I haven’t had many ideas for articles lately so I thought I’d just revisit some of the idea’s I’ve shared on this website. Specifically what has been working for me as of mid-2021. Disclaimer that these are my personal results and your mileage may vary. Lets get started in no particular order:
Broad ETFs and Index Funds
Index funds have been my bread and butter, and I’ve tried to keep at least 70-80% of my investments within them. They are simply the easiest way to consistently build up your portfolio. Your returns will never be amazing, but they’ll always be good. And if you string enough good investments together you’ll be doing great. Just look at VFV, one of my earliest ETFs that tracks the S&P 500. It has gained nearly 300% since 2013 with a consistent upward trend. Sure it’s been a bull market nearly that entire time, but even in major downturns the S&P 500 has recovered quickly.
I am completely confident in admitting that, if I had just stuck with broad market ETFs like VGRO or VEQT, I would be ahead of where I am now. Don’t be tempted by the siren call of Wall Street Bets YOLO tech investing.
Blue Chip Dividend Companies
A couple years ago I slowed down my contributions to ETFs and started investing mostly in Canadian blue-chip companies like Bell, Canadian Utilities, Fortis, Manulife, Brookfield, and the major 5 banks. These have largely performed well but have a few disadvantages.
- Dividends – If you hold these in a taxable account, you’ll be taxed on the dividends every year, which will reduce your overall gains compared to a swap ETF like HXS. Obviously if you hold these in your TFSA or RRSP you will avoid the tax, but any US dividends will be subject to US withholding tax as well. Although ETFs are not immune to these same issues. Also eligible Canadian dividends do have favorable taxation.
- Commission Fees – Unlike ETFs, buying an individual stock isn’t free. As a result it’s not worthwhile to purchase small amounts of shares. With ETFs you can buy a single share as soon as you have the funds to do so. In order to make up for the commissions you need to buy the stock in large blocks, normally $1000+, which leads into the next issue.
- Diversification Loss – Proper diversification requires you to buy many companies across many industries. As mentioned you’ll need to purchase in large blocks to avoid large commission fees. Thus you’ll need a lot of money to be properly diversified. Furthermore you’ll probably want to keep your money in CAD, so you’ll be buying mostly Canadian companies, and thus you’ll be overexposed to the Canadian market. Nothing can beat the diversification of ETFs. VCN will exposed you to the entire Canadian market and VUN will give you the entire American market and you can get a share of each for about $120 and no commissions.
- Complexity – Lets say you now own 20 companies and think you’re diversified enough. Now you have to keep an eye on those 20 companies. Sure, they’re blue chips and shouldn’t need to be watched, but your account will be clogged with many holdings, compared to just a few ETFs, or only one if you go for VGRO.
Conversely, individual stocks tend to have higher dividend payments than ETFs. You will also save on ETF management fees (MER). So is it worth it? Maybe. It’s up to you. It doesn’t hurt to have a few Canadian blue chips for companies you believe in, but if you also own an ETF you’re just increasing your exposure to some specific companies.
One more point about dividends – when a dividend is paid the stock will drop by the exact amount of the dividend (although in practice it’s difficult to see with the normal daily fluctuations). Thus a divided can be thought of as reducing the total share price by the amount of the dividend. If you are trying to build wealth it almost never makes sense to sacrifice share price for income. Especially if you will be taxed on that income in the current year.
Ultimately it’s very satisfying to see a real deposit enter your account, and despite my complaints above I’ll continue to own some dividend stocks.
REITS (Real Estate Investment Trusts)
I used to think REITs were amazing, and I still think they are a good idea in small amounts and specific scenarios. Ultimately they carry a lot of risk and are mainly good for generating income rather than generating wealth. The problem with REIT income is that it’s not subject to the favorable tax rates like eligible dividends from Canadian blue chips. Again, not an issue in your TFSA or RRSP but in a taxable account you shouldn’t even bother.
Furthermore, REITs tend to have very little, if any, capital appreciation. All the value comes out in the dividend, which will then be taxed. And let’s say you were as foolish as I was and you invested in Morguard. They specialize in retail and office space. Not a good industry to be in during a pandemic works and shops from home.
REITs are good for generating income in retirement and getting exposure to different real estate markets, but I would have been better off just buying VGRO.
Buying Stock Options
Yes I admit I dipped my toes in the world of options trading in the style of Wall Street Bets. I would buy put options if I thought a stock was going down and calls if I thought it would go up. I actually had a few successes where I tripled my investment. The problem was that every winner came with two losers.
Lets say that you think a stock will go up. Seems to be a pretty safe bet, stocks normally go up. But if you’re buying an option you need to correctly predict exactly how much it will go up and by when. Say XYZ stock is currently trading at $90 and you think it will reach $100 by next Friday. You purchase a call option for $5. One of three things will ultimately happen after the option expires:
- The stock goes up higher than $105 ($100 + the option premium). Congratulations you’ve made money!
- The stock just barely goes up and ends at $98. Sucks to be you! Your option slowly decayed and eventually expired worthless. Maybe XYZ stock eventually did go above $100 after your option expired. You were right on the direction but wrong on the timing. Too bad.
- The stock goes down to $90. Well that’s not good, your investment just dropped 50% overnight! You can sell at a massive loss, and if you don’t, you’ll likely get a 100% loss.
So if the chances are roughly equal for each of those results (stock goes up, down, or sideways) you’re going to lose 2/3 times. Don’t do it. Don’t listen to Wall Street Bets. Just go to the casino if you feel like gambling.
Selling Stock Options
Options are a zero sum game. For every buyer there is a seller, and for every winner there is a loser. Thus if I’m the loser 2/3 times when I buy options, then maybe I’ll be the winner 2/3 times when I sell options?
On paper, selling options sounds horrible. In the example above, as the seller the maximum I could make is $5/share, but if the stock ran up to $200 I would lose about $100/share. There is a fixed maximum profit, the premium, and near unlimited downside.
In exchange for this crappy deal the odds are in your favor. I normally only trade if the chance of success is above 70%. The winnings are small but consistent. And the losses are normally salvageable.
My options selling strategy is referred to as “the wheel”. I won’t get into it now but it involves selling cash secured puts and covered calls. I’ve been using it for about six months, which is longer than I was buying them. And so far I’ve been earning money on about 4/5 trades and completely made up for my losses from buying options.
“Wow that’s great” you’re thinking. Well not so fast. It’s still playing with options which tends to magnify your gains AND losses. The market has been on a very steady uptrend for the past 5 months, and when it eventually corrects I expect my losses to be magnified. Hopefully the gains I’ve made up to that point will make up for future losses.
I plan on continuing to sell options until someone or something convinces me otherwise. I do NOT recommend this as a casual trading strategy. It’s the most complex strategy I use and it’s difficult to learn. Literally every single person I’ve explained it to has not been able to comprehend it (which is maybe more my fault than theirs). This is not me patting myself on the back, it’s just my experience. If you’re still interested, you can search “the wheel”, “cash secured puts”, “covered calls”, or check out my attempt to explain it.
Just buy index funds. If you want to branch out, get some bank stocks. Maybe telecoms like Bell or Telus. If you’re restless you can look into options with a paper trading account. Don’t be tempted to buy options. Selling covered calls or cash secured puts is more reliable.