September 05, 2023
The Benefits of Portfolio Investing
When it comes to investing, there are many different avenues to consider, including investing in a diverse portfolio of stocks, bonds, and other financial instruments (portfolio investing), real estate (rental properties), or even physical commodities like gold and silver.
Although the popularity of portfolio investing continues to grow, periods of volatility and downturns in the market can sometimes make both current and potential portfolio investors reconsider if it is still, or will be, the right choice for them.
We wanted to discuss some of the various benefits of portfolio investing, specifically with the help of a professional, experienced advisory team. These benefits can sometimes be forgotten, especially during short-term negative periods in the market when sentiment feels negative.
With portfolio investing, you can spread your money across a variety of assets, reducing your overall risk. At times, portfolio investing can appear to be risky because the values are mark-to-market meaning you are constantly seeing the market value of your holdings if you were to sell them at that point in time. The vast majority of securities we hold or recommend in your accounts managed by us are highly liquid and can be sold at any time if unexpected needs arise. This factor can sometimes be underappreciated by many as it is usually not a concern until a major event requiring liquidity occurs.
When reviewing your portfolio, your fees paid are clearly stated and are predictable. Management fees paid in non-registered accounts also qualify for tax deductions for greater tax savings. However, fees do vary across different advisors and products, and you must be comfortable with the service you are receiving for the fees being paid. With some other assets classes, there are sometimes expenses that are unseen or underestimated. For example, even physical gold ownership involves a number of costs, including storage and insurance costs, and the transaction fees and markups associated with buying and selling the commodity.
Rental property investing carries a number of expenses that can sometimes be underestimated as this normally involves many separate transactions over the course of the year and not broken down on any one single statement. These expenses include property taxes, maintenance costs, and insurance premiums. A general rule for these expenses is approximately 2%-2.5% each year (1% for ongoing maintenance, 1%-1.5% for property tax and insurance) based on the purchase price of your rental property. Additional upkeep expenses such as renovations or major repairs can be unexpected and result in large, short-term expenditures. One must also consider transaction costs for real estate. Both a buyer and seller can expect to pay significant closing costs which can account for roughly 3-5% off the top of the real estate sale price. These include items such as lawyer and legal fees, land transfer tax, property survey, appraisal fees, home inspection fees, title insurance, etc.
Dealing with a portfolio manager can help you make investment decisions and manage your portfolio over time. We also have access to a network of professionals such as lawyers and accountants and provide other services along with managing your portfolio. Services such as financial planning, estate planning, and overall investment advice are all encompassed within the professional management scope.
While owning an asset like a rental property, the task of maintaining the property and managing tenants rests in your hands, which can be physically and mentally demanding. Time also must be put aside to handle all matters related to management of the property, leaving less time for other things like hobbies, vacations, etc.
Portfolio investing does not require a large amount of upfront capital to start building wealth. One can start with a smaller amount of money and gradually build their portfolio over time. Owning a portfolio of diversified, good quality securities still has many risks with the potential of being down in value at any given time, but in most cases you cannot lose more than your initial investment and usually results in positive returns over time.
With portfolio investing, you have the potential to earn higher returns over the long term, as you can invest in a diverse range of assets that can help you achieve your financial goals. In the chart below you will see a comparison of 4 asset classes with the last 10-year returns for each. $200,000 invested 10 years ago would have resulted in the respective values today:
Please do keep in mind, this exercise is fairly simplistic and does not take into account an individual’s tolerance for risk, cash flow needs, or other exogenous factors that could affect returns. This also only considers average scenarios, so there can always be opportunities for certain asset classes to outperform others. Depending on the size of one’s portfolio, a larger portfolio can actually benefit long-term through the diversification aspect of owning a mix of different asset classes alongside a traditional investment portfolio.
Overall, while investing in other asset classes outside of portfolio investing can be a good choice for some investors, portfolio investing can offer a number of advantages as well. By diversifying your investments, keeping your costs low, and working with a professional investment manager, you can potentially achieve strong returns over the long term and build the wealth you need to achieve your financial goals.
 Composite Canadian Housing Prices; Source: https://stats.crea.ca/en-CA/ MLS® HPI data
2 Average Rent prices for 3 bedroom apartment in Toronto; Source: https://www03.cmhc-schl.gc.ca/hmip-pimh/en/TableMapChart/Table?TableId=2.2.11&GeographyId=2270&GeographyTypeId=3&DisplayAs=Table&GeograghyName=Toronto
3 S&P 500 return and Gold return; Source: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
Adam Slumskie is an Investment Advisor with CIBC Wood Gundy in Sault Ste. Marie. The views of Adam Slumskie do not necessarily reflect those of CIBC World Markets Inc.
Yields/rates are as of 2023 and are subject to availability and change without notification. Minimum investment amounts may apply.