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It's clear investors crave simplicity in portfolio building. That's how I explain the growing level of interest in the Two-Minute Portfolio, a long-running experiment to quickly and easily invest in the Canadian stock market. The 2MP is basically a rules-based twist on indexing: You buy the two largest dividend-paying stocks by market cap in each of the S&P/TSX composite sectors and update the holdings at the beginning of every year. Note: the actual dividend yield of the stocks is irrelevant.
I've been writing about the 2MP since 1999, and the helpful data crunchers at Morningstar Canada use a 1986 start date for their monitoring of the portfolio. Yet the 2013 update for the 2MP (read it here) has generated more questions from readers than ever before. Let's take a look at a few of them:
1.) Is there a U.S. version of the 2MP?
No. Morningstar tested one for me back in 2010 and the results were lame – a 16-year annualized gain of 3.6 per cent in Canadian dollars, compared to 6 per cent for the S&P 500. Morningstar tried a tweak – picking the two highest yielding stocks in each sector – and it produced gains of 8.8 per cent annually. I consider this a spin on the Dogs of the Dow strategy, where you invest in under-valued stocks (high yields are caused by falling share prices).
2.) What is the minimum portfolio size suggested for the 2MP?
I used $50,000 because that's the account size at which most brokers charge $10 or less per stock trade. Independent brokers Questrade and Virtual Brokers charge $5 or less for trades in accounts of any size. Some investors wonder if they must buy board lots of 100 stocks. The answer is no – odd lots of any number of shares are fine.
3.) Is the 2MP suitable for a TFSA?
Yes. In a taxable account, you'll have to keep track of capital gains and losses on an annual basis, as well as dividends. Both are taxed advantageously compared to regular income, but you'll nevertheless have some work to do in filing your tax return. A TFSA gets the taxman off your back and allows you to reap full benefits from the portfolio. RRSPs are OK for the 2MP, but you lose the benefit of those capital gains and dividends. When money is withdrawn from an RRSP or RRIF, it's treated as regular income.