Introduction

If you have a small portfolio you face special challenges:

• You have probably heard of the old saying: don’t put all your eggs in the same basket. But it is difficult to diversify when you have small amounts to invest.
• The financial markets are similar to other markets. They tend to be more costly when you are dealing in small amounts.
• The no one loves me phenomena. How can you interest a broker in looking after your affairs if you have a small portfolio?

These are real challenges. But they can be minimized with good planning. Here are some simple guidelines on how.

The good and bad news

First, the good news

Fortunately, the big picture is the same for all investors, large and small. The principal long term factor that will determine how well you do will be your Asset Allocation, and in particular what portion of your portfolio is in equities (i.e. in common shares) and what portion in bonds. So don’t sweat the small stuff, but focus on picking an allocation best suited to your circumstances; see Asset allocation on our site.

Secondly, minimizing taxes is another objective common to big and small investors. Pension funds are tax-exempt entities, so they can automatically avoid taxes. But you can too, by making maximum use of tax-favored accounts. So make full use of RRSP and TFSA accounts, and only invest in regular, taxable accounts what you can’t invest in RRSP’s and TFSA’s.

Finally, minimize your investing costs is another objective common to all investors; see Costs of investing on our site.

Now, the reality

The reality is that few traditional brokers are interested in servicing small accounts, which are generally defined as somewhere between $250,000 and $500,000. So what to do? We say turn necessity into a virtue. Our site advocates that investors who feel comfortable looking after their own affairs use a discount broker; in general, see Independent Investor on our site. If you do, you will significantly save on your costs, one of the biggest obstacles for DIY investors. But here are some related suggestions:

• Limit yourself to one broker, and centralize all your investments with that broker. It is challenging enough investing a small portfolio.
• Don’t compound the problem by dividing up the pie. And many brokers charge less for accounts of a minimum size, another argument for centralization.
• Use a broker to whom you can easily transfer funds electronically from your bank or credit union, and vice versa.

 For those investors who don’t feel comfortable using a discount broker, here are some suggestions for using a traditional broker:

• If the size of your portfolio is smaller than most of your broker’s other accounts, be realistic in how often you will hear from your broker.
• The vast majority of brokers are honest, hard-working individuals. But they are not your friend. They will act in their own interest, not yours. For those interested in this subject, there is a Ontario court of appeal case reminding us of this: Hunt vs. TD Securities or as a PDF doc.1706.
• Our suggestion is to stick with good old stocks and bonds. But your broker is often under pressure to sell home-grown products that may be complex and more difficult to understand. This is never a good sign. Here is what one commentator (Aleph blog) suggests: Retail investors, take note. Wall Street knows more than you do, and you are the patsy at their poker table. The deck is stacked against you. Avoid buying their products where they try to sell you an enhanced yield in exchange for a less certain return of principal, whether due to default, prepayment, call, or extension.
  
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