Building the foundation on a small budget

Hello!

I am a very new member and investor who is starting with 5k at 40 years old in an RRSP. I also plan on adding 200.00/month into the account from my pay.

I’ve poured over the various lists and resources to see what style of investing I am comfortable with, and am convinced that I first want to build a diverse foundation before diving into riskier investments.

To achieve that, I’ve put 30% into an S&P 500 ETF and am now trying to figure out how to divvy the other 70%.

As a starting point, Is it a better idea to invest more money into a few foundational stocks, or rather own a smaller amount of more companies for the sake of diversity? I feel the portfolio would stand still at best with just a few shares of more companies given my budget, but i am also eager to lay the foundation “properly” before adding more adventurous investments.

Thank you!

-Michael

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Asked on June 24, 2021 2:34 pm

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Private answer

Hey Michael,

It really doesn't matter how much you start out with - the best time to start is today and sounds like you already to go. Starting with a strong foundation is an excellent choice - it is how I built my portfolio. You can get a strong foundation with 5 to 10 high quality stocks. Despite being in your 40s, you still have some time ahead of you. My approach when I was just starting out was to worry less about diversification, and focused more on buying good stocks with growing dividends which I could then re-invest into other positions.

Fees also play a factor here. If you are in a no-fee account (Wealthsimple is the only one) then it may not matter, but if you aren't then spreading out your initial investment over 10 positions will cost more in fees, than it say - grabbing two.

It really is up to each individual investor. While we do advocate for diversity, I've always been of the opinion that it is less important when you are in the building stage of your portfolio. The closer you get to retirement and become dependent on that portfolio, the more you will want to diversify. In my case, I'm in my early 40s and still am not fully diversified. I likely won't shift to a truly diversified portfolio until I'm in my 50s - while I do pay attention to my weightings and exposure, I won't fully diversify until later in life.

If I was in your position, I'd like take that initial investment and put it into 2-3 foundational stocks, maybe with a higher yield (+3%) and then slowly build out from there. You have to do what fits within your own risk profile but for what its worth, that is the route I'd take.

Mat

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Posted by Mathieu Litalien

Answered on June 25, 2021 5:12 am

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