There are a number of options when it comes to creating your own personalized financial portfolio. Depending on what the funds will be used for, your ability to manage it yourself, or even just your basic interest, it can be a lot to think about.
It can also be expensive. If you’re wanting to make money but just simply don’t have the time, the simplest solution is also the priciest one: hire an advisor. I’m not knocking that option at all, however. If it’s available to you, hiring someone to watch your finances is the perfect choice to producing as much money as possible over the long haul.
However, if you’re like most people, you probably lack the funds to hire someone and the time to manage a portfolio super closely. But don’t fret! There are three steps you can take to creating the perfect hands-off portfolio for the long term, no matter what stage of life you’re in.
Step 1: Open a TFSA
If you’re not familiar with the program already, the Tax-Free Savings Account (TFSA) was opened in 2009 as an option for Canadians to start investing in Canadian companies again. The government provided contribution room of $5,000 to start, with any investments made coming straight to Canadians’ pockets, totally tax free.
Since then, the government has increased that contribution room every year; this year that total is $63,500. Whether you have that money available to you or not isn’t the point; it’s the fact that you now have all this money you can put aside and see cash come in totally tax free. In fact, I would urge investors to open a TFSA before a Registered Retirement Savings Plan (RRSP) given the advantages it has over the latter.
Step 2: The three-fund portfolio
The idea behind the three-fund portfolio isn’t simply to buy up stocks, it’s to buy certain types of investments that create a diversified portfolio for investors. Analysts usually recommend buying a bond fund, a stock fund, and an international fund. This creates enough diversification so that it’s like you’ve purchased a bunch of stocks, when really you’ve chosen only a few well-managed ones that you don’t have to worry about going forward.
While the stocks can be boring, that’s kind of the point. While you will likely pay a management fee for the funds, it’s definitely cheaper than hiring an advisor. Rather than checking in every day, you can go to bed easy at night knowing there are financial advisors monitoring the funds you’ve painstakingly chosen.
Step 3: Pick your poison
Now for the hard — or fun — part, depending how you look at it: choose those three stocks that you can buy and hold for the long run. I would recommend researching the following three as your options.
iShares Core Canadian Universe Bond Index ETF offers investors a plethora of Canadian bonds that gives you about 2.4% in interest payments over the year. That might seem like a pittance, but it’s definitely a great choice to fight against any market volatility.
BMO Low Volatility Canadian Equity ETF is another great option to fight market volatility, with high-quality, low-beta Canadian securities producing a yield of 2.36% annually. The stock consistently outperforms the market and offers management fees that are next to nothing compared to peers.
Finally, we have Vanguard FTSE Global All Cap ex Canada Index ETF, an international fund that doesn’t include Canadian stocks, with a five-year market price return of 10.47%. Therefore, if the Canadian economy is doing poorly, this fund is here to pick up the slack. Vanguard has over 20 funds in its arsenal, so if you’re looking for a solid company to produce results, this is the one.
It doesn’t have to be a headache when it comes to investing. By following these three steps, and researching funds like the ones I’ve mentioned here, investors can create a hands-off portfolio that will pay big time over the long run.
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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.