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.
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 email@example.com. You can also send your questions to firstname.lastname@example.org.