At the beginning of this week, I made the big announcement that I quit my job. While this decision generates an immediate financial stress in my household, there are also positive financial outcomes, like having to invest $100,000. For over a decade, I’ve participated in my previous employer’s defined pension plan. I will finally see this money as I now need to make a decision about what will happen next. My latest pension plan statement was dated December 2016 and showed a cash value (the value you receive if you take it as a lump sum payment) of $105,000.
$100,000 coming in my investment account
Unfortunately, this money cannot be directly deposited in my bank account; it has to remain in a “retirement account”. Since I live in Canada, this money will be “frozen” in a Locked-in Retirement Account (LIRA). This means I can’t have access to this money until I retire. On the positive side, this money can be invested tax-free as long as it remains in the account. Withdrawals will be taxed according to my marginal tax rate upon retirement. Therefore, I have no taxes to pay on capital gain, interest or dividend income.
The fear of making a bad investment
When we have such a significant amount of money to invest, the very first thing that comes to our mind is OMG, I don’t want to make a bad investment and lose all my money! If I had $2,000 to invest, I wouldn’t really have nightmares thinking I could lose 20% because it would only be $400. However, when I think about investing $100,000, that 20% represents $20,000. Same percentage, but definitely a different ball game when you put it in dollar figures. On top of this, the stock market has been riding one of the strongest bulls ever, making it very difficult to pick strong companies since all the garbage stocks were also on top.
The market trading at all-time high
The U.S stock market has more than doubled in value since 2008. While the TSX isn’t showing these astronomical numbers, we are still very close to all-time high as well. Thus, it’s my turn to face the ultimate dilemma many of you have faced and sought answers for on this very blog:
Shouldn’t I wait for the next correction to enter into the market?
The short and intuitive answer to this question is obviously. Why on earth would I invest my money now if I have the possibility of buying the exact same shares but 20% cheaper in a few months? This is the kind of reflection I would have if I had a time travel machine and knew exactly when the next market crash would occur. But as I mentioned it many times on this blog; nobody knows when the market is going to crash and the worst investment decision you could make is to sit on the sidelines.
When you wait, you are sure of one thing; you are not cashing those juicy dividend payments! For this reason, as soon as I receive my cheque, I will start investing this money.
Giving this money to an advisor… NAH!
With $100,000 in hand, I might just chicken out and let a third party manage this money for me. This would certainly help me make the emotional break between my money and the way I should invest it. This reflection makes sense for many investors… especially those who get emotional when they lose money!
But the problem is that an advisor will charge me crazy fees and will most likely not give me much service. After all, $100K is a lot of money for me, but it’s a very small amount for a good advisor. I know that since I use to take care of clients with a minimum asset value of $1M. Therefore, if I want to have access to a super knowledgeable advisor, I need to add a “0” to the end of my cheque. Besides, I’m kind of excited to invest this money on my own!
Leaving the $100K in my pension plan… Not that either!
Another option I have is to leave the $100,000 with my ex-employer. They could manage the money for me and keep it under the previous arrangement. I must admit this is an interesting alternative. After all, I could get a bank to manage this money for me and get a “guaranteed return”. While I would not control my investment, the pension I would receive at age 65 would be guaranteed. To be honest, this might be an alternative I’m ready to consider.
I’ve done those calculations many times for my clients and the decision has to be taken on a case-by-case basis. I will have to wait until I receive my final pension booklet telling me how much exactly I would receive as a pension at 65 and how much I would receive if I cash it in for a lump sum payment. Then it becomes a numbers game where I simulate how much my 100K will be worth in 29 years (I’m turning 36 in September.) In the meantime, I will still start working on my investment plan!
My $100,000 plan
If I invest 100K for 29 years and generate a 6% return, my portfolio will be worth about $550,000 ($541,838.79 to be precise) and generate about $16,500/year in dividends (at 3%) at retirement. I believe I can achieve a 6% return in a conservative manner mainly because I will select only strong dividend payers. Dividend growth stocks can generate a 2% to 5% dividend yield at the time of their purchase. Because their stock prices will increase over time, their dividend will grow accordingly.
I also have to keep in mind that I will not invest for just 29 years, but rather for the next 59 years assuming my life expectancy is 85. With that much time in front of me, I can easily apply my 7 dividend growth investing principles and build a core portfolio of relatively conservative stocks with a growth portion that will boost capital appreciation over the years.
I’m well aware that investing now means having to pay full price and sometimes a little bit more for some companies. This is why I will not invest my 100K in one shot, but rather identify potential core and growth holdings and buy regularly into the market. This technique is often used to average your short term result. Investing the full $100,000 in the market today and getting hit by a huge bit of bad luck with the market crashing the next morning would be more painful than investing $10,000 each week for 10 weeks in a row.
How many different stocks should I own with 100K?
Some people will tell you 50, some others, like me, will tell you that a number close to 20 is more effective. The reason is quite simple; the larger the amount of stocks you hold, the longer it takes to review your portfolio each quarter. I don’t want to follow an unnecessary amount of companies if it will often result in a lack of time and duplication. For example, there is no point of holding the 5 big Canadian banks when I can spend a few hours and only buy 1 or 2 of them instead.
My goal will be to build a portfolio with each holding representing about 5% of my portfolio. I don’t want to overload my portfolio into a specific sector, either. While I really like the dividend paying techno stocks right now, I will make sure not to buy Apple (AAPL), Microsoft (MSFT), Intel (INTC) and Qualcomm (QCOM) all together. My asset allocation should look like my 100K Growth DSR portfolio:
Source: Dividend Stocks Rock
This portfolio shows a total return of 45.92% since October 2013 and has beat the XDV/VIG (I have 50% CDN and 50% U.S. holding) by 17.05% during this period (as at May 12th 2017).
Tools I use to invest
You will not be surprised to know that my main tool for building my portfolio will be my own service; Dividend Stocks Rock. I’ve developed a dividend investing platform where buying and selling decisions are easy and portfolio management is optimized. We are now three passionate investors working full-time on this platform and this is expanding rapidly.
Once I chose my portfolio (the 100K CDN growth), I will select my first purchase from the Rock Solid Ranking, an exclusive valuation system providing upside potential for each company my team and I follow. As of July, here are a few interesting picks from the Top 10:
Brown-Forman Corp (BF.B), Helmerich & Payne (HP), Cisco (CSCO), Hormel Foods (HRL) on the U.S side and Alimentation Couche-Tard (ATD.B.TO), Telus (T.TO), Emera (EMA.TO), Intact Financial (IFC.TO) on the Canadian side.
Besides DSR, I do all my stock research online with Ycharts, and use a free alert subscription service at Seeking Alpha to keep up with recent stocks news.
Patience…
For now, there is no need for me to go further as I haven’t received my pension booklet yet. Transferring a pension plan could take a few couple of months between the time you quit your job and the time you actually receive your cheque. I don’t expect to invest my money before September, but at least I have the first steps done already. One thing is for sure; I will invest my money and not wait on the sidelines!
Disclaimer: I hold shares of AAPL, MSFT, INTC, CSCO, HRL, ATD.B.TO, T.TO, EMA.TO, IFC.TO in my DSR portfolios.
I like your approach, investing the $100,000 on a regular basis in good dividend paying stocks. I think the growing dividend portion will keep you way ahead of inflation.
Are you tempted by investing a portion in some riskier stocks that might double or triple in a short period of time? Sometimes, I feel that way but I usually back off for obvious reasons.
I will be very interested in this process of investing your future pension.
Hello Michel,
I once picked stocks with strong growth potential (and obviously higher risk) and I will not do it anymore. I’ve already used 5% of my RRSP to buy AMZN this year (because I’m convinced it will kill major dividend payer in the retail industry).
As for my pension, I rather invest in companies with strong growth potential like AAPL, DIS that still pay dividend at the same time. I know those companies won’t triple their value like Netflix could in the next 5 years, but I rather stick to my investment strategy that works.
I will definitely follow-up on my pension investing process. But as you know how banks are fast, I’m not expecting my pension documents for another 2 months! hahaha!
Good luck Mike, and congratulations on the new options……and newfound freedom. I look forward to following along with your progress.
-Bryan
Thx Bryan! it’s going to be a fun adventure!!
Although I have been a long term dividend growth investor for several decades, I have been augmenting my approach recently to a shareholder yield strategy (Meb Faber). It includes dividend growth, stock buybacks and debt reduction factors in its approach. Faber’s book, “Shareholder Yield” is worth a read and he often offers them for free as an ebook.
All the best to you and your family on this new path.
Hello Colin,
Big fan of Meb Faber as well. I’ll check this book!
Cheers,
Mike
DG –
Talk about a fun dilemma! You are right – systematically buy undervalued stocks throughout a time period until the $100K is gone. I agree on not doing it in one swoop, but maybe $1,500-$2,500 per week or every two weeks. Keep it simple and average cost your purchases throughout a time period. Or look at them once every/every other week and if the metrics point to XYZ stock and ABC stock – buy them that week, if the next turn XYZ and DEF are looking better, buy them, and if the following time period ABC & DEF are looking right at your metrics being used – then buy those guys. You got this and it’s going to be sweet for you!
-Lanny
Hello Lanny,
I will probably put $5,000 on each company as I don’t want to follow 50+ stocks. If you are going to hold that many companies in your portfolio, you are better off just buying a dividend ETF… it will have exactly the same result 🙂 For example, there is no point of holding USB, WFC, JPM and 4 Canadian banks in your portfolio. You are better off doing a stronger analysis and pick only 2, max 3 of them 🙂
Cheers,
Mike
Bonjour Mike,
Four years ago, I rolled over an old retirement account that was full of mutual funds and bought individual companies with it. I did all the buying/selling within a couple of days. I went from 100% equity with mutual funds to 100% equity with individual dividend paying stocks.
People were concerned back then that the market was high, etc.
I know that noone can time the market, and that waiting in cash waiting for a decline could be costly in the long-run, so I invested it.
If the prices had collapsed from there, obviously it would have seemed that I should have waited. As the prices and dividends rose from there, the decision sounds pretty smart in retrospect.
Of course, noone can time the movement of stock prices. So I just invested the money in the best values I could find at the time. If you want to try, you can always keep the dividends in cash, and reinvest them into other companies that are attractively valued once you hit $1,000 in cash dividends sitting there ( as opposed to reinvesting automatically)
Hey DGI,
Thx for sharing your story! You are right; we are better off investing than waiting! I like the idea of using the dividend payments to add new companies to the portfolio!
PS: I bet you did a lot better than the mutual funds 😉
Cheers,
Mike
Congratulations on the pending payout. You’d think that with a $100,000 payout, a person would be excited but I would totally share your trepidation.
You mention that you can’t take your LIRA money out until you’re 65. I personally hold a “low value” one (less than $10,000) and will be able to withdraw it at 55. I’m pretty sure that if you have financial need before 65, you can also withdraw it early. Something to look into if you need it.
Thank you so much for sharing your stock holdings (I own a few, I’m very heavily weighted in Canada, I am also Canadian) and the Seeking Alpha subscription (didn’t know about it).
P.S. Are you currently in Central/South America? We spend close to half the year in Southern Mexico (San Cristobal de las Casas, Chiapas). Let me know if you’re ever in the area.
Looking forward to following along.
Regards, Sarah.
Hello Sarah,
you are right, I will be able to withdraw this money faster than 65. But I don’t think I will.
I’m back to Quebec, but I miss the Frontera Café in San Cristobal.. hum…..
Cheers,
Mike
Good approach. Having invested a large sum of money from plan contributions transfer in the past few years, I have used a similar approach with the caveat that I have already reached my maximum number of stocks long ago …
I have around 30 stocks for a 500K dividend portfolio and will not go really higher. My highest holding has over 30K in it. I usually end up doing one of the following:
– Add to an existing holding to a maximum percentage of my portfolio (5%)
– Ensure sector diversification follows the plan
– Swap completely out of one holding in favor of a better one. (sometimes I miss a good stock …)
I pool all of my accounts together to manage the portfolio as I see it as a holistic retirement plan rather than each account being its own portfolio.
Good luck in selecting your stocks. Within a month I usually have deployed all of the money.
I like your approach DivEarner!
This is definitely a good way to manage your portfolio once you are fully invested.
Cheers,
Mike
I’m staying in cash a bit longer, for two reasons. Inflation is still low, and I think a generous fraction of current market valuation rests on Trump/Congress ability to pull of corporate tax reform. I’m beginning to have reservations given their performance on health care. Just sayin’.
Hello Jesse,
I agree with you, the market seems overvalued. However, if you look at each year of the past 30 years, you will find some very good reasons not to invest in the stock market. However, the market has boomed over the past 30 years (while encountering a few speed bumps in the process). Do you remember as 2008 announced the death of capitalism and the stock market?
do you use stop loss orders? That would allow you to invest the full amount in one shot, but limit potential downside if the market goes down rapidly.
I’m looking at this myself as I need to invest $30K but need to keep it available for withdrawal over the next couple of years. I don’t want to put it in savings with the current low yield, but want to protect any major loss of principal due to stock price declines.
Hello Erik,
I really don’t mind about short term losses. They are irrelevant as this money will be invested for nearly 30 years anyway. In your situation, I would leave the money in a savings account if you need the money anytime soon. The market is a long term game, definitely not a good place for short term investments.
I’m getting a similar ‘payout ‘ soon (decided to retire at 56). It will go in my RRSP since I had a employer match program.
That plus around $100k cash will give me $185k to reinvest and is rather daunting. I suppose more Beating the TSX or Dogs of the Dow but I’m very interested to see what you come up with.
I’m with Div Earner, treat all accounts together as a big portfolio.
Thus far dividends are yielding 3.5% but I need to deploy all funds while keeping some in cash. I think I have too many stocks and am looking to cut them down to a manageable list since I don’t want a new job as a portfolio manager.
Any information on simplified portfolios while preserving yield would be great.
Thanks.
Tomboalogo,
Investing that much money is not an easy task. Thank you for the inspiration, I’ll work on how to reduce the number of stocks while keeping similar return and yield in the portfolio.
Cheers,
Mike.
Congrats! I hope all goes well. I am just starting and trying to put together my sector diversification percentages. Do you mind sharing your thought process on how you did your percentages and especially how you came up with the 25% for financials?
Thanks in advance.
Hello Terry,
While building my portfolio, I start by looking at interesting companies first. Then, I look at how I can fit them together and not be over invested in some sectors. This particular portfolio shows 25% in financials because Canadian banks are awesome dividend payers and I added BlackRock (BLK) on the US side.
Cheers,
Mike
Thanks for the quick response. Good luck investing the $100,000!
I get infusions of cash periodically into my qualified plan. Because I have a mature portfolio, I generally purchase from within the group of stocks I already own.
Were I to come into a large chunk of cash without a prior portfolio to which to add, particularly with the market at a historic high, I would consider using the cash balance to cover the sale of cash covered puts. As long as you are in cash, you can “commit” to a stock you’d like to own, but at a lower price sometime in the future. You are paid to sell the put, you either collect the put premium or you receive the shares at the strike price. Your actual cost is the strike price minus the put premium, which is already cash in your pocket. You might not commit all the cash, or you might purchase puts that are WAY out of the money to minimize the chance you’ll get shares before they bottom in a correction. However, you can also roll the option forward if the equity price is dropping near the strike price and you think its price will decline further in the future. If you do this with relatively short expiration intervals, You will always have an easily accessible hunk of cash to commit after a correction and your cash will work for you in the meantime.
Personally, I find this to be a lot of work, but you’re now unemployed, so you have some time to devote to more intensive portfolio management. I’m happy to just “average in” to a larger position understanding that I can’t predict when I will have better opportunities to deploy cash into dividend generation.
I am in a similar position but with close to $360,000. $260,000 are available immediately and the rest coming hopefully in a couple of months.
I decider to use short term (30 days) GICs that pay 2.0%. I also placed $100,000 in the EQ Bank’s savings account that pays 2.3%. Unfortunately they do not take more than $100,000.
Wait until market crashes and then buy in.
What do you think of this strategy?
Hello Roman,
I will answer with a set of other questions;
what will you do if the market crash happens in 2 or 3 years?
Also, how do you define “market crash”… -10%, -20% or worse?
Because if tomorrow morning the market drops by 20% in one day, are you going to buy or wait the next day to see what happens?
Cheers,
Mike