Episode 43: Portfolio Construction

How do you build an efficient and effective investment portfolio? What type of investment accounts to open? Are there other methods to build wealth over time outside your own accounts? What is the “Lump Sum versus Dollar Cost Averaging” debate?

All that and more in Episode 43 on the Wilson Wealth Management YouTube channel.

To date, we have covered investor profiles and how they drive the target asset allocation. We have also reviewed the asset classes, different types of investment options, and whether to actively manage your assets or not. We can now take all that knowledge and begin to construct an investment portfolio.

In Episode 43, we consider the following questions:

“What type of investment accounts should I open and where?”

We discuss where you should maintain your investment accounts.

With your current financial institution, where you have your chequing account? Should you consider a speciality or independent brokerage house? Or with a mutual fund company?

“What about tax-efficient accounts?”

We look at the differences between taxable and tax-efficient investment accounts.

For most investors, annual and cumulative contribution limits are often high enough that taxable accounts are not needed. But that will vary between jurisdictions.

“Will I need a margin account?”

There are pros and cons to setting up margin accounts versus cash accounts.

A margin account allows you to leverage your portfolio. In an up market, leverage can be useful as it boosts returns. However, in a down market, or where the investment in question declines in value, that can create problems.

“What other investment options may exist?”

Often, employers provide employee pension plans. These may be defined benefit, where upon retirement you receive predetermined periodic payments from the pension plan. Or defined contribution, where the employer (and perhaps employee, as well) makes periodic monetary contributions into the plan. Upon retirement, the employee receives the value of the total contributions and investment return growth.

Employers may offer Employee Stock Purchase Plans (ESPP). Or stock options to key employees.

You may be able to invest directly with public companies, with no transaction costs. Direct Stock Purchase Plans (DSPP), convertible assets, warrants, and options, are a few examples.

Finally, there are often Dividend Reinvestment Plans (DRIP) for investments you acquire. The DRIPs allow investors to automatically reinvest any distributions (e.g., dividends) into the investment, rather than receiving cash.

For a little more detail on ESPP, DSPP, and DRIP, please read, “How to Acquire Common Shares”.

For further information on convertible assets, please refer to, “Key Bond Features – Part 2” and “Preferred Share Features”.

“What is the ‘Lump Sum versus Dollar Cost Averaging’ debate?”

In this introduction, we look at the basics of lump sum investing.

Then contrast that with an overview of Dollar Cost Averaging (DCA).

And discuss why there is a debate as to which is the preferable way to build a position in an asset.

For a little more on this introduction, please refer to, “Building an Investment Portfolio”.

We will next move into a deeper dive as to whether Lump Sum or DCA makes sense for you.