The primary goal of investing is to beat inflation and create a substantial nest egg for retirement. So, you need to identify asset classes that have the potential to outpace inflation over time. It’s essential to create a diversified portfolio, which lowers investment risk significantly.
Here’s how you can create an inflation-beating portfolio with $10,000 in May 2024.
Invest in ETFs such as the S&P 500
Canadians should allocate the majority of their investments towards ETFs, or exchange-traded funds, that track major indices such as the S&P 500. This index provides you with exposure to some of the largest companies globally and has returned over 10% annually for several decades. In addition to capital gains, the S&P 500 offers a dividend yield of 1.1%.
One Canadian ETF that tracks the S&P 500 is Vanguard S&P 500 Index ETF (TSX: VSP). With more than $1 billion in assets under management, the VSP is hedged to the Canadian dollar, sheltering you from foreign exchange fluctuations.
Investors with a long-term horizon should allocate a majority of their savings towards low-cost ETFs. So, if you have $10,000 to invest, allocate at least $5,000 to low-cost passive funds such as the VSP.
Invest in dividend-growth stocks
While passive investing is a great way to build wealth, Canadians can also consider investing in quality dividend growth stocks such as goeasy, Canadian Natural Resources, Enbridge, and Brookfield Asset Management.
Its essential to hold multiple stocks across sectors that are positioned to grow revenue and earnings at a consistent pace over the upcoming decade. A widening base of dividends enhances the effective yield, making these stocks attractive to income and growth investors.
Investing in individual stocks is far more risky than holding passive funds. You may consider allocating around 20% or $2,000 towards these dividend stocks.
Invest in GICs
Guaranteed Investment Certificates, or GICs, have gained popularity in recent years due to interest rate hikes. Today, several GICs in Canada offer an annual yield of 5%, which is higher than the current inflation rate of 2.9%.
GICs work just like fixed deposits, where you allocate a certain sum of money for a particular period ranging from a few months to a few years. At the end of the lock-in period, you will be able to access the principal amount as well as the associated interest paid on the capital.
GICs are a low-risk asset class and ideal for those nearing retirement. Younger investors can consider allocating around 15% or $1,500 towards GICs.
Invest in gold ETFs
Historically, gold has been viewed as a hedge against inflation and a store of value. The precious metal generally has an inverse relationship with asset classes such as stocks and bonds while thriving during periods of economic turmoil.
Investors can consider gaining exposure to iShares Gold Bullion ETF (TSX: CGL), which seeks to replicate the performance of the price of gold bullion after adjusting for fees and expenses. The ETF provides cost-effective exposure to the yellow metal and can be used to diversify your investment portfolio. You can allocate around 15% or $1,500 towards the ETF.
