If you’ve been scrolling through financial articles seeking stock-picking advice, you might want to check out some of the other excellent recommendations from my fellow Foolish writers. They’ve got a knack for identifying those individual Canadian stock gems.
I’m an ETF and portfolio management enthusiast, and my focus is on helping you build a diversified, robust portfolio. I’m all about creating a strong, resilient core for your investments, something you can buy and hold with confidence while you explore and experiment with picking individual Canadian stocks.
In today’s guide, I’ll walk you through the fundamentals of investing, especially through ETFs, which are top-notch vehicles for diversified, long-term growth. By the end, you’ll have a clearer understanding of how to transform your savings into a source of earnings.
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Equities for the long run
When it comes to investing with a horizon of 20 years or more, equities – also known as stocks – should be a key component of your portfolio.
Yes, it’s true that stocks can be risky and their prices may fluctuate widely over short periods. However, this risk is typically offset by the potential for significant growth, growth that far surpasses what you’d typically earn in a standard savings account.
It’s important to recognize that while stocks do go through ups and downs, they have historically provided robust returns over the long term.
Despite major market downturns in 1974, 2000-2002, 2008, and most recently in 2022, the U.S. stock market has demonstrated resilience and growth. From 1972 to the present, the annualized return of the U.S. stock market has been approximately 10.5%.
For those looking to invest in the U.S. stock market without the complexity of picking individual stocks, ETFs offer a convenient solution. A prime example is the BMO S&P 500 Index ETF (TSX:ZSP).
One of the most appealing aspects of ZSP is its low cost. With a management expense ratio of just 0.09%, it offers an affordable way to invest in the broad U.S. stock market.
Fixed income for safety
Personally, I’ve always appreciated having a buffer in my portfolio to help smooth out the inevitable volatility of the stock market. While this approach might slightly reduce long-term returns, the peace of mind it offers is invaluable – it truly helps me sleep better at night.
This buffer role is perfectly suited for fixed income investments, primarily bonds. I have a preference for short-maturity bonds with high credit quality. These types of bonds tend to be less sensitive to interest rate changes and offer a relatively stable return, making them an ideal choice for risk management.
The allocation to fixed income should be tailored to your individual risk tolerance and investment time horizon. Whether it’s 10%, 20%, or even 40%, the key is to choose a percentage that helps you stay invested and comfortable, especially during market downturns.
I like BMO Money Market Fund ETF Series (TSX:ZMMK), a prime example of a conservative fixed income investment.
ZMMK holds a diversified portfolio of treasury bills, bankers’ acceptances, and commercial paper, all maturing in less than a year. This short-term maturity profile further reduces risk, ensuring liquidity and stability. As of now, it yields an annualized 4.93% – a respectable return for a low-risk investment.
Another appealing aspect of ZMMK is its monthly interest income distribution. It provides a steady, predictable cash flow, which can be crucial for budgeting and financial planning.
