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The inbox is full of questions again, so let’s plunge right in.
Q – Can you give me some guidance regarding the number of holdings based on total dollars invested? I began my journey about 12 years ago following your newsletter suggestions. I had never previously been a DIY investor but decided to try to see if I had the aptitude and confidence to do so.
I began with approximately $50,000 to see if I could manage to successfully invest. With your help I have been successful.
I have a non-registered account, a TFSA for my wife, and I and manage a TFSA for my son. Recently I took over managing my RRIF account from the investment manager I was using because their performance was significantly worse than my accounts, and I was paying a large fee in addition.
In addition to those funds, I was fortunate to inherit a from my parents.
At present my total of all portfolios is more than $1 million. I currently have about 60 stock/bond positions across the five portfolios. Is this too many to manage? – Gord Z.
A – You certainly have done well. Congratulations.
As for the number of positions, 60 is a lot. The fact you’re asking the question suggests you feel the same. That’s an average of about $16,700 per position, which is small in a portfolio of that size. If you aimed for 25 positions, the average would be $40,000 each. This strikes me as more manageable, while maintaining good portfolio balance.
You could reduce this even more by using five index ETFs to cover the TSX, S&P 500, Russell 2000, and EAFE, plus the bond market. Then choose 10-15 individual stocks from the U.S. and Canada to target companies you feel have above-average prospects. Portfolio size: 15-20 positions.
Having said this, if you are generating above-average returns and you’re comfortable with the current situation, don't change.
Q – I am 62 and considering retirement at 66 or somewhere around there. Recently a retired colleague mentioned about cash wedging one’s retirement portfolio. Apparently, this helps protect the portfolio from withdrawing income when the market is down.
As I understand it, the idea is to withdraw a cash buffer of three times the needed annual income and invest it as follows: one-third in a high interest savings account, one third in a one-year GIC, and the rest in a two-year GIC. In the event of a downturn, one would withdraw from this reserve and hopefully the market would recover in three years.
Is this a worthwhile strategy? I was considering doing it right now, in advance of retirement. I would invest a third of my anticipated income in retirement in a three-year GIC, one-third in a four-year GIC, and one-third in a five-year GIC. So, by the time I retire, I would have one-third ready to use, and two more years remaining.
I will greatly appreciate your considered opinion on it. To me it makes sense. – Kamal G.
A – This is a very prudent way to approach retirement planning, but it comes with a price. If the market continues to rise, you’ll forego much of the potential profit, with your money tied up in interest-based securities. On the other hand, you’ll have peace of mind, knowing that your income is guaranteed for the next three years no matter what the market does.
One point to note. You mention withdrawing money to do this. If you are talking about taking it out of a registered plan, I would advise against it. Such a withdrawal would attract tax at your marginal rate, which could be over 50% depending on your total income and your province of residence. You could achieve the same goal by setting up your high interest account and GICs within a registered plan. You would then withdraw the money each year as you need it at, presumably, a lower tax rate.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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