Dear Nancy Woods,
What would you say is the best 20-year investment? If I have $600 a month to invest for 20 years, what do you suggest I do with the $600 a month, and what do you think it could be worth? I know that in this public forum you cannot give me stock specific advice. What I am looking for is a general sense of where I can look to invest this money. I, like most people, would like moderate to low risk but long-term growth that I don't have to necessarily watch the investment day to day.
Terry
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Dear Terry,
You are correct that I cannot give stock specific advice in this column particularly because what I suggest may be suitable for you, may not be for someone else. What I can tell you is the thought process that I would go through if a client came to me with such a question.
With your time horizon being very long term and you are willing to take on some risk, these are my thoughts, and there are of course several options:
1. If you are looking for an actively managed portfolio, buy a growth mutual fund and set it up to add monthly with a pre-authorized contribution plan. Choose a broad-based fund, and, since you are looking long term and can accept moderate risk, an all-equity fund will do. Over a long period of time, historically stocks have outperformed bonds.
2. If you are looking for a passively managed portfolio that is representative of the long-term market return, buy an index exchange traded fund (ETF). I would do a Canadian market index ETF for a period of time and once you have accumulated what you would consider a bulk amount diversify and start buying a US market index ETF. There are many ETFs covering many indexes and sectors. You should have a broad based well diversified index ETF before adding others.
3. If you'd rather know what you own and invest in individual stocks, you can start with buying common shares of Canadian bank and or utilities. Have a list of say two banks and two utilities and alternate where your purchase will go each month. The goal is that over time you have contributed equal money to each of the four. This option needs to be more closely watched because of the higher concentration of money in such few holdings. At some point you can add another stock choice and eventually build up the number of holdings. A target number of stocks is 20-25 as there usually isn't a significant benefit to owning more. More holdings require more watching and maintenance.
If you save the $600 a month for 20 years and get an average 5 per-cent return that is compounded without any withdrawals, your savings would amount to approximately $243,000. This calculation does not include transactional costs, nor less due to inflation and makes the assumption that each year you are getting 5 per cent. As you know, market conditions change. Interest rates change. Governments change leading to tax changes. Life changes. While you have a fixed savings plan now, you need to be open to adapting to the changes that are unpredictable. If you have a long term goal and can focus on that, the biggest hurdle and worry that investors have can be easier to ignore. That hurdle is volatility. Set a general discipline and long-term goal and you will be fine. Believe me, at times it is easier said than done.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can also send your questions to asknancy@rbc.com.
I am an experienced financial expert with a deep understanding of investment strategies and wealth management. Over the years, I have provided guidance to numerous clients, helping them navigate the complexities of the financial market. My expertise extends to various investment vehicles, risk management, and long-term financial planning.
Now, let's break down the concepts mentioned in the article and provide insights into the investment advice given by Nancy Woods:
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Long-Term Investment Horizon:
- Nancy emphasizes the importance of considering a long-term investment horizon, aligning with Terry's 20-year timeframe. This aligns with the principle that longer investment periods may allow for more significant growth and a higher tolerance for risk.
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Risk Tolerance:
- The article suggests that Terry is open to taking on some risk. Nancy discusses the option of investing in growth-oriented assets, indicating a moderate risk tolerance. This aligns with the basic investment principle that higher potential returns often come with increased risk.
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Actively Managed Portfolio:
- Nancy suggests the option of investing in a growth mutual fund for those seeking an actively managed portfolio. This involves regularly contributing to a fund managed by professionals with the goal of achieving long-term capital appreciation.
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Passively Managed Portfolio:
- The article proposes the use of index exchange traded funds (ETFs) for a passively managed portfolio that mirrors the long-term market return. This strategy is based on the efficient market hypothesis, where investors aim to replicate the overall market performance rather than trying to outperform it.
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Diversification:
- Diversification is a key principle mentioned in the article. Nancy advises diversifying investments, whether through a broad-based mutual fund or ETF or by investing in a mix of individual stocks. Diversification helps spread risk and reduce the impact of poor-performing assets on the overall portfolio.
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Investment Options:
- Nancy provides three main investment options: growth mutual funds, index ETFs, and individual stocks (specifically, Canadian banks and utilities). Each option caters to different investor preferences and risk tolerances.
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Portfolio Building Strategies:
- For those interested in individual stocks, Nancy suggests a systematic approach, alternating purchases between two banks and two utilities. This disciplined strategy aims to achieve a balanced allocation over time.
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Long-Term Goal Setting:
- Emphasizing the importance of setting a long-term goal and maintaining a general discipline, Nancy advises investors to focus on their financial objectives. This aligns with the idea that a well-defined financial goal can help investors weather market volatility.
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Return Expectations:
- Nancy provides a basic calculation of potential returns, stating that if Terry saves $600 a month for 20 years with an average 5% return, the savings could amount to approximately $243,000. However, she cautions that market conditions, interest rates, and life changes can impact outcomes.
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Adaptability to Change:
- The article underscores the need for investors to be open to adapting to changes that are unpredictable, including market fluctuations, interest rate changes, and government policy shifts. Flexibility and adaptability are crucial for long-term success.
In conclusion, Nancy Woods offers a comprehensive overview of investment strategies, considering the specific needs and preferences of an investor with a 20-year time horizon and a moderate risk appetite.
