Investment Strategy for a Good Night Sleep
Do you find yourself worrying about your portfolio at night over the working years as you accumulate more and more wealth? Let’s find the right investment strategy for a good night sleep.
Save, Invest, Protect
Save, invest, protect is the common adage for wealth accumulation. What if you are now at the stage where you have saved and invested, and now you just want to protect your wealth from the next dot com bust, or Great Recession? May be you are the age, where you want to reduce your risk exposure and want a more balanced approach.
Today, I’ll share my portfolio allocation approach that allows me to sleep well most nights. In fact, I almost never lose sleep over portfolio performance, because I am a long term growth investor balanced out with regular dividend payments. That means regardless of how the market performs, I still get paid each month. However, as I want to capitalize on the stronger capital returns of a growth portfolio, I’ve split my portfolio in half between dividend and growth investing.
Dividend Portfolio vs Growth Portfolio
Dividend or growth? That is the long term question. Why not do both?
50% growth index funds –
this could be any index fund that tracks the S&P 500.
50% dividend stocks –
Regardless of the market’s performance that day, dividends are regular passive payments. I pick from dividend aristocrat list that has a long track record of consistent payout and growing dividends. I also look at the payout ratio.
Payout ratio is the amount of earnings paid out as a dividend expressed in a percentage. A lower payout ratio means that a healthy amount of earnings is retained for a company’s expansion. When a payout ratio is over 100% then you should be concerned because the dividend paid out is more than what the company is earning. The exception is for REITs but they are a different asset class altogether. For Canadians, the dividend tax credit allows your dividends to be taxed at a lower rate than employment, rental, and interest income – all of which are taxed at the highest rate.
When picking index funds, I always opt for the lowest MERs. MERs stand for Management Expense Ratios, which is the cost for the financial institution to operate the fund. Passive index funds have very low MERs that vary from 0.06% to 0.33%.
Another form of fees are the transaction cost per trade. Some online brokerages charge anything from $4.95/trade to $9.99/trade. If you open a brokerage with the larger financial institutions, they often have their in-house index funds that can be purchased at no transaction cost. This is the reason why I have stayed at a traditional bank’s online brokerage system vs the lower cost online brokerages with free ETFs.
Dollar Cost Averaging
Since I am applying a dollar cost averaging strategy, I want to be able to make incremental purchases every time the fund price falls below my average cost of purchase. In other words, if a fund costs $10 and my average cost of purchase has been $12 to date (shown on my brokerage platform), then anytime the fund falls below $12, it’s considered on sale to me, and I want to buy some more –even though at the same time the fund would be performing at an unrealized loss at that moment in time.
Buy low, buy regularly
People often have the fear of further loss and sell when a stock or fund is underperforming, but in fact should be doing the opposite. When a stock or a fund is going up, people get greedy and want to ride the upswing, but that’s when we should not be buying when everyone does.
Buying low and selling high can only be achieved when we do the opposite of what everyone else is doing. Of course, at this point of my investment life, and still fully employed, I seldom sell, and when I can’t resist seeing all the red on my screen during a market downturn, I have to resist all I can NOT to press the sell button.
Summary – Invest to sleep better
- Split your portfolio between dividend and growth depending on your comfort level for regular payouts and capitalizing on index growth
- Pay attention to the fees – MERs and transaction cost
- Purchase incrementally to take advantage of dollar cost averaging
In the future, we’ll discuss other asset classes to diversify our holdings. What is your investment strategy for a good night sleep?
Disclaimer: I am not a financial professional. The opinion expressed are from my personal experience only.