Stocks, Bonds etc. -> Recommended Investment Portfolio for Novice Investors
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Recommended Stocks (ETFs) for Your RRSP, RRIF, RESP, RDSP, TFSA or Non-Registered Portfolio - for Novice Investors
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.
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.
Make sure that any foreign investments are held in a US$ brokerage account, so that there are no exchange premiums charged except when funds are deposited or withdrawn.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 Risk as it Relates to Investing, Currency Risk, and Tax Treatment of Investments in Foreign Shares.
Investments For Your RRSP, RRIF, RESP or RDSP:
We recommend that you buy the following ETFs, in equal amounts (in Canadian $). 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.
You should rebalance your portfolio as you purchase more ETFs, so that you continue to own approximately the same market value in Canadian dollars in each ETF.
The table below shows how the ETFs are diversified by country:
As of May 4, 2019, all of the ETFs in the above table had management expense ratios (MERs) of 0.13% or less. However, these ratios change over time, so this is one of the things you should be checking prior to buying an ETF. See the links to fund information below the next table.
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 below are held. Again, these are percentages that can change over time. If you want to hold bonds, then reduce the XLU by the amount of bonds purchased.
Note: We've combined VWO, VGK and VPL and replaced them with VEU, which was not available when we first created this table. We also replaced XIU with XIC because of the much lower MER.
- NYSE Euronext Exchange Traded Funds - search by ticker for any of the above funds except XIU
When we first started investing, there were no ETFs available. When we first compiled the above information, there were very few ETFs available. These are among the lowest cost (MER) ETFs available. This is meant as a guide for novice investors, or for people who have no interest in picking their own stocks. There are now many choices available in ETFs, but the main point is to choose low cost, broadly based (diversified by country and economic category) ETFs which hold large, well-established corporations (less risk).
Of the above ETFs, the best ones to put into a TFSA would be ones in which 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 (because they are foreign) except for XIC. 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. However, ETFs are also okay for an emergency fund, because trades are settled 2 business days after the sale, so funds can still be obtained fairly quickly. The difference is that ETFs will vary in price, so it is best to plan to hold them for a long time.
If you have investments in a non-registered account as well as investments in RRSPs and TFSAs, it is best to hold the foreign investments in the registered accounts, and Canadian stocks that pay eligible dividends in the non-registered account. This allows you to take advantage of the enhanced dividend tax credit.
If you want to hold only 1 investment you should buy iShares Cdn Core S&P/TSX Capped Composite Index (XIC), but the dividend yield is only 2.88% as at May 4, 2019, and it would be more volatile that the 20 stocks below.
The following list of 20 Canadian stocks could each make up 5% of your total non-registered portfolio. These stocks were chosen because most of them pay a good dividend (average 3.9% as at May 4, 2019), are diversified internationally and are good quality (blue chip) low risk stocks which can be held forever. These stocks would be more interest-rate sensitive than the iShares. We own most of these stocks, in non-registered accounts.
The advantages of following any of the above plans are:
We mostly buy good quality (blue-chip) stocks and ETFs with the intent of holding them forever.
We've contributed the maximum to our RRSPs and TFSAs.
In our non-registered accounts we hold all Canadian stocks (not ETFs), including most of the above. We do a lot of research on companies, reviewing their fundamentals. The non-registered investments make up just over 50% of our total investments.
We also borrow to invest in Canadian stocks - see our Borrow to Invest article.
Holding Canadian stocks in non-registered accounts takes advantage of the enhanced dividend tax credit for eligible Canadian dividends. The marginal tax rate is much lower than the rate for interest or foreign dividends. You can use our Investment Income Tax Calculator to see how much it can reduce your tax, even if you are a senior and the dividends increase your OAS clawback.
In our registered accounts we hold only foreign stocks, mainly the ETFs noted above. Our foreign investments used to include more blue-chip stocks and fewer ETFs, but we are now consolidating more into ETFs to keep things simpler and require less research. The registered investments make up just under 50% of our total investments.
We provide information on our average annual return each year, in our Free in 30! article.
- Investing - includes tips on choosing a brokerage
Tax Tip: Make your money work for you instead of you working for it.
Revised: May 13, 2019
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