Dollar-cost averaging is a proven investment strategy to create long-term wealth in the equity markets. Here, you allocate a portion of your savings (each month or each quarter) and purchase index funds as well as individual stocks to benefit from the volatility associated with the stock markets.
As it’s impossible to time the equity market, it makes sense to remain invested over the long term and view every major dip as a buying opportunity.
Investors remain wary due to a challenging macro environment, which might drive valuations of companies across sectors significantly lower in the next 12 months. So, you need to diversify your portfolio and hold different asset classes, lowering the overall risk in the process.
With this in mind, here’s where I would invest $10,000 in October 2023.
Guaranteed Investment Certificates
GICs, or Guaranteed Investment Certificates, are a low-risk, fixed-income investment product for Canadians. As interest rates have surged in recent months, several Canadian banks offer an attractive yield on their GICs.
For instance, Tangerine Bank offers an interest rate of 5.95% on its one-year GIC. You can consider allocating around $2,000 to a high-yielding fixed-rate GIC and benefit from a steady stream of recurring income.
Index funds such as the XSP
Investing in index funds is a good way to gain exposure to equities, an asset class that has historically outpaced inflation and generated long-term wealth. An index fund holds a basket of stocks across multiple sectors, diversifying your portfolio at a low cost.
One popular index fund in Canada is iShares Core S&P 500 Index ETF (TSX:XSP). The index tracks the S&P 500 index and has returned 172% in the last 10 years after adjusting for dividends.
Several prominent tech companies, such as Apple, Nvidia, Alphabet, and Amazon, are the major holdings of the XSP. Moreover, the XSP ETF is hedged to the Canadian dollar, protecting investors from fluctuations in foreign exchange rates.
Typically, ETFs and index funds should account for a majority of your portfolio. I would allocate around $6,000 towards index funds.
Undervalued stocks such as TD Bank
The ongoing pullback provides investors an opportunity to buy quality stocks such as Toronto-Dominion Bank (TSX:TD) at a discount.
Rising interest rates act as a headwind for bank stocks, as they increase the cost of debt, driving down the demand for loans in the process. Moreover, elevated inflation levels have reduced consumer spending in recent months, resulting in a tepid lending environment.
TD stock is currently down 24% from all-time highs, raising its dividend yield to almost 4.7%. However, TD Bank enjoys a wide economic moat and an entrenched position in Canada, allowing it to end fiscal 2023 with adjusted earnings of $8.1 per share. Comparatively, it reported earnings of $8.36 per share in fiscal 2022 (ended in October).
Priced at 10 times forward earnings, TD Bank stock is quite cheap, given its tasty dividend yield. Moreover, its dividends have risen by 10.5% annually in the last 25 years, which is exceptional for a cyclical company.
Analysts remain bullish and expect TD Bank to surge over 12% in the next year. Investors can identify similar undervalued blue-chip stocks and allocate $2,000 to this portfolio.
