Is there anyway to invest your money safely?
God-forbid that you put your money in a GIC or let the bulk of it sit cash. You sadly won’t even beat inflation.
If you can’t beat inflation you mine as well just burn some of that saved cash every year.
Does that paint an awful picture for you? It sure does to me.
“Properly” investing your money over the long term will help you obtain financial independence wherever you are in life. You must think “long term” in the frame of many years.
Unfortunately, there are no risk free ways to invest your money. There are however ways that are safer than others. For example, an older individual may have a portfolio with a 70-30 bond to stock split. A younger person may have the exact opposite. The 70-30 bond to stock portfolio is subject to lesser swings up and down as as the market progresses with time. This portfolio will inch out smaller gains than a 30-70, but will be less volatile in comparison.
Having exposure to many companies in ETF’s with a broad range of different sectors can further decrease volatility. Owning international stocks, bonds, and ETF’s in different areas will further minimize risk.
Ill outline what I consider safe investing. Having a balanced and diversified portfolio is step 1.
Safe Investing, wherever you are in the game.
Safe investing can be different dependent on where you are in life. For example, a person who is approaching retirement years may carry a higher weight of bonds compared to stocks. Their portfolio is built to withstand downward pressure in the markets and their annualized gains can be more easily predicted. Their money will almost always be on hand (smaller paper losses) to take if needed.
If you are truly playing the long game and are young, you may hold few if any bonds in your investment account. Your portfolio may be completely in equities. This will come with extreme fluctuations in stock price, higher volatility, and a chance for more reward with more risk. I would only recommend this portfolio to people who can stomach price fluctuations. If you truly own good companies, these price swings are immeterial long term. While I consider this portfolio the riskiest, it can however be made somewhat safe.
I’ll outline 3 safe portfolios dependent on where you are in life.
At a minimum, you should have at least 30% of your money in bonds (individual or ETF’s). You should own both corporate and long term treasuries with exposure to international markets. I would recommend that you own 60% in U.S., 25% in Canadian, and 15% International. Furthermore, I highly suggest that you group these bond purchases into ETF’s. You will be subject to less volatility as your portfolio will be comprised of hundreds of bonds. Take a look at the Vanguard ETFS. Their management fees are very low and have a great track record on annualized returns.
You should always keep at a minimum 10% of your money in cash. The reason being is that you can have the opportunity to act when there is downward movement in the market.
For example, when the world markets hit their lows in the 2008/2009 housing crash, the market bounced back. When Covid-19 appeared, the March lows were down 30% from their previous highs. The market bounced back months later. We are currently sitting with a 10% gain year over year in the SP500.
Playing the long game is essential to winning with investing. Looking at the SP 500 and the Canadian TSX, you can see that these periods in time were short lived with a bull market right after.
When we have these downward swings, having cash on hand to purchase hard hit equities is a fundamental principle to achieve a greater return. You can also convert bonds into stocks to increase your portfolios positive gain.
My favourite rule. Never sell in a storm and turn your paper loses into real ones. It has been proven time again that a strong and balanced portfolio will weather it and come out on top. You can see this by looking at the charts. That is why you must play the majority of the innings.
Lastly, your portfolio at this stage in the game should be no more than 70% in equities. If your investments are your primary source of income, you would never want to go to cash because you need the money in a period of a damaged market. To prevent this, it is better to have a very balanced portfolio with a stronger exposure to bonds. You should be able to comfortably aim for a 6% annualized return.
Early in Life.
Famous investor Jack Bogle once said that your current age in percentage of bonds you own compared to equities is a good way to invest. You have time on your hands to handle any storm.
Looking at the long term graph of the TSX or the SP500, the ultimately markets move up. While there are downward periods and times of little movement, by playing the long game you will have a positive return on your money.
While you might hear that past performance has no effect on future movement, I believe that for the next 4 years the market will move upwards. This is due to low interest rates for borrowing money and vaccines distribution taking place.
Dependent on how you purchase your equities, I recommend holding the bulk of them in U.S. A similar 60% American, 25% Canadian, and 15% International compared to the bonds works for me.
The majority of my holdings are in an ETF “VOO” which tracks the SP500. Since inception, this ETF comprised of the top 500 U.S. stocks has had an annual return of 14.5%. Basically when you buy this ETF, you are buying a piece of all the stocks in the SP500. Warren Buffet even said that there is nothing better to the average investor than buying some of the SP500 and holding long term.
I believe that by carrying many individual stocks with strong earnings and increased revenue year over year (upwards of 20%) you can increase your equity returns drastically.
Peter Lynch said its a good time to own a company when its in the 3rd to 7th inning. It will have proven its business model and shown promising growth. I also look at companies that follow where the world is heading. For example, purchasing stocks such as Shopify in the past due to the rising E-commerce market has further increased these returns. Buying cybersecurity stocks or video streaming companies has also increased these returns. 60% of my equity portfolio is in ETFs, while 40 percent is in individual stocks. My investments follow the 60% U.S., 25% Canadian, and 15% international guideline.
Moving Through Life.
As you journey through life and learn how to invest your money safely, most people will transition from predominantly holding equities into bonds. The reason is that your portfolio will be subject to less volatility and you will be able to gauge your annual returns.
Some people will keep their portfolio the same, while others may increase their exposure to dividend paying stocks and efts.
While their is no way to be completely risk free, you must make sure you minimize it. By having a balanced and diversified portfolio comprised of stocks, ETF’s, and bonds; spread over the world market, you can minimize the risk and have a safe return on your money.
In the end, the most common question I get from investors is that if I am afraid of the market crashing. My answer is simple. If the market completely crashes, you have way bigger problems to worry about. With Covid-19, equities fell greater than 30% from their previous highs. If you rode out the storm and used cash on hand to buy damaged equities, you would be sitting higher today. While my investing career only began in 2011 (I missed 2008 crash), I knew other people who followed this strategy and are in better shape then before.
In the end, by having a broad, balanced and diversified portfolio, your initial investments will increase with time. While past performance won’t dictate the future prices, there are 5 key takeaways that will help you win.
- never sell in a storm
- keep cash on hand
- purchasing equities which are growing with a proven business model
- have a balanced and diversified portfolio
- and hold long term.
No matter where you are in the game, or the composition of your portfolio, these rules will set you up for a successful investment career.
Note: If you looking for a place to find ways to make more money for your investments, take a look at 18 ways to make extra money.