Sunday, April 28, 2013

Portfolio for Beginners

The hardest step of doing anything is getting started.

When I talk to various people (friends, co-workers, people on the internet), they often say 'I would love to invest and grow my wealth, but I have no idea how or where to start!'. Its true. While the concept of investing or why you should invest, is not a hard one to grasp, or a hard one to accept, many people get stuck on how to begin doing it. To an outsider, the world of investments often looks at best confusing, and at worst, scary. So many investments to choose from, where do I start?  What makes the process of getting started even more difficult, is that beginner investors often have a fear of seeing paper losses.

Today's your lucky day. I'm going to help you get started with a portfolio for beginners. I will even track it over time to see how you would have done, had you actually followed through on it.

First, let's set some rules, or guidelines, regarding portfolio management.

How the portfolio will be set up:
  1. The portfolio will have an initial investment of CAD$24,000 in total. If you have more, or less, simply scale the shares purchased up or down. Very simple
  2. The $24,000 will be divided up evenly into 6 blocks of CAD$4,000 each
  3. Each $4,000 will then be used to purchase shares in the following companies at the April 9 closing price: KO, JNJ, XOM, CNR, BNS, RCI.B
  4. For US companies (KO, JNJ, XOM), we will exchange the CAD$4,000 to USD first using April 9 noon USD/CAD exchange rates provided by Bank of Canada (1 CAD = 0.9841 USD) leaving USD $3,936.40 to purchase shares with
  5. To keep things realistic, I'll use brokerage transaction fees of $9.95 per trade.
  6. New funds of $400 per month will be added to the portfolio.

After making the purchases, and paying the trading fees, we have the following:

Holding Symbol Purchase Price Shares Total
Coca Cola US: KO U$40.71 96 U$3908.16
Johnson & Johnson US: JNJ U$81.52 48 U$3912.96
Exxon Mobil US: XOM U$88.77 44 U$3905.88
USD Cash - - - U$52.35
Sub Total USD

CN Railway Canada: CNR C$98.11 40 C$3924.40
Scotiabank Canada: BNS C$57.37 69 C$3958.53
Rogers Canada: RCI.B C$51.73 77 C$3983.21
CAD Cash - - - C$104.04
Sub Total CAD


Now, we also need to determine how we're going to reinvested dividends, as well as how to invest new funds as they get added.
  1. New funds of $400 per month will be added to the CAD cash pile per month.
  2. Take dividends in cash as well
  3. Buy some more stocks each time total CAD cash pile gets to $1000
  4. Alternate between buying USD stocks and CAD stocks to maintain 50/50 weighting of currencies
  5. Gradually add more to each original investment until $10,000 each, then consider diversification

Overall, our portfolio is pretty diversified already. We have a bank, a telecom, a railway, an energy, a consumer staple, and a healthcare. Among these, we have 3 blue chip businesses whose earnings are resilient and not very economically sensitive (KO, JNJ, RCI.B) and 3 businesses whose earnings are more sensitive to economic conditions (XOM, CNR, BNS). Each of these are best in breed, and their brand is very well known.

Let's take a look at what our investments give us for the moment in terms of cash flow, cost basis (rounded to nearest dollar, going forwards):

Holding Cost Basis Div/Year Div Yield
US: KO U$3908 U$107.52 2.8%
US: JNJ U$3913 U$117.12 3.0%
US: XOM U$3906 U$100.32 2.6%
Canada: CNR C$3924 C$68.80 1.8%
Canada: BNS C$3959 C$165.60 4.2%
Canada: RCI.B C$3983 C$133.98 3.4%

Overall, this gives us ~$325 USD and ~$368 CAD per year of dividend income, or about $700 CAD annually, on $24k of invested capital, or average portfolio dividend yield of about 2.9%

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