On Monday, I wrote about my lump sum dilemma. I had a big bonus this year, but I decided not to invest in the stock market and pay off my consumer debts instead. Eventually, this will leave me more cash flow to invest on a regular basis, so I guess it is a good decision ;-).
Where did the 2K Come From?
One of my “debts” was to pay back my Home Buyer’s Plan (HBP). Each year, I “reimburse” 1K from the money I borrowed from my RRSP to buy my first house. It’s an amazing program we have in Canada where first time home buyer can withdraw up to 25K from their RRSP tax free to purchase their first home. Then, you have 15 years (plus a two year grace period) to put the money back in your RRSP to avoid a tax claw back.
The other 1K comes from… drum roll… Dividends accumulated throughout 2014. I started the year 2014 with $45,000 in my RRSP account. It has generated $1,634 in dividend income for a 3.64% dividend yield. Part of it was reinvested during the year (when I make trades) and the remaining amount was sitting in a US equity index mutual fund. I sold the fund and am now ready to invest $2,000 in my portfolio!
Two Options: Buy More Shares or Buy New Shares
When you have additional money to invest, you usually have these two options; you either increase existing positions as it may be an opportunity to boost one of your holdings (as I did with AAPL last year… it was a very good move indeed!) or you simply go on the hunt for a new company for better diversification. However, adding a new stock, also adds to the time and effort required to manage your portfolio. I personally read all quarterly reports to make sure the companies I hold still demonstrate the same reasons why I bought them in the first place. Plus, as I’ve mentioned in my asset allocation post at the beginning of the month, I’m pretty well diversified right now.
I’m Going to Increase not ONE but TWO positions
The amount I have to invest is not really important this year, if I had to buy a new company, this would only represent 3.6% of my portfolio. This is not important enough in terms of asset weight. This is why I’ve decided to boost two of my holdings. I looked at all my positions and decided to increase Gluskin & Sheff (GS.TO) and Black Diamond Group (BDI.TO). Yeah… I decided to buy two losing stocks in my portfolio!
First: Gluskin & Sheff
Unfortunately, the Canadian stock market took a hit due to the price of oil. Most financials where hit during this period and GS was part of the lot. In order to make things worse, GS published disappointing asset under management (AUM) numbers in November. For a private wealth company, it is important to have as much money under management as possible since this is the source of your income (a percentage is charged as management fees). Therefore, the more AUM you show, the higher your income will be. After the purchase of Blair Franklin, the market didn’t expect to see so many investors defect (I recall the drop in AUM was 8%). Nonetheless, December AUM numbers were much better and the stock bounced back.
The fundamentals why I purchased GS last year are still there: strong cash flow machine evolving in one of the most profitable segments of the financial industry. Chances are GS will be bought out by one of its competitors and the company will pay a generous dividend (don’t forget the special dividend at the end of the year!) to its investors.
Second: Black Diamond Group
When I sold McDonald’s (MCD) to generate some liquidity in order to buy BDI, many people on this blog weren’t convinced of my move… and they were right… for now anyways! While MCD hasn’t gone anywhere since my trade, Black Diamond has followed oil prices down the drain. I’m currently showing -41% on this trade… not my best shot since I started investing I must say the least!
At this point, I have two options: #1 I admit I’ve made a mistake, sell the stock and never look back. #2 I still think it is not a mistake, average my cost down and earn a bigger dividend from this “gamble”.
You understand I took option #2. I believe BDI will go through this rough phase of oil pricing and once the commodity kicks back, I’ll be laughing. I just have to be patient!
What do you think?
I’m pretty sure I’ll have a few comments about my “journey to hell” with BDI, but I’m really interested in hearing what you have say about my two trades!
I already averaged down in BDI. I think it will eventually come back to the 30s but we have to wait…
Hello Al, I agree with you. But I’ll be happy once it is back to $20 🙂 it’s just a matter of seeing the oil barrel going back up… but it will happen.
I think paying off the debts is a great idea. Get rid of them and free up your cashflow!