Five ways to invest your money like an expert to build your wealth
I often get asked how I invest my own money. It’s a great question. After all, knowing how a wealth planner with 30 years of experience in the industry handles his own money is a great way to cut through the confusion about investing and find strategies to both protect and grow your money.
A smart investment strategy is one that is diversified, which means investing in several different types of assets. This is to protect yourself against the possibility of something bad happening to one kind of asset, such as a drop in house prices, a stock market collapse or a decline in the value of your business.
A good investment strategy is also tailored to your particular circumstances and preferences, including your stage of life, risk tolerance, and dreams about what you intend to do with the money in the future.
So let me tell you about my investment portfolio. Keep in mind that it was designed to suit my personal situation. But it will show you some proven and successful strategies so you can think about what will work for you and then pursue the assets — and advice — you need.
First of all, who am I? You’ll need a basic sense of my circumstances in order to assess the decisions I have made.
I am a professional Portfolio Manager, Director, Wealth Management. I own my own practice, which has two main functions. We help clients with all aspects of their wealth planning, and we invest their money through investment models I built myself. In my personal life, I have been married for over 30 years to my high school sweetheart. We live in central Toronto, and we have three children — two adult sons and a teenage daughter.
Here are the top five investment vehicles I use — starting with the one that has the highest value.
1.) Build your own business
My biggest asset is my wealth management practice, Dri Financial Group, which is part of Scotia Wealth Management, a subsidiary of Scotiabank. Business ownership is often a primary source of wealth for individuals and families. It’s also a great way to achieve financial independence. (That’s a topic for another time.)
Like any other service organization, the value of my practice is based on a multiple of its recurring revenue — usually 1 to 2 times that amount. So, if my business generates an annual recurring revenue of $100k, my practice would be valued between $100k and $200k.
One day, when I decide to retire (hopefully, not for a long time!), I will sell my practice and the funds from the buyout can be used for whatever purpose my wife and I have in mind. That might be funding our retirement, passing a portion along to our children, or helping to pay for our grandchildren’s education. (No pressure, kids, but we are definitely hoping for some grandchildren!)
The risk with this investment is that the value of my practice is dependent on the recurring revenue stream. If forces in the market or the economy beyond my control change for the worse, it’s possible my currently thriving practice could face some difficulties.
That’s why its important for me to diversify my other assets and I have a plan that ensures I arrive at financial independence separate from the success of my business.
2.) Buy your own home
My next most important asset is my principal residence, which is located in mid-town Toronto. It overlooks a beautiful park and is within walking distance of the subway and a short drive to the major highways.
Our house has four bedrooms and was perfect when the three kids each “needed’ their own bedroom (unlike my brother and I who shared a bedroom until I moved out). Today, we only have our daughter at home with us (much to her chagrin) and the home is starting to feel “BIG.”
As baby boomers approaching retirement, we are faced with a decision about whether to sell the house and cash in on our primary personal asset or continue living here.
My preference is to downsize, but my wife is adamant that we keep the home, so we are currently in a bit of a stalemate. My dream would be to buy a smaller home and use the surplus funds from our house sale to purchase a vacation property in a warmer climate. (The negotiations are ongoing, most often over a glass of wine on Friday night!)
If we continue to live in our house into — and possibly throughout — our retirement, there will not be any retirement income coming from the house, so we cannot count on this asset for cashflow. On the flip side, we will have the security of knowing that a real estate investment in a growing international city like Toronto is a good bet.
Also, if we do stay, we will always have the peace of mind that comes with knowing we could sell if we had to — either because we are ready to move on or because we have other ways we want to use the money currently tied up in the house.
3.) Grow your investment portfolio and maximize your RRSPs and TFSAs
My third most significant asset is my investment portfolio. By this I mean the combination of my cash account, RRSP and TFSA.
Because I also contribute to a company pension (see below), my annual RRSP contributions are lower than they would be for someone whose pension savings are entirely within an RRSP. That said, I have always tried to maximize my annual contributions to my RRSP so that I can take full advantage of the tax-deferred savings it provides.
Looking back on my career, I remember a few years when I didn’t maximize my contributions because my lower early-career earnings and family obligations meant I did not have surplus funds to save. As my financial means improved, I made sure to catch up by using up all available RRSP room. Today, my wife and I have zero unused RRSP room, and we make the maximum allowable contribution every year.
For both of our RRSPs, I decided to invest in a ladder of 5-year GICs and government bonds. There are no stocks or equity-based funds in these plans.
I consider this portion of our investment portfolio to be the “guaranteed” component. It is always advisable to have a portion of your investment portfolio in fixed income assets that are certain to deliver a return. The return here is lower than I might achieve in something like a stock-based fund, but having this guaranteed portion of my portfolio is an important way for me to ensure I protect our wealth.
In addition, another feature of this approach to our RRSPs helps to minimize risks from the possibility of a drop in the stock market, which is the biggest financial risk in my portfolio. A portion of my portfolio increases at the rate of inflation and is guaranteed by the Canadian government.
This approach to RRSPs emphasizes capital preservation over capital growth, which is a deliberate strategy on my part. Remember, because of the nature of my profession, my biggest asset (my business) is tied to the health of the stock market. So, I use the RRSP portion of my investments as a small hedge to help reduce my overall risk exposure in the event that something dramatic happens in the markets.
As for my cash account and TFSAs, they are invested in the individual stocks that are included in the Richard Dri Canadian Dividend Growth Model. I have always invested in my own models. I do this for several reasons. It’s an approach to investing I deeply believe in, it’s a method that is historically proven to succeed, and I believe in giving my clients the confidence of knowing that my money is right in there with theirs. I never buy a stock if it is not in my dividend model.
When I was building my business, I spent numerous hours and dollars on my investment models. Since then, my research has shown that the models have historically outperformed their respective indexes, so when it comes to my personal investing, I follow the models without overthinking their recommendations. (Dividend growth investing is an excellent method for growing the value of your assets, but that’s a topic for another time.)
Have there been times when I have ventured into investments that don’t follow my models? Sure. And they have almost always led to poor investment outcomes.
4.) Acquire rental properties
My fourth biggest asset is two rental properties I own in mid-town Toronto. One is a single-family home and the other is a triplex. I have four tenants and I’m a landlord in my spare time.
Owning rental properties is like running a business. Over the years, I have accumulated a small group of trades I call on when anything breaks down at the rental properties. I don’t have the time or expertise to take care of those issues and I want my tenants to be happy living there.
The only major time commitment to renting is evaluating new tenants. I spend hours on this task because it is essential to get the right people, and the only way to do that is to invest the time upfront. Also, on a long-term basis, it’s not really much of a time commitment when compared to the years and years of contented living that follow if I find a tenant who is the right fit.
I purchased these properties five and six years ago. At the time, I put up 50% of the purchase price in cash and mortgaged the other 50%. Today, the rent covers the mortgage and all of the carrying costs, while producing a small profit, which I reinvest in improving the units. Meanwhile, the value of the properties continues to climb.
As with my RRSP approach, I consider this portion of my investments a hedge to reduce the risks associated with having a business that is so heavily tied to the volatility of the stock market.
5.) Participate in company pension plans and deferred stock option plans
My last major asset is the funds in my defined benefit plan and deferred stock option plan with Scotiabank.
Since joining Scotia Wealth Management, I have participated in Scotia’s defined benefit plan, which will provide me with a guaranteed pension when I retire. The income I receive then will be based on a formula that takes into account my salary and years of service to the firm. It’s a guaranteed pension, which is a big positive, and it has survivor benefits that will ensure my wife continues to receive a portion of my pension if I predecease her. The only problem is that I just started with the plan eight years ago, and I cannot retroactively contribute to the pension for years when I was not employed by Scotia.
I also contribute a portion of my salary, which is then matched by Scotia, to a deferred stock plan that is invested in phantom stocks of Scotiabank. The plan mirrors the movement of the Bank of Nova Scotia stock, including allocating dividends which are reinvested into additional Scotia stock.
For both of these pools, a big positive is that the funds are tax-sheltered until I retire.
That’s it. Now you know how I invest my money. As I said, every person’s investment strategy has to be adjusted to suit their particular situation. For example, some of my choices are based on my large exposure to the stock market because of what I do for a living. For you, it might not be necessary to be so conservative with your non-business assets. It’s just something that has to be decided as part of an overall wealth plan and investment strategy.
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Read more by Dri Financial Group
- The difference between earned income versus income statements
- 7 tips for a successful partnership with your wealth advisor
- Does saying “I do” mean “yes” to a joint bank account?
Originally published at https://richarddri.ca on September 26, 2019.