Q – My son will turn 18 in the fall and I would like to build him a portfolio. It’s a small amount but, time being on his side, should i focus on buying indexes, individual stocks (banks, telcos), ETFs? This is money he won’t need in the near future, but again the magic of dividends could help a lot. – Bobby S.
A – Since the amount is small, I would focus on exchange-traded funds (ETFs) at the outset. This will provide more diversification than individual stocks and will be cheaper than mutual funds. Start with three basic ETFs that, together, will provide global exposure.
I would suggest investing half the portfolio in an ETF that tracks the U.S. market, since it has been the best performer in the industrialized world in recent years. One possibility is the Vanguard S&P 500 Index ETF (TSX: VFV), which has a low management expense ratio (MER) of 0.08%.
Invest 25% in a fund that tracks the S&P/TSX Composite Index, such as the iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC). It has a MER of 0.06%.
Put the other 25% in an ETF with a global focus. One example is the BMO MSCI EAFE Index ETF (TSX: ZEA). It’s more expensive, with a 0.22% management expense ratio, but it offers broad international exposure and is ahead about 13% so far this year.
I would not suggest holding any fixed-income securities, given your son’s young age. As the portfolio grows in value over time, he can add more asset diversification but for now keep it simple. – G.P.