I’m always slow to jump into the lake. Sometimes it’s a good idea.
Photo by Tommaso Fornoni on Unsplash
In previous newsletters I’ve argued that middle-class American expats can’t practically use inexpensive diversified investment products like exchange traded funds (ETFs). Ownership of a foreign (non-🇺🇸) ETF will require the filing of a special, complex form on your US tax return every year that you own the ETF. Accountants charge about $200 to complete that form!
Such high tax prep costs can be avoided by directly purchasing stocks yourself. Income and transactions for direct stock ownership (foreign or domestic) are included in the 1040, so no special forms are required.
The biggest drawback for direct stock ownership is that most of us have neither the time nor interest in researching which stocks to buy and deciding when to sell.
Luckily, that research stumbling block can be easily sidestepped. Find an ETF that shares your investment goals and buy the same companies that they do. They may own hundreds of companies but you can purchase their 10 favorites. They’ll even tell you which ones those are.
In short, you don’t have to be a rich expat or a stock market genius to create a diversified investment portfolio. You just need to have some savings to invest and a tiny bit of courage (no more than it takes to jump into that lake on summer holiday). Read on to learn how to get started.
Get an ETF Top 10 list and a brokerage account
In my previous newsletter (How to steal and cook an ETF recipe) I described how to find the list of an ETF’s top 10 stock picks. It should be an ETF that reflects your personal investment goals, such as income or growth, etc. Buy the stocks on that Top 10 list. Go about your life. Check a year later and sell companies that have dropped off that Top 10 list and buy their replacements.
First, you’ll need to open a trading account with a brokerage firm where you live. A discount broker will do; you just need basic service for trading stocks for low transaction fees. Discount firms typically allow for online registration, but it may take a couple of days to get going. Once you’re set up, you can trade stocks by the glow of your computer screen.
How much money is needed?
In prehistoric times, when I was young, stock market investing took a lot of money because you had to trade in 100-share lots and transaction costs were very high. Now you can trade a single share of a company and trading costs are low or free.
Still, the question about your portfolio remains: How much money do I need? This will depend on the share prices of the stocks on your list. The price of a single share on the Canadian market can vary a lot, from a few dollars to over a thousand.
Your goal will be to invest roughly 10% of your investment funds in each of the Top 10 companies. You probably can’t buy a fractional part of a share, so 1 share is the smallest investment you can make in a company.
The one-share constraint means that the company with the most expensive share price on your list will limit what you can do.
To invest equally in all companies, you must spend about the same on the other 9 companies as you spend on the most expensive company. As you can see from the Top 10 List example below, the most expensive stock in the VDY ETF, CM.TO, had a share price of $162 at the time of the following screenshot.
To invest equally in the other companies you’d need to have at least 10 x $162, or $1620, available to invest.
When company share prices on the list vary widely, you probably need to double or triple the 10x amount in order to represent each company on the list equally – or even approximately equally.
Spreadsheets rock!
It’s much easier to do all this with a spreadsheet. I’ve created one that will estimate how many shares of a particular stock you should buy. It’s possible to have the spreadsheet automatically enter the latest stock price so you don’t have to. Here’s a screenshot.
One enters the information in the yellow cells and the spreadsheet does all the hard work. In the example, I entered the total amount I wanted to invest, $5200. I also listed the cost of a trade (buy or sell) with my brokerage account.
Math whiz that it is, the spreadsheet instantly calculated the number of shares for each company that I would need to buy. The Shares to buy column lists in red how many shares of each company I should buy (under the assumption that I want to give each stock equal weight in the portfolio).
Final steps
Because stock prices fluctuate when the market is open, it’s easiest to do this work when the market is closed. You can list the latest price as your purchase price when you place your buy order. That price will then likely be accepted when the market next opens.
Congratulations
You’re now what they call a retail investor. If you have a question, please put it in a comment. I’m also interested in whether anyone in the world finds this relevant to their expat situation.
Best wishes for 2023.