Recommended stocks (ETFs) for inside or outside of your RRSP or TFSA
If you have read our Risk
article, you will notice that cash and bonds are rated
less risky than stocks. This is true in the short
term, but if you look at our table of investment returns, you
will see how stocks have greatly outperformed bonds over
time. You won't see the volatility that happened along
the way. From our point of view, the asset which provides the best
return over a long period of time is the least risky.
Therefore, we consider a well diversified portfolio of exchange-traded
funds (ETFs), which are funds which hold stocks) to
be less risky than bonds. When you own stocks, you
actually own part of a company. When you own bonds,
you are lending money to a company or a government.
Would you rather own a company, or lend money to it? We don't hold any bonds now,
but we have held Canadian federal and provincial bonds in
the past, when they were yielding over 9%. If their
returns go that high in the future we may buy them again,
but only inside RRSPs.
You can eliminate some of the volatility from
stocks by following 4 simple guidelines.
Buy stocks slowly (dollar cost averaging). Don't try to time the market. Buy stocks at
fixed intervals 2 to 4 times a year over a long period
of time (20 years or more).
Buy stocks in all global markets
(diversification). This reduces currency
fluctuations.
Buy stocks across all
sectors of the economy (diversification).
Hold stocks for a long time (buy and hold). You
can hold the recommended ETFs from the day you are born
till the day you die (we buy them for our
grandchildren).
Unfortunately, you can't eliminate all the volatility from
your portfolio. The individual ETFs will rise and fall
continually, and the whole portfolio will suffer a large
drop (10% to 20%) approximately once a decade. Over a
long period of time the ETFs will rise, because the stocks
that make up the ETFs slowly increase in value. If the
value of an individual stock falls continuously, it will
gradually represent a lower percentage of the ETF, and
eventually it will be replaced with another stock.
For your RRSP:
We recommend that you buy the following ETFs, in equal
amounts. The order in which you purchase
them doesn't matter. Just buy at market (market
order), because the spread between bid and ask is only
pennies. We believe that this portfolio of investments will provide an
average annual return of 9% or more. Regarding the holding of foreign stocks in
your RRSP, see our articles on Washing Trades
and Currency Risk.
The table below shows how the ETFs are diversified by country:
approximately 500 stocks from 16 European countries
VPL
Amex
Vanguard Pacific
Vanguard
0.18%
approximately 500 stocks from Japan, Australia, Hong Kong,
Singapore, and New Zealand
VWO
Amex
Vanguard Emerging Markets
Vanguard
0.27%
approximately 800 stocks from 22 countries including South
Korea, Taiwan, Brazil, Russia, China, South Africa,
India and Mexico
XLU
Amex
Select Sector SPDR Utilities
State Street
0.21%
over 30 US utility stocks
The table below shows how the
ETFs are diversified by economic category, and the average % of your
portfolio in each category when equal amounts of each of the ETFs are
held.
Of the above ETFs, the best one to put into a TFSA
would be VWO, because the return is mainly capital gains, not
dividends. There is 15% withholding tax deducted from dividends paid
into a TFSA from any of the above ETFs except for XIU. See our TFSA
article on this for an explanation. If you are using your TFSA
as an emergency fund, you may want to hold a certain amount of it in cash,
T-bills, or GICs.
For your non-registered account:
Make sure that the foreign ETFs from the above table
are held in a US$ brokerage account, so that there are no exchange
premiums charged except when funds are deposited or withdrawn.
Regarding the holding of foreign stocks, see our articles on Currency Risk,
and Tax
Treatment of Investments in Foreign Shares.
Use
the same investments as for an RRSP, but replace the
Select Sector SPDR Utilities (XLU) with Canadian dividend-paying stocks, to take
advantage of the enhanced dividend tax credit. These stocks should
be pipeline, utility, and telecommunications companies. There is no
ETF for this category. The following are the largest of the Canadian
companies that fit this category, with their ticker symbols on the Toronto
Stock Exchange. If you are a novice investor, you should buy these
large companies, and diversify among the three sub-categories.
Pipelines:
TransCanada Corp. (TRP)
Enbridge Inc. (ENB)
Utilities:
Canadian Utilities (CU)
Emera Inc. (EMA)
Fortis Inc. (FTS)
TransAlta Corp. (TA)
Telecommunications:
BCE Inc. (BCE)
Cogeco Cable Inc. (CCA)
Manitoba Telecom (MBT)
Rogers Communications Inc. (RCI-A and RCI-B)
Shaw Communications Inc. (SJR-B)
Telus Corp. (T)
Lower risk portfolio for more conservative investors
If you're getting close to retirement or are worried
about volatility, you may want to adjust your portfolio to the one
below. The returns will probably not be quite as good as the one
above. We've added more consumer staples, technology, telecom,
healthcare, pipelines, utilities and Canadian financials. These
sectors are less volatile than the others. The table below shows the % of the portfolio that
should be invested in each ETF or stock.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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