How to Build A Balanced Stock Portfolio

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Many people wonder how to build a balanced stock portfolio, but the process is easier than you think.

Self-directed investing means managing your stock investment portfolio by yourself. You’re responsible for researching securities, making trades, and minimizing fees and taxes. For most people, this is a daunting task. The stock market can seem intimidating and complex, and it has a steep learning curve! Nevertheless, there is a way to do it safely and profitably. 

Building a portfolio from scratch takes time and discipline. If you’re not up for the challenge, that’s ok too! If you want a totally hands-off approach to investing, you need a robo-advisor. But if you do want to manage every dollar and cent yourself, read on!

How To Build A Balanced Stock Portfolio 

Below are the key steps to building a balanced portfolio from scratch:

1. Pick a brokerage

A brokerage account is different than a traditional bank account. A brokerage account is an account that lets you access the stock market, where you can buy and sell securities. 

Many of the large banks also have brokerages, but there are independent providers as well. When selecting a brokerage, you’re looking to:

  1. minimize fees and trading commissions
  2. invest in tax-sheltered accounts

Brokerages can differ wildly in price, from $0 to $30 per trade! Some also charge additional fees like account maintenance or inactivity fees. Likewise, not every brokerage can offer registered accounts like the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) or Registered Education Savings Plan (RESP).

Battle of the discount brokerages: Questrade vs Wealthsimple Trade 

Questrade and Wealthsimple Trade are the leading discount brokerages in Canada. Both are wildly more affordable than the brokerages of the big banks. Which one is best for you depends on what kind of account you are looking for and what kind of trader you are. Here is a summary of how they stack up:

 QuestradeWealthsimple Trade
Trading commissions$0 to $8 per trade$0
Registered AccountsTFSA, RRSP, RESP, LIRATFSA, RRSP
Margin AccountsYesNo
Minimum to open an account$1,000$1

If you want a more detailed breakdown of how they stack up, you can read our full Wealthsimple Trade vs Questrade Post here.

2. Choose the best tax-advantaged account

Before you start trading, you want to make sure you’re doing so in the correct account. Investing in a registered account like the TFSA or RRSP can re

Investing in a Tax-Free Savings Account (TFSA)

The best way to use your TFSA is to invest in the stock market! When you invest using your TFSA, all the investment income you earn is tax-free. This can really supercharge the growth of this account and eventually grow it into a million-dollar asset.

There is one exception: if you hold foreign dividend-paying stocks in your TFSA, the dividends may be subject to a withholding tax. For example, if you hold US stocks that pay dividends, you’ll pay a foreign withholding tax of 30% on your dividends. Ouch! You can get the money back, but you don’t get the extra room in your TFSA to put it back where it belongs.

From a pure dividend perspective, it’s better to keep your US holdings in an RRSP. However, the downside of foregoing any international holdings in your TFSA also means you’ll miss out on any capital gains on those stocks. It is up to you to determine if it’s worthwhile paying 15% to 30% of withholding taxes on your dividends in order to capture capital gains on foreign holdings. Remember 30% of a 1% dividend is only 0.30%, but a capital gain of 15% is a tax-free 15% gain in your TFSA!

Learn more about the TFSA here.

Investing in a Registered Retirement Savings Plan (RRSP)

Using your RRSP to invest in the stock market is the best way to build wealth for retirement. Unlike the TFSA, dividend-paying US stocks will not be subject to a withholding tax in your RRSP. All the investment income you earn in your RRSP will grow tax-deferred until you take it out in retirement. 

Tax-free is always better than tax-deferred, so your TFSA is a preferrable investment vehicle to the RRSP. However, most people end up with more contribution room to their RRSP, so chances are you will eventually need both a TFSA and RRSP to invest. 

Learn more about the RRSP here

Investing in Unregistered Accounts

You don’t have to choose a registered account like the TFSA or RRSP when you invest. You can open what’s called an unregistered account, and all brokerages offer these even if they don’t have registered accounts. 

An unregistered account is a trading account where your gains are subject to income tax. It does not have any special tax-designation, so you cannot shelter your income. 

An unregistered account makes sense if you have already maxed out your TFSA and RRSP, or you want to take on bigger risks in the stock market. If you’re investing “just for fun” because you want to play the stock market, an unregistered account is better than a registered account because you are not putting any tax-advantaged contribution room at risk. If you lose money in a TFSA or RRSP, the money and the contribution room is gone forever!

3. Start with a foundation of ETFs

You can take most of the legwork out of building a balanced portfolio with Exchange Traded Funds (ETFs). ETFs are bundles of related securities that trade like a single stock. Buying a share of an ETF is like buying a small piece of dozens, or even hundreds of different companies. This allows you to diversify your portfolio at very low cost. 

You can create a balanced stock portfolio with as little as 2 or 3 ETFs. No, really! It’s easier than ever to buy the whole stock market with index funds. You can choose index funds from providers like Vanguard or BlackRock, and buy the shares of their ETFs in your brokerage account.

Select individual stocks carefully

Once you’ve established a solid base of ETFs in your self-directed portfolio, you want to fill any gaps or focus on specific financial goals with select individual stocks. Maybe you want to create a dividend income stream. Maybe your focus is on capital gains. What you need and want from your portfolio determines what securities you choose.

One good rule of thumb is to never have more than 3% of your total portfolio invested in a single stock. This way, if one of your picks were to go sour, the loss will be relatively minor to your overall financial health. 

Growing your stock portfolio

Once you’ve established your investment portfolio with some broad market index funds and select individual securities, all that’s left to do is to grow it!

  • contribute regularly, either on a monthly or bi-weekly basis in conjunction with your regular paycheque
  • reinvest all interest & dividends
  • review your investments one to four times per year and rebalance as necessary
  • don’t withdraw your funds!

Final thoughts

How to invest successfully is not something you learn overnight. It takes time, and you’ll spend years perfecting your personal investing strategy! How much risk you take on and what you choose to invest in is likely to change with time, as well. Your portfolio should adapt to your goals and lifestyle over time.

If you want to learn more about self-directed investing, check out the investing course The Six-Figure Stock Portfolio. You’ll learn everything you need to know about going from $0 to over $100,000 in the stock market!

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8 Comments. Leave new

  • On the Tangerine mutual funds: “Of the four versions of the Global Couch Potato, three saw almost identical performance. The Tangerine Balanced Portfolio lagged the TD e-Series and ETF versions by less than 0.10%, despite an MER of 1.07%. […] The point is not that cost is unimportant. But if you’re just getting started and you’re intimated about building an ETF portfolio (and I’ve heard from many readers in this boat), a balanced fund is great choice, even if it isn’t the absolute-lowest-cost option. The price of siting on the sidelines over the last few years has been a lot higher than 1.07%.”

    Source: http://canadiancouchpotato.com/2015/01/09/couch-potato-portfolio-returns-for-2014/

    I remember spending a lot of time figuring out what to invest in in the early days, thankfully while also contributing a good sum, so I was able to rearrange things later once I’d learned more since I had the money saved. I was a bit obsessed with finding the perfect solution. (still am really!)

    Reply
    • I’m very happy with my Tangerine portfolio! It is great for beginners. I didn’t have a hot clue what it was when I invested in it, so I was lucky LOL.

      Reply
      • haha I agree, when I started, I didn’t really understand it at all but 4 years later that little fund has done really well. I still put a little bit in each month (it’s in my RRSP) even though I have a stock portfolio with Questrade. The Tangerine funds are great.

        Reply
    • Agreed! Even with index investing I modified mine so much to include the common stocks I already own it’s still all kind of mashed together. I have a hard time accepting that I can’t beat the index, so I give myself some leeway to “play” the market but my foundation is 100% index investing.. it just has to be, it’s the best option.

      I love this part: “The price of siting on the sidelines over the last few years has been a lot higher than 1.07%.” Amen!

      Reply
  • I just started investing this year (verrrrrrry late bloomer) but I picked a pair of index funds with Vanguard and plan to stay in them exclusively for about twenty years. Then I’ll gradually start rebalancing towards more bonds over about a ten-year period, assuming we’re not in the middle of a market plunge. It was really interesting reading this from a Canadian perspective — for obvious reasons I haven’t sought those out in learning about investing, and it never occurred to me that (say) American stocks would be taxed differently.

    Reply
    • I like the Vanguard ETFs a lot. We’re in some bearish months, not sure if it’s a plunge (outside of oil, that is!) yet… but who knows yet.

      I think staying in index funds and gradually adding bonds to your portfolio as you age makes sense. I still keep a chunk of my portfolio in bond funds right now, and I’m gradually adding to it too going forward. So much less stomach churning than stocks haha

      Reply
  • Do you hold some of your TFSA under Questtrade as well as under Tangerine? I’m exploring a few vehicles for some of my funds and I’m not sure how it works if you have your TFSA split between institutions.

    Reply
    • Yes, I have TFSAs with both Tangerine and Questrade.

      All you have to watch is contribution room, but as long as your tracking that it doesn’t matter how you split things =)

      Reply

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