How to Diversify a Portfolio Without Becoming a Full Time Analyst
Depending on what you are adding to your portfolio, you can diversify yourself in the market without having to go through the hassle of…
Depending on what you are adding to your portfolio, you can diversify yourself in the market without having to go through the hassle of reading financial statements.
In this article there are several links to external websites, financial products, and services. I do not get commission or reimbursement of any kind. They are strictly for demonstration purposes.
As mentioned in a previous article, diversifying your portfolio can land you in steep red ink if not done correctly. In short, not doing your research and investing in shares of companies or other financial instruments that you don’t fully understand can lead to your money being put in the wrong places at the wrong times. Fortunately, there are a few instruments that can help you diversify your portfolio without requiring you to feel like a full-time analyst.
ETFs — Exchange Traded Funds
Exchange Traded Funds are professionally managed (but not activly traded) baskets of stocks that are picked to balance risk with return, often corresponding to a specific sector such as mining, or airlines. When you look for them on your trading platform of choice (WealthSimple, EasyTrade etc.) you will note you can buy and sell them in the same way you would any other tradable share. You can do this at will, something that separates ETFs from mutual funds.
Some important numbers to keep in mind are:
The MER (short for Management Expense Ratio) is a fee charged by the ETF manager to cover the costs of administration, record-keeping, and research. It is usually reflected in the face value of the ETF (the amount you would pay when you press ‘buy’) and is calculated daily.
The high and low 52-week values represent the highest and lowest prices that the ETF has reached over the past 12 months. Unlike stocks (individual shares in companies), this value generally does not fluctuate too much, which is why some investors prefer it. It usually hovers around a consistent range, so if you are alerted that the price has suddenly dropped, you may consider adding more to your portfolio, as long as there is no wider event taking place.
The Yield % represents the portion of the ETF price that is paid out to investors as a dividend. A dividend is a payment to shareholders of part of the company’s profits. This is usually split into four payments that are made over the course of a year. For example, if the price of the ETF is $100 and the yield is 10%, the total dividend would be $10 paid at $2.50 every three months. In many jurisdictions, this is considered taxable income, so be sure to check the rules in your jurisdiction.
Top 25 ETFs - MarketWatch
Use the Top 25 ETFs, on MarketWatch, to compare ETFs.www.marketwatch.com
Mutual Funds
Mutual funds are actively traded pools of investments that seek to return a higher yield than the wider market. The main difference between mutual funds and ETFs is that people usually make active trades (buying/selling) with the fund pool to generate a return, instead of passively increasing value.
Another important difference is that you cannot trade shares of mutual funds like you can with ETFs during market hours (usually 9 am to 4:30 pm in any given time zone). The Net Asset Value is calculated at the end of every trading day, and you can only buy mutual fund shares after the close of trading hours. Often, the minimum requirements for buying into a mutual fund are much higher than ETFs.
According to some reports, the minimum deposit is $2,000-$3,000, instead of $10-$150 per share for ETFs. Some mutual funds have historically offered higher returns during limited periods of three to four years. However, on an eight-year timescale or longer, few, if any, publicly available active funds are able to beat the market average, and they have higher fees.
Vanguard Mutual Fund Profile | Vanguard
Edit descriptioninvestor.vanguard.com
Top 25 Mutual Funds - MarketWatch
Use the Top 25 Mutual Funds, on MarketWatch, to compare mutual funds.www.marketwatch.com
Robot Advisors
Some services offer robot advisors that use automated signalling to find patterns in the market. This has the advantage of taking all the guesswork out of where to place your investment. The downside of this is that it also takes almost all the control away from the investor; this may not be a bad thing for those just starting.
You can change you level of risk. The lowest level risk normally places the focus on fixed income assets like government debt issues and Guaranteed Income Certificates. Increasing the level of risk changes the balance to favour ETFs and company stock.
These are normally provided as service directly through your broker such as WealthSimple or CharlesShwab.
Schwab Managed Portfolios - Portfolio Diversification
Schwab offers professionally managed, broadly diversified portfolios of low-cost ETFs or mutual funds. Compare our…www.schwab.com
Managed Portfolio Investing for Canadians
Automatic deposits, rebalancing, and dividend reinvestment make sure your money is working hard, even when you're not…www.wealthsimple.com
What is best for you?
Unfortunately, this is a question that is personalized to the individual’s situation. For people who are just starting out on a trading platform, ETFs are a great, lower risk way to understand the mechanics of making trades and learning the basics of investing.
For those who are relatively uninterested in learning about finance beyond the fact that invested money grows over time and want to start small, robot-managed accounts are a great option.
For people looking for a more service-heavy, curated experience and who also have more money to invest, mutual funds are an interesting choice. However, given the higher fees, you may want to do your research to see if the net returns are really higher than the market average.
Happy trading everyone!