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When to transition to owning ETFs and stocks

Thanks to a reader question, I’ll share with you the approach I took to transition out of mutual funds to Exchange Traded Funds (ETFs) and dividend stocks in my investment portfolio.  First up the reader question:

Chris asked My Own Advisor…

What would be your thoughts on this?

I recall a while ago you mentioned that it would be advisable to move into ETFs and dividend stocks when the portfolio value is larger to mitigate the fees associated with it.  Do you know what or when that criteria could be met?  I’d like to transition into ETFs or individual stocks but I am unsure how to bridge the gap.

Thanks for your question Chris, hopefully the information below will give you some insight into my situation, what I did and why I did it so you could this to help make the right decision for your own situation.

When to switch?

In my opinion, there is no absolute right answer regarding how much your investment portfolio must be worth to own Exchange Traded Funds (ETFs) or individual stocks.  Your portfolio value could be $1,000, $10,000 or $100,000.  However, based on what I’ve read and the practices I’ve applied in my own portfolio, I think a transition to owning ETFs and individual stocks usually makes sense when you have at least $25,000 to invest.  I believe this is an appropriate value because diversification is essential in any well-constructed portfolio and to obtain some diversification, you’ll need to own at least a couple of ETFs or many individual stocks and to get that diversification, making trades will cost you money.

To sell out of your existing mutual funds or other financial products, you might be charged transaction fees to do so.  If you’re fortunate not to be paying fees when selling your mutual funds, you’re likely going to be charged some fees to buy ETFs and it will definitely cost you money to buy individual stocks.  As an investor, paying fees can be a portfolio killer because fees often take some time to recuperate from.  To avoid paying more fees than necessary, individual discount brokerage accounts greater than $25,000 in value or household assets usually greater than $50,000 have reduced transaction fees applied.

In my case, when I switched out of mutual funds into ETFs and dividend paying stocks a few years ago, my household assets were at a point where I qualified for $10 transactions.

As a small aside, most DIY investors I know usually don’t make any ETF or stock purchases until their commission costs are about 1% or less for the transaction.  That means they have saved up at least $1,000 or more to buy an ETF or stock with a $10 transaction fee.

Starting your do-it-yourself ETF portfolio can be easier than you think, and with a handful of ETFs, it can be diversified right from the start.

Owning dividend paying stocks for the long-run is another excellent strategy for wealth creation but based on the diversification reasoning above, it’s hard to achieve with a small portfolio value under $25,000.  Sure, you could own $1,000 of every Canadian bank, a few Canadian telecommunications companies, pipelines, utilities and energy companies as well but it will cost you a bunch of transaction fees to build that portfolio.  Even with those companies, you’re still missing out.  Canada only represents something like 2-4% of the entire global equity market.  Even with all these Canadian stocks in your portfolio, you’re only getting a slice of the portfolio pie; you’ll need to look to the U.S. and beyond for more equity diversification.

With only a few exceptions, I waited until I had a core portfolio of at least three broad-market ETFs from Canada and the U.S. before I started investing in individual dividend paying stocks.  Since those early purchases, as my portfolio value and investing knowledge grew, I took new monies saved each year and purchased individual stocks to buy and hold in various accounts.  Today, I continue this approach and now own around 30 individual companies along with ETFs that are at the core of my investment portfolio.   The way I see it, owning ETFs along with dividend paying stocks is a winning combination for me and my investing objectives.

You need to decide what’s right for you.

The Summary

If your portfolio value is over $25,000 or your household assets are approaching $50,000, it might be time to start researching some great ETFs and/or some dividend paying stocks to own instead of your mutual funds.  ETFs can be excellent products for index investors who want market-returns or those investors seeking to keep their portfolios simple and easy to maintain over time.   Owning individual stocks, especially those that pay regular dividends, is also a wealth-building strategy but one must be more careful with this strategy over indexing.  There are never guarantees in owning any one company no matter how long it has paid dividends.

Got a question for My Own Advisor?   Email me via my About & Contact page.

Filed in: Exchange Traded Funds (ETFs), Stocks

19 Responses to "When to transition to owning ETFs and stocks"

  1. I feel that it’s more a question of education and comfort. Once you’re comfortable trying to invest in individual stocks you can do so by investing in $1,000 blocks. I’m building my dividend growth portfolio over time. When I started, I wasn’t very diversified, now I’m more diversified and still working on it.

    You don’t need to necessarily sell out of your mutual funds. You could just stop adding investing in them and transition into stocks as you feel comfortable.

  2. Dan Mac says:

    I agree with Financial Independence Journey. I invest in $1,000 blocks at a time and am slowly building my dividend growth portfolio. Right now I’m pretty diversified and getting more diversified with each new purchase. Also my trading fees are pretty low if you can find a good online broker. If your not comfortable with individual stocks I’d look into buying index funds. They give you the diversification and average market returns with low fees. As far as money already invested in mutual funds I’d probably keep it in there unless you will face no fees to sell them or if the mutual funds performance isn’t at least matching average market performance.

    • Great point Dan. I typically invest every $1K myself although sometimes a bit less.

      There are really no rules per se, when you must have X $$ to invest in ETFs but my key is….you should try and keep your transaction costs low.

      How long have you been investing BTW?

  3. Adam says:

    Great article. Here’s something that might help someone just starting out.. Questrade has no commissions on purchases on ETFs. That means: stocks, bond funds, stock funds.. any Canadian and American funds traded on an exchange. Very handy. That means someone with very little capital can purchase just one or two shares of each ETF a month and incur no fees. The regular fees for selling still apply. Great for dollar cost averaging.

  4. Eddie says:

    Great article.
    I don’t invest in ETFs yet, but I’ve looked at QuestTrade and their options. Any thoughts? Who do you use? TD E-Series?

  5. @Eddie

    Eddie, Questrade has the most reasonable fees by far compared to any discount broker in Canada. At $4.95 per trade you can’t beat it plus commission free ETFs. I believe they have no admin fees for the RRSP either, and no inactivity fees etc. etc.

    You’ll need 25K minimums to avoid the $125 RRSP admin fee each year, with most brokers. As well, if you don’t have 50K with TD you’ll end up paying $29 per trade instead of $9.99.

    I’m with TD because I bank with them, but if I was doing it all over again, I would likekly go with Questrade IMO. But they are certainly not 100% and I’ve heard some problems from some. ;)

    Cheers
    The Dividend Ninja

  6. Mark, excellent post!

    I agree with everything here. I think the ETF and Index core to start is the most sensible approach, and I fully agree with it – only start to invest in stocks when you have the core.

    From my expereince I think 25K to 30K is the absolute minimum before you should start buying individual securities. You really need to have 100 shares to get the DRIP benefit, and that doesn’t happen until your at the 50K point IMO. But even with 1K 1.5K purchases you’ll still get the real benefit of dividend income.

    You just have to watch your fees though, but with a broker like Questrade at $4.95 per trade, you certainly can buy cost effectively in 1K blocks.

    Cheers
    The Dividend Ninja

  7. 101 Centavos says:

    30 individual equities? That’s about where I am as well. But the greater part of the portfolio is in ETFs.

    • I figure 30 is decent diversification although far from ideal…I suspect an investor needs about 50+ stocks to have really good diversification whereby no one holding exceeds 5% of portfolio value.

      Thoughts?

      Thanks for stopping by as always!

  8. I think the new commission-free ETF innovations make this an almost negligible point Mark. You can open a discount brokerage account and run your own TFSA or RRSP for almost nothing if you’re just dealing in basic bread and butter ETFs. As long as you don’t need to sell (and why would you if you’re just starting out) you can basically do this all commission free. If you need to re-balance your portfolio when you’re small, you can basically do it just by allocating your new additions periodically right?

    • It’s possible TM, but not everyone is a fan of Questrade or SoctiaItrade. Also, not every ETF is available for commission-free investing. That’s like going to restaurant and only getting part of the menu!

      Also, what if you want to own Vanguard US products??

      Mark

  9. Bet Crooks says:

    @The Dividend Ninja
    Be careful Questrade does have an inactivity fee if you don’t make a commissionable trade a quarter. So if you buy only no-fee ETFs you will get charged an inactivity fee unless you are 25 years of age or under or unless you have a 5000 balance. It’s still a brokerage worth considering, though.

    I think you can start buying no-load mutual funds as soon as you want. The trick is to buy ones with a very low MER and a broad diversification or a balanced fund. Buying ETFs might require a commission unless you are at Questrade or possibly iTrade so I would agree $25k and up might be the time to start investing in ETFs.

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