When to transition to owning ETFs and stocks

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 – when to own ETFs and stocks?

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 $10,000 – $25,000 to invest. I believe this is an appropriate value or range 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.

Besides, once you have established an emergency fund I believe it makes sense to invest your money for the long-haul. That’s usually after you have saved up a few months’ worth of an emergency fund.

We did it – why we have a $10,000 emergency fund

To sell out of your existing mutual funds or other financial products (if you have them…..) a reminder you might be charged transaction fees to do so. If you’re fortunate not to be paying fees (i.e., deferred sales charges) when selling your mutual funds, you’re likely going to be charged some fees to buy ETFs – so watch out for those. 

So, look for commission-free buying of ETFs and brokerages that offer that.

Beyond buying ETFs, account fees can be a portfolio killer because fees often take some time to recuperate from. It’s money you never see again!  To avoid paying more fees than necessary, most individual discount brokerage accounts invested with > $15,000 in value will waive all account management fees.

So, look for brokerages that have no account minimums or at least, very low thresholds for account minimums.

In my case, when I switched out of mutual funds into ETFs and dividend paying stocks many years ago, my household assets were at a point where I qualified for $10 transactions and no account fees.

What about owning just stocks?

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 $10,000 or even 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 may 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.

Check out my ETFs page for the best low-cost ETFs to own and why. That will set you up in a good diversified direction!

When to transition to owning ETFs and stocks?

If your savings are over $10,000 or closer to $25,000 then I absolutely think it might be time to get investing.

ETFs can be excellent products for every investor. Individual stocks can be a great way to invest for more sophisticated investors who are willing to take on some individual company risk. In the latter case, 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.

When to transition from mutual funds to owning ETFs and stocks?

Well, if this applies to you, here are some ideas and reminders:

Mutual funds and exchange-traded funds (ETFs) are two distinct products – so – there is no way to transfer funds directly from one to the other. You must first sell your mutual funds and then purchase ETFs.

Given you may or may not able to purchase ETFs at the same financial institution as you currently hold your mutual funds – you will need to open a self-directed account.

Finally, if you are holding the mutual funds in a registered plan, such as an RRSP, you will not need to pay tax on any capital gains from the mutual funds as long as the funds stay within the plan (i.e., you continue to hold all assets/new ETFs in the same registered plan). If you are moving funds between two financial institutions, the transfer must be made directly by the financial institution to avoid a tax bill. There may be fees associated with the transfer.

Be careful!

Thanks for your readership and your questions!

Mark