Diversification

In the past few months, I've been reading and learning about how to do fundamental analysis of a stock to determine its growth or value potential. I did some analysis of a few stocks listed on the TSX, and I came up with 15 potential growth candidates. I haven't done any deeper analysis yet, just some initial weeding out of stocks that didn't fit my basic criteria.

I decided to create a new portfolio in Google Finance and add my 15 hopefuls to it, just to see which ones outperformed the others. I added hypothetical transaction data to each stock so that the cost basis was around $500 for each one. This is my personal minimum amount to invest in a stock, since it makes brokerage fees around 1% of the total amount being invested. All in all, my hypothetical cost basis was around $7,700. In the two weeks since I started the portfolio, it has gone up to +3% and is now around +1.6%. While it's true that two weeks is a very short time frame for growth investing, I realized something as I checked on the portfolio every day.

I have read many times before how diversification in a portfolio is essential for mitigating concentration risk. I didn't actually realize the true value of diversification until I saw it in action. The worst of my 15 picks is currently down $62. However, my overall portfolio is up by $63. Just under half of my picks are in the red by small amounts, but from diversifying across multiple stocks I have managed to keep the overall portfolio value positive.

Since this is all hypothetical, it's purely for the sake of learning on my part. However, it made me re-examine my current strategy for my real stock portfolio. Up until now, I've been working on building a dividend growth portfolio. The dividend growth strategy is a valid strategy, however it takes a fair amount of capital before the dividends start to really pay off. The dividend growth strategy also takes patience, which I don't seem to have when I say that I'm considering switching strategies.

I have two excuses for moving away from the dividend growth strategy for the time being. Firstly, my whole investing experience so far has been all about learning as much as I can, both by reading about the vast amount of things there are to know about investing, and also to learn by doing. Learning investing through hands-on experience was my inspiration for starting this blog in the first place. Secondly, as I mentioned above, it takes a significant amount of capital to earn meaningful dividend amounts through a brokerage account every so often. It's a little different if you buy shares direct and can hold fractional shares, but that's not the case for me.

So after taking a good look at my diversified pretend portfolio, I saw the true power of diversification and the role it plays in growing your money. Since I have a very limited amount of money to invest with, I decided to try and grow my account more efficiently and effectively. Perhaps a few years down the road when I have more income available and a larger balance in my TFSA, I can consider re-implementing the dividend growth strategy.

If I want instant diversification and my TFSA is a discount brokerage account, what's the first thing that comes to mind? ETFs! I did a little research on what types of ETFs are available on the TSX, and what sectors and market caps they cover. I came up with a few choices and put them into a new hypothetical portfolio in Google Finance. Then I scrolled down to the portfolio performance window, and checked off the box for comparing portfolio performance with that of the S&P/TSX index. As it turns out, my ETF choices outperform the S&P/TSX by almost 10% over the past 12 months! I have yet to examine the risks associated with each ETF, and I also need to decide what percentage of my portfolio each ETF should occupy. I'm excited to try out a new strategy, and I've now given you fair warning for the types of posts you might see on this blog in the near future.

RRSP First Time Home Buyer's Plan

Just recently, I was getting my taxes done at a tax preparation company, and was discussing my RRSP with the employee there. I mentioned that I was planning on using the RRSP's first-time Home Buyer's Plan (HBP) in the next few years for a down-payment on a house. The employee also knew that I have a Tax-Free Savings Account, and politely told me that in his opinion, I should be using my TFSA instead of my RRSP to save for a house down-payment.

His reasoning was that the money I currently have in my RRSP would disappear when I make use of the HBP, and then I would be missing out on years of growth in that account until I fully paid back the balance. I gave this some thought, and while that fact is true, it's also true of the TFSA, or any other account I might decide to use. Money spent is money lost, which is money that can't grow because it's gone, no matter what account you hold it in. However, his recommendation to use a different account still merited some further reading.

After reading up on how the HBP works, I have decided that I will make a change of plans, and use an account other than my RRSP to save for a house down-payment. The HBP is essentially a loan that you owe to yourself, and that loan remains even, if you go bankrupt. While I don't plan on going bankrupt, it might still be too stressful to have that loan hanging over my head. Around the time I decide to buy a house, I will probably have just finished paying off my student loan. I know that a mortgage is also a loan, but I wouldn't want to have that extra HBP loan tacked on to me as well.

If I decide to use my TFSA or some other account to save for a down-payment, I would highly enjoy having the option and not the obligation to pay back the amount I withdraw. This also frees the money in my RRSP of dual purpose. The money I have in there currently will just stay in there and grow for the main purpose it's there: to save for retirement.

RRSP vs. TFSA: Who cares?!

Now that the TFSA has been around for a while, people have some significant used or potential contribution room for their account. This has given rise to the debate between the RRSP account and the TFSA account. Which is better? Which should I contribute to? What are the benefits, risks, and best practices for me? What if I'm heavily taxed in retirement? What if I don't get as much Old Age Security?

If you're young like me (22 years of age), I say who gives a flying fig? I have both accounts, and I contribute to both evenly. Each account has its purpose, and I'll meet whatever complications arise 40 years from now when they come. What else can I do? There is absolutely no way of predicting what taxes will be in four decades, what income bracket I fit into, whether I'll be eligible for OAS. I say that it's essentially a guessing game as to whether taxes will be higher or lower when I start withdrawing from my RRSP when I retire. If I don't qualify for OAS because I have too much money that I can live off of on my own, isn't that fair?

My plan is this: Contribute to my RRSP for the purpose of a first-time-home-buyer down-payment. Contribute to my TFSA to build a dividend growth portfolio. Simple. Sound principle, should work out just fine if I'm disciplined in sticking to my plan. I don't give a hoot which is better.

Edit: An update on my RRSP plan: RRSP First Time Home Buyer's Plan

Back to Investing

After a period of 4 months of unemployment, I once again have an income. I decided not to work during my school term at university, in favour of studying and improving my grades to attempt to renew my scholarship. I have set up Pre-authorized Purchase Plans (PPP) for my two RRSP mutual funds, alternating contributions to each every two weeks (every pay day). This way, I'll keep my allocation at about 50-50 equity and bonds. If I want to fine-tune the allocations, I'll have to save up $100 to contribute since that's the minimum contribution outside of a PPP. I've also started contributing small amounts to my stock-trading TFSA account. Once I get enough for a round of dividend stock purchase, I'll post another dividend stock analysis on what I decide to buy. Stay tuned!

Introduction

It all started one day in August 2010, when I was looking at my bank account online, and saw a button labeled "Purchase an Investment". Before that point, I had never considered investing, especially since I had just recently witnessed what could happen when a global recession hit. Then I began to think about the student loan I'm going to have to pay back, and how I'll eventually need to buy a car, a house, and eventually eventually retire. So I clicked on the button.

All the different investment options that my bank offered came up on the screen. I Googled any terms I didn't know, and began to learn more and more about all the different investment options that are available, how they are taxed, what type of accounts they can be held in, what risks are involved, and so on. I decided to ask several people I know that invest in different things for some advice. Several people recommended I start by opening an RRSP account to start saving for retirement, and I can make use of the first-time home-buyer's clause to make a down payment on a house at some point.

I went to my bank, armed with some rudimentary knowledge of mutual funds, and a few ideas of which funds I might be interested in. When I opened the RRSP, I had to take a quiz that assessed my investment knowledge and risk tolerance. The bank basically decided for me which mutual fund I wanted, so I left it at that for a couple months. Just recently, I recognized that a mutual fund with a MER of 1.9% was actually a fairly high fee, and there were some much cheaper options available. I switched over to two different mutual funds, one with a MER of 0.48%, and the other with 0.31%.

Shortly after opening my RRSP account, I also decided to open a Tax-Free Savings Account (TFSA) with a discount brokerage so I could dabble in trading stocks. I've made a few trades over the past few months, and I plan to blog about what I learn, what I mess up on, and what successes I find.

I've done a fair amount of reading on personal investing in the past few months, and I've decided to get started on a dividend growth strategy for my TFSA account. I will elaborate more upon this strategy in further blog posts. I like the idea of the "buy-and-hold" strategy for stocks, as they generally tend to show positive returns in the long run, and dividend payments offer a way to earn passive income. I've heard nothing but bad things about day trading and trying to time the market, and I don't have the time or motivation to learn all there is to known about technical analysis to try and make that strategy work.

In writing this blog and learning more about personal investment, I hope to be able to accomplish my long-term financial goals, and end up with a nice portfolio for retirement.