lunch.

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November 7th, 2017

Posted In: The Greater Fool

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