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.
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.