I’ve gone through various stages in my investing career.
First Stage (mutual funds):
When I started working, I was just leaving money to accumulate in a bank account because I didn’t know where to start. A friend from university told me to go up the street to Montreal Trust (that’s how long ago it was) to open a money market mutual fund account. I don’t remember why I didn’t do exactly that, but it did get my off my duff to start researching mutual funds, and I ended up investing first with Altamira Funds, which had had a couple of good years. I gleefully invested a few hundred dollars a months in a few funds on automatic investment. Sometimes I moved money from one fund to another trying to time the market, but never with much success. As my portfolio grew, I started looking further afield and ended up investing money with AGF, another star performer, but one with higher management expense ratios (MERs), and onto various other companies.
Second Stage (index investing):
Over time I began to realize that I wasn’t really ahead of the market. I had some winners, some funds that moved only a little, and some dogs (hello Japan Fund). As I read more, I began to realize that I am not smarter than the market, so trying to pick winners was a bad idea, especially trying to pick winners on the basis of recent returns. I also began to realize that as it looked like the high returns of the 1980s were coming to an end, the impact of MERs is an important determinant of overall return on investment. I began to shift funds from managed funds to TD’s e-series of low-cost index mutual funds.
Setting up a brokerage account and getting into exchange-traded funds (ETFs) was the next logical step, especially as my portfolio grew larger and the trading costs associated with ETFs would be relatively small compared to the values I was purchasing.
Third Stage (income investing):
The third stage of my investment career began about five years ago when a relative began teaching me about investing directly in companies. This help came along at the right time for me, as my portfolio had grown to a size where it made sense to invest directly, but I need some help to get started. His focus was on dividend-paying stocks, with some more colourful investments on the side. I dipped my toe in the water, and over time began to shift more and more of my portfolio from ETFs to stocks as my comfort level grew and as I found more opportunities that I wanted to pursue.
The settlement of a lawsuit gave me more time to focus on investing, and cash to invest, and it was around then that I disposed of my remaining ETFs and invested the whole portfolio in stocks. I also began investing some of Spouse’s money into the more conservative stocks that I was buying for myself.
This style suits me for my stage in life: with financial independence imminent, it helps me to have an identifiable stream of income to support Spouse and me in the style to which we would like to become accustomed. Dividends and REIT distributions are not the most tax efficient form of income. Indeed, it would make more sense from a tax perspective to have our taxable account heavily invested in non-dividend-paying stocks with a better likelihood of capital gains, which are taxed less. But capital gains simply are not as reliable as dividends and distributions from good companies and REITs. I don’t think I would be comfortable planning financial independence based on assumption about realizing capital gains to fund our lives.
What about bonds? I had some bond mutual funds and then bond ETFs, because I was always told to have a balanced portfolio. When I started investing directly, I really had trouble justifying buying bonds with low interest rates when there were real estate investment trusts (REITs) offer nice juicy returns of 5-6% or even more. And I rationalize it to myself that my defined benefit pension plan is the fixed-income part of our portfolio, so the rest of our portfolio can be held in equities.
Our equity investments are by-and-large, conservative – dividend stocks and REITs are going to be less volatile than other stocks, especially since I focus on those that have not cut their dividends. Of course, there is a first time for everything, but if a company didn’t cut its dividends during the crash of 2008, I think it is probably pretty stable.
In the next post, I will discuss what I have invested in. Thank you for reading. Comments are welcome.