Sunday, March 8, 2020

How to Build A Portfolio

If you go on Facebook and join various groups on investing, one of the most common questions you see is "what stocks should I buy?"

"I'm a new investor with money to invest where do I start?"

Really hard to give advice without knowing any individual's personal financial situation. Nevertheless you see and get asked the question a lot.

I try never to tell people what to eat, how to exercise and what and where to invest their money. It always causes some sort of battle of the wits with twits. I only entertain the question on a one on one basis. When someone asks these questions in a group setting or publicly they are usually not serious.

There has always been a great divide among individual and wannabee investors. Should you buy individual stocks or broad market ETFs because they're cheap to own and diversified?

When you pick individual stocks you think you will outperform the broader market. Can you? Is that the only investing goal one should have?

I feel a greater personal connection to my money than just owning an ETF. This is just how I feel after losing money to cheap mutual fund salesmen of the 1990's. Anyone remember Brian Costello and his 'taking care of your money' tagline and radio show? He was actually trying to take as much of your money by way of trailer and management fees by setting you up with mutual fund salesmen. I just dated myself.

We've come a long way from those heady days of heavy hitting funds and when funds were the shit. Heavy on the fees that is. Hey, whatever became of Ranga Chand? I don't really care. I do know Gordon Pape is still selling. I subscribed to all of them back in the day so I have a bit of history.

What I've Done

I'm just documenting my how to 'journey' and getting started. If you don't like this approach or don't agree with it that's fine. When someone asks this is what I tell them. It's just that simple. If not go buy a fund or some ETFs.

Right now I would recommend NOT buying anything for long term investing. Stocks are just expensive and I suspect will get cheaper in the coming days. We had a stellar 2019 here in Canada so a pullback of a few percentage points is expected and happening now. Your long term return will depend on changes in valuation and it's dividend growth.

"the return on equities depends on the dividend yield and the rate at which the dividend grows” - The Road to Recovery

Be careful

When selecting your stocks 'be careful'. You are your worst enemy. Don't get sucked into high yield stocks or what's hot and exciting. Try and resist all temptation to chase these stocks. 

They are expensive because everyone is buying and driving up the price.

Instead look for stocks that grow their dividend year after year for at least a decade. It's a sign of health. Canadian banks are cheap right now and could get cheaper. Why not own the bank you deal with? This is where I started. I held my mortgage (since paid for) with Bank of Nova Scotia. So I bought the stock. I bank there, own the stock and collect the dividends. Is this risky?.

The longer you hold the stock the safer it becomes.

You want increasing cash flow from a company that makes their stock more valuable; that drives price growth. As your retirement years go by, you want more of your income coming from the income the stock provides rather than from eating through or having to sell your capital. Now there's a nice strategy for retirement, right? 

Generate the income you need from your investments. A growing income for your retirement years.

For more on how to select these stocks read 'Your Ever Growing Income' by Henry Mah.

I would start with a bank, your bank. Then a telco, again the one you pay your data bill to and also a utility company. Lots of great ones in Canada. Right now yes they're expensive.

In my case I start with BNS, BCE and FTS.

You might start with TD, T and CU.

Either way all great places to start. I don't know what you might prefer or what's down and cheaper at the moment but this is the exercise I go through in stock selection. When someone asks, where do I start? This is my advice.

Just keep a few stocks. It's just a big myth you need more. Start small and take your time.

Make a list of all the banks, telcos, utilities and pipelines. List them in order of the yield they pay. You can select the ones that pay the most or second place to be safer. This is another stock selection strategy. Make a choice and now just HOLD.

If you go look at the oldest and biggest ETFs in Canada (XIC, VCE) you will find a lot of banks, utilities and telecomms in their top ten holdings.Why not just buy a few stocks on your own? Ignore the noise and your brother in laws hot tips.

You should always have a watch list of stocks you would like to own should they become cheaper during the current sell-off. 

You will hear a lot of prognosticators and braggards who possess wads of market knowledge, beating their chests on how they plan to load up on “quality stocks” at good prices when the market really tanks. 

As if life is that simple. What does that even mean?

Quality stocks (companies with a business model that is hard for rivals to emulate, wide moats if you will) started off expensive and are only a little cheaper at the moment.

I like to look for the unloved value stocks, now selling for a low multiple of their profits. they have become even cheaper. 

Such firms are in industries whose long-term prospects look bleak—banks, auto makers, oil and energy firms etc. etc.

Owning them has been an unrewarding experience. Their profits are getting crushed by travel bans, supply-chain snafus and low interest rates. 

It is because they're cheap they deserve a look from astute stock pickers. Are you one?


I don't bother or even think about whether to re-balance or not. It seems to me a lot of unnecessary work. 

What is the end goal of all that activity anyway?

Who says that the original allocation, whatever you choose, is correct anyway. 

In my opinion common stocks of the highest blue chip quality are the best asset class one could own.

Based on this thesis, I'm 100% invested in stocks. 

Once you have held them for a while (years and years), good stocks are safer. This is how I invest my money and what I tell newbies on how I fund my retirement.

You will hear of investors that hold a portfolio split 50-50 or 60-40 between stocks and bonds.

They might sell the bonds that have gone up in price, as interest rates fall, to buy shares that have fallen in price, and are now cheaper. 

Doing this once a month, once a quarter or even once a year in January to keep the weightings constant. 

A more aggressive investor might just keep cash in reserve so they can take advantage of bargain prices when the markets have turned away from risky assets. Right now FEAR is guiding investor decisions.

When would you consider buying more stocks? Is it after a 20% drop?

How about 40%? Yes sure, if you are really waiting for a massive plunge and are hunting for value.

  1. Don't get spooked by a short term temporary paper decline.
  2. Concentrate on creating value.
  3. Hold sound investments. Hold to receive the compounding benefits of dividends gained.
  4. It's NOT what you buy but the price you pay that will determine your long term return.

"I am an advocate of investing in individual stocks" - Stephen Jarislowsky, founder of wealth management firm Jarslowsky/Fraser (since sold).

"Buy when others are despondently selling" - John Templeton

I Don`t Buy or Own Bonds

Do you? 

Why? Please tell.

The financial industry and advocates of modern portfolio theory want you to have a 60/40 split of stocks and bonds. The classic balanced portfolio.

Warren Buffett doesn't invest this way. Should we?

In Berkshire's 2017 Letter on page 13, Buffett states;

 “It is a terrible mistake for investors with long-term horizons - among them pension funds, college endowments and savings-minded individuals - to measure their investment 'risk' by their portfolios ratio of bonds to stocks. Often high-grade bonds in an investment portfolio increase its risk.”

Good enough for a savings minded individual like me and any newbie that asks me. You don't need to buy bonds.

In Sum

  • buy individual companies
  • greater reward and more profitable
  • NO annual fees
  • eventually become safer than bonds
  • growing income and rising capital are driven by an increase in yield
  • put your money in the best companies
  • ETFs are active, putting money in high yield and they re-balance
This is just what I've learned and how I now invest after experimenting with and following other gurus of the 80's/90's. I do my own thing and I like to buy and research individual companies for possible investment. You may not, for me it's a hobby I love.

Other Ideas to Consider

How I Built My Own Dividend Stock Portfolio

How would you advise someone who asks "Where do I start?" when it comes to investing.


  1. Great article and thanks for the mention. You, me and Tom are the rare bred who suggests investors concentrate on Income and quality dividend growth stocks.

    1. Hi Henry, you're welcome. I think this is one of the best and simplest strategies that Joe and Jane average can implement. Also cheap and effective. As you know investors just have to commit and hang on through thick and thin. The rewards come in the long term holding of assets. Of course you know all this.

  2. Do you recommend using the DRIP for people who use their bank brokerage software or get the cash instead?

  3. Hi KF, I like to let the cash from dividends build up and then buy and add to existing holdings. That way I can look for bargains on my own. It's just my personal preference. With a DRIP you buy when prices are high sometimes but you also save on commissions. Nothing wrong with either strategy.

  4. That the mindset I have... a rock and a hard place to decide to drip or take cash

    I’m new, 6 months now... currently have 100 TD @ $73 in December which I’m down 21% and 25k in 4 e-serie, I’m like down like $450

    Also trying to decide if I should average down on TD or use my 13k cash and buy stocks in new sectors

  5. Tough call K. I don't think you can go wrong either way. TD is down to $54 but yields almost 6%.

    I think all the blue chip dividend growth stocks are a buy. You have to decide what you want to own. Good luck and keep me posted on what you decide to buy. Thanks for dropping by:)