# 200K Cash to Stocks



## JackJac (Mar 13, 2017)

Hello all,

I am a total newbie when it comes to investing. I currently have 200K sitting in a savings account generating 1.8% interest. I do not need this money for the foreseeable future. I am simply wondering if the following would be a better choice; take the 200K in cash and invest it accordingly:

-50K in BNS
-50K in CNR
-50K in BCE
-50K in FTS

My plan is to buy and hold the above. Can anyone tell me why this wouldn't be a good idea?


----------



## Spudd (Oct 11, 2011)

Well, it's not very diversified, and it's 100% equity. 

I think that something like VBAL or VGRO (or XBAL/XGRO if you prefer) would be better, depending on your age/time horizon.


----------



## like_to_retire (Oct 9, 2016)

Spudd said:


> Well, it's not very diversified, and it's 100% equity.



Yeah, for sure.

The OP has told us very little about their goals, etc.

And now they want to switch from 100% cash to 100% equities?

Realize these equities could offer a total return of quite a bit below zero over many years?

ltr


----------



## JackJac (Mar 13, 2017)

Thanks for the responses. I'm not interested in Index Funds or ETF's.

I am simply wondering whether the stocks I chose will be better than holding that cash in a savings account. I know nobody can predict the future, but any additional insight, remarks will be appreciated.


----------



## Topo (Aug 31, 2019)

If you have a well-padded emergency fund (at least 6 months of expenses, preferably one year), then you can invest those savings into stocks, provided you have a long time horizon (20+ years). The stocks you have chosen seem good, but it also depends on what other stocks you have in your portfolio. Given those are sizable positions, you could be more diversified by buying 10 stocks, each for 20k each. So you would add another bank to BNS, another utility to FTS, etc. You could also consider buying a few USA or international stocks. 

As they say, there is only one free lunch in investing and that is diversification.


----------



## Spudd (Oct 11, 2011)

Why aren't you interested in index funds or ETF's? 

You could hedge your bets by doing some percentage of your money in stocks and the rest in cash or bonds. It doesn't have to be all or nothing.


----------



## cainvest (May 1, 2013)

JackJac said:


> -50K in BNS
> -50K in CNR
> -50K in BCE
> -50K in FTS
> ...


Looks fine however ... if your 200k drops to 150k for a while are you going to sell it or wait it out?


----------



## JackJac (Mar 13, 2017)

Thanks guys. Yes, I will not need this money for quite some time. I do have other savings that is currently in GIC's; and that cash will remain (GIC) cash. 

I know it seems reckless, but I''m not really into diversifying. I feel that if I can choose four wonderful companies that will have a consistent trajectory of growth -- despite temporary market fluctuations -- then why look any further?


----------



## Topo (Aug 31, 2019)

JackJac said:


> I know it seems reckless, but I''m not really into diversifying. I feel that if I can choose four wonderful companies that will have a consistent trajectory of growth -- despite temporary market fluctuations -- then why look any further?


Most retail investors and even most professional stock pickers cannot beat the market in the long term. As such, the odds are stacked against you.


----------



## fireseeker (Jul 24, 2017)

JackJac said:


> I know it seems reckless, but I''m not really into diversifying. I feel that if I can choose four wonderful companies that will have a consistent trajectory of growth -- despite temporary market fluctuations -- then why look any further?


Personally, I think the logic above has been turned inside out.
The question is not "why look further" than your four stock choices.
It is "why look further" than a single, broad-market ETF?

Not "being into" diversification isn't a satisfactory explanation.


----------



## james4beach (Nov 15, 2012)

JackJac said:


> -50K in BNS
> -50K in CNR
> -50K in BCE
> -50K in FTS


I hold a similar mix of individual Canadian stocks so I'm not opposed to these stocks. They aren't bad stock picks.



JackJac said:


> I am simply wondering whether the stocks I chose will be better than holding that cash in a savings account.


Yes I think holding those will give a higher return than holding cash, in the very long term (maybe 10 to 20 year horizon). These stocks are better than holding cash.

But I also think it would be an _even better_ idea to hold XIC (Canada) and XAW (world) instead. This would more reliably beat the cash return. I don't think it's a great idea for a total newbie to hold individual stocks. Specific reasons:

1. holding individual stocks still requires some strategy and long term maintenance... it's not just a simple matter of buying and then blindly holding onto stocks for many years. I do hold some individual stocks (including CNR, BCE, FTS) but I also have a maintenance routine and long term strategy with them.

2. as a total newbie, it's hard to know how your brain will handle the stresses and surprises that hit these stocks. What if some horrendous thing happens at BNS, for example, a total collapse of their Latin American business? You might see daily stories in the news, and on TV, about how BNS is toast ... the stock could start crashing. How would you respond? Without a clear plan of action, *this situation will be extremely difficult to navigate*. Would you be committed to holding it "no matter what", or is there a point at which you would dump BNS?

3. in a few years, these stocks may no longer be strong competitors in their fields. They may even turn into the "duds". This has happened time and again through history. At one point, Bombardier (not CN Rail) was the top industrial stock in Canada. If you're going to pick individual stocks, you need a solid strategy for how to handle this possibility. A great stock today _may not_ be a great stock 5 or 10 years from now.


The pitch for indexing (like holding XIC) is that _you get all of this for free_, automatically. The index does have a strategy (which is time proven). The index also automatically navigates the changing nature of the competitive landscape. For example, as Bombardier became less relevant over time, its weight in the index shrank and new giants took over.

Using XIC also helps reduce the emotional challenge of dealing with stressful decisions about what to do with particular individual stocks when really bad things happen.


----------



## agent99 (Sep 11, 2013)

fireseeker said:


> Personally, I think the logic above has been turned inside out.
> The question is not "why look further" than your four stock choices.
> It is "why look further" than a single, broad-market ETF?


One reason might be that a broad market ETF gives you the good with the bad. You get over diversified and at best only get an average total return and a low dividend yield.

He has chosen 4 good stocks. I would double the number. 2 banks (I have all 6!), 2 utilities (FTS & EMA?), and 1 each of BCE (telecom), TRP(pipeline), POW(insurance, etc), Russel (materials/Infrastructure). All good dividend payers. Large cap except for Russel.

It's a personal choice. But given he has fixed income already, stocks should be good if horizon is 5-10yrs or more.


----------



## Jimmy (May 19, 2017)

It isn't a bad idea. A diversified portfolio w some US stocks would be better though. Here is your portfolio (P1) vs a portfolio 2 of 50/50 the S&P 500 ETF SPY and S&P TSX 60 ETF XIU. Over 7 yrs the returns are 1.61%/yr better


----------



## agent99 (Sep 11, 2013)

Jimmy said:


> It isn't a bad idea. A diversified portfolio w some US stocks would be better though. Here is your portfolio (P1) vs a portfolio 2 of 50/50 the S&P 500 ETF SPY and S&P TSX 60 ETF XIU. Over 7 yrs the returns are 1.61%/yr better


Interesting, but a bit of apples and oranges because one portfolio has US content and the other not. 
In one place you mentioned XIC and in another XIU.???
And 7 years is just a snapshot. There have been times when the US content wouldn't have helped at all.


----------



## Jimmy (May 19, 2017)

agent99 said:


> Interesting, but a bit of apples and oranges because one portfolio has US content and the other not.
> In one place you mentioned XIC and in another XIU.???
> And 7 years is just a snapshot. There have been times when the US content wouldn't have helped at all.


That was the pt. Diversifying gives you better returns unless he didn't want US stocks for tax reasons. The US has outperformed the CDN index generally over the longer periods too. For some reason Fortis's financials are the limitation

XIC and XIU are similar CDN index ETFs. XIC is 300 stocks, XIU 60 . XIU is older though so used it.


----------



## AltaRed (Jun 8, 2009)

There is nothing wrong with 'guaranteed' index returns less MER, which is what broad based index ETFs give you. How can one go wrong with guaranteed 20-30 year returns for the baseline 25/25/25/25 asset allocation shown in Norm's Asset Mixer? Change it up with whatever ratios one wants.


----------



## MrBlackhill (Jun 10, 2020)

JackJac said:


> Hello all,
> 
> I am a total newbie when it comes to investing. I currently have 200K sitting in a savings account generating 1.8% interest. I do not need this money for the foreseeable future. I am simply wondering if the following would be a better choice; take the 200K in cash and invest it accordingly:
> 
> ...


I think everybody is talking about diversification for a simple reason. Yes, it's less risk, but I'm also going to ask you why those 4 specific stocks even though they are wonderful stocks? There are also other wonderful stocks out there.

Why BNS.TO and why not TD.TO?
Why CNR.TO and why not CP.TO?
Why BCE.TO and why not T.TO?
Why FTS.TO and why not AQN.TO?

If you had bought your selection 10 years ago, you'd be sitting on 600K today.
If you had bought my alternative choices, you'd be sitting on 1M today.
And since 10 years ago you would not know which was the better choice, if you had diversified and bought all 8 stocks, you'd be sitting on 800K today.


----------



## agent99 (Sep 11, 2013)

Wouldn't it be great if hindsight worked for us when buying stocks  No doubt, some diversification would be a good idea. But not so sure I would buy two each of just 4 sectors.


----------



## JackJac (Mar 13, 2017)

I am opposed to over-diversification -- when you're holding a bunch of companies in an index that you've never heard of nor understand. I just don't want to do that. However, James made a good point when he stated the following:

_"The index does have a strategy (which is time proven). The index also automatically navigates the changing nature of the competitive landscape. For example, as Bombardier became less relevant over time, its weight in the index shrank and new giants took over. "_

I guess I have some things to think through before I go through with my original idea.


----------



## Eder (Feb 16, 2011)

I also think diversification is over rated...a few concentrated bets on wide moat, large cap dividend increasing businesses is a great strategy for younger people.


----------



## agent99 (Sep 11, 2013)

The problem with the index example, is that when large components like Bombardier, Nortel, Air Canada (both before and since bankruptcy) fail, they drag the index down with them. Smaller companies too like Loblaws and currently energy stocks. Not sure who the New Giants are who compensated for these very large losses. 

Investing in an index fund may be suitable for those starting out with insufficient funds to build their own diversified (but not over-diversified) portfolio. You have to be prepared for mediocre to low returns long term.


----------



## cainvest (May 1, 2013)

agent99 said:


> The problem with the index example, is that when large components like Bombardier, Nortel, Air Canada (both before and since bankruptcy) fail, they drag the index down with them.


Do they?

How Nortel's 'falling knife' proves worth of index investing


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Do they?
> 
> How Nortel's 'falling knife' proves worth of index investing


In fact the whole experience with NT just shows how amazing indexing is. Look at XIU, the first index ETF in Canada. In its early days, pretty much right after it came into existence, Nortel dominated the index and was a huge % of XIU.

You might think this means that XIU was doomed. Hardly! In fact the XIU return since inception is 6.5% annualized, a perfectly solid return, probably greater than what most Canadian equity investors got over the last 20 years.

That's because the index *does* adapt and change over time. Poor performers become minor weights, and new top performers become top weights that drive the performance.



agent99 said:


> when large components like Bombardier, Nortel, Air Canada (both before and since bankruptcy) fail, they drag the index down with them. . . Not sure who the New Giants are who compensated for these very large losses.


What happens is that as large weights crash, they become more minor and less influential in the index. Other stocks rise (in relative weight) to take their place. It's somewhat of a natural evolution between winners and losers.

For example, Bombardier was replaced by CNR as the top weight in 2003. As you know, CNR has performed spectacularly ever since. So yes, BBD.B brought some losses, but they were quickly replaced by the huge gains from CNR.

So we see that the index does adapt and reposition itself over time, grabbing onto the new best performers. Now here's the question... do individual stock pickers do this as effectively?

I would say they don't. Many people stubbornly hold onto stocks, even as they get pounded into nothing.

The index also adds new potential up and comers. The TSX index added SHOP, WCN, DSG, CSU and many other stocks which turned out to be great success stories which contribute to the index gains.


----------



## cainvest (May 1, 2013)

james4beach said:


> So we see that the index does adapt and reposition itself over time, grabbing onto the new best performers. Now here's the question... do individual stock pickers do this as effectively?
> 
> I would say they don't. Many people stubbornly hold onto stocks, even as they get pounded into nothing.
> 
> The index also adds new potential up and comers. The TSX index added SHOP, WCN, DSG, CSU and many other stocks which turned out to be great success stories which contribute to the index gains.


While the index does provide protection it also limits gains so the replacement protection comes at a potential cost.

On the Nortel side the index could have saved your bacon, unless of course you're watching like hawk and/or had a stop loss in place.

On the flip side consider someone who bought a high percentage of SHOP in Dec 2018 dip. How many years of index investing with the same amount of money would it take to make those kind of gains SHOP has had in under two years?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> While the index does provide protection it also limits gains so the replacement protection comes at a potential cost.
> 
> On the Nortel side the index could have saved your bacon, unless of course you're watching like hawk and/or had a stop loss in place.
> 
> On the flip side consider someone who bought a high percentage of SHOP in Dec 2018 dip. How many years of index investing with the same amount of money would it take to make those kind of gains SHOP has had in under two years?


Well sure, and hedge funds (and active managers) claim to do all the above. They claim to ride hot new stocks for gains, and they claim to get out of bad stocks. But we also know from the statistics available on active managers, that they don't do this very well.

Look at CMF for instance. There wasn't even a single mention of SHOP until very recently. We have a lot of experienced investors and stock pickers here, yet just about nobody was in SHOP.

In fact, despite all the supposed hot-shot investors around here, it seems that nobody was even in tech stocks! For many years now, Canadian tech has blown away all other returns. Why is everyone always discussing energy? Why were people not buying tech?

How about all the individual CMF stock pickers. Sure, BCE and FTS are great stocks, but how come none of us individual stock pickers (including me) had any significant positions in tech? We missed out on years of big returns.

I think this shows that in practice, active investors really are not good at doing these "ideal" things. The constant discussions and focus on energy stocks really proves it. People get some idea in their head (like when energy was once hot) and then keep investing like that.

Nobody is actually looking for the new up and comers. Nobody at CMF got into SHOP early, and everyone including me missed the huge performance of Canadian tech / XIT.


----------



## agent99 (Sep 11, 2013)

cainvest said:


> Do they?
> 
> How Nortel's 'falling knife' proves worth of index investing


So OP has $200k. He invests it in an index that has 30% of a Nortel like stock. He doesn't re-invest in more of the index. Just hangs on until the stock is worthless. How does he make out?


----------



## cainvest (May 1, 2013)

james4beach said:


> Look at CMF for instance. There wasn't even a single mention of SHOP until very recently. We have a lot of experienced investors and stock pickers here, yet just about nobody was in SHOP.
> 
> In fact, despite all the supposed hot-shot investors around here, it seems that nobody was even in tech stocks! For many years now, Canadian tech has blown away all other returns. Why is everyone always discussing energy? Why were people not buying tech?
> 
> How about all the individual CMF stock pickers. Sure, BCE and FTS are great stocks, but how come none of us individual stock pickers (including me) had any significant positions in tech? We missed out on years of big returns.


Not everyone here posts all the stocks or ETFs they own so I can't comment on who owns SHOP or something like XIT.

I was just pointing out that index ETFs are a "safe middle ground" with both pros and cons. Even the 5/6/x pack people have enjoyed better gains than a pure index approach, well for the most part.


----------



## james4beach (Nov 15, 2012)

agent99 said:


> So OP has $200k. He invests it in an index that has 30% of a Nortel like stock. He doesn't re-invest in more of the index. Just hangs on until the stock is worthless. How does he make out?


He makes out fine, because the index adapts over time. New top stars become the new highest weights. How else do you explain the 6.5% CAGR performance of XIU, despite starting at a point where NT was a whopping 24% of the index?


----------



## cainvest (May 1, 2013)

agent99 said:


> So OP has $200k. He invests it in an index that has 30% of a Nortel like stock. He doesn't re-invest in more of the index. Just hangs on until the stock is worthless. How does he make out?


You didn't read the article did you ... Did the index become worthless with Nortel down?


----------



## agent99 (Sep 11, 2013)

I did until I realized it was not relevant. And who said the index became worthless? 

Why not consider my example. You buy 60 stocks and never any more. One of them represents 30% of your portfolio. After a few years, that stock drops to zero. The other 70% are supposed to provide you with a good market return, say 8% pa on average. Some of them do well, some not. When would the portfolio recover? 1 yr, 10 yrs, 100 yrs? Do the Math.


----------



## Topo (Aug 31, 2019)

agent99 said:


> I did until I realized it was not relevant. And who said the index became worthless?
> 
> Why not consider my example. You buy 60 stocks and never any more. One of them represents 30% of your portfolio. After a few years, that stock drops to zero. The other 70% are supposed to provide you with a good market return, say 8% pa on average. Some of them do well, some not. When would the portfolio recover? 1 yr, 10 yrs, 100 yrs? Do the Math.


About 7.5 years. Not bad for a 30% permanent loss. A globally diversified portfolio would not have 30% in one stock. Not even 30% in one sector.

Holding the index and individual stocks are not mutually exclusive. One could start with a core index and then add some dividend players or value stocks, etc to further tilt in the direction one wants to. But for most investors, it pays to start with the index. In the case of 4 stocks, if one crashes, the survivors may not be able to do the heavy lifting like the rest of the index did for Nortel.


----------



## agent99 (Sep 11, 2013)

For what it's worth and with thanks to Morningstar, it might be worthwhile looking at what happened through the dot-com period with a lot of help from Nortel. By taking the safe route and buying an index fund, you could make zero return over ~7 years? That's what it looks like to me. Financials were main reason for recovery.


----------



## Topo (Aug 31, 2019)

agent99 said:


> ...Financials were main reason for recovery.


That proves the value of diversification. In the aughts financials carried the index; tech has been doing so since 2008. 

I believe there have been changes to the index since those years. Now XIC for example is called "capped composite", mitigating the risk of a single stock imploding.


----------



## agent99 (Sep 11, 2013)

Topo said:


> That proves the value of diversification.


I suppose so if all you want to do is break even after 7 years.


----------



## Topo (Aug 31, 2019)

agent99 said:


> I suppose so if all you want to do is break even after 7 years.


Sometimes that's the best you can do. It beat getting wiped out.


----------



## cainvest (May 1, 2013)

agent99 said:


> I suppose so if all you want to do is break even after 7 years.


Of course the 7 year break even period is only related to what you bought at the peak.


----------



## agent99 (Sep 11, 2013)

cainvest said:


> Of course the 7 year break even period is only related to what you bought at the peak.


And related to just when you might have sold. Many would have bailed and lost their shirts. 

Those that held individual stocks (like Nortel) may have bailed out of that one stock early and actually made money over those 7 years. I can't recall exactly, But I think we sold our Nortel at just under a $100. At $60 our FS brokerage was telling us to buy! Another reason we went DIY!


----------

