In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit where the user is asking the best way to grow a small portfolio. Let’s dive in!

The entire purpose of investing is to expand and grow one’s portfolio, and investors all around the world use different tactics and methods to accomplish this, but having experienced different cycles and stages of the market, we have found the best way to grow one’s portfolio is simply ‘time’.

Source: Reddit

Picking the right stocks and investments of course helps, but the reality is, the key to growing one’s portfolio is time spent in the market. The whole purpose of earning a return in an investment is that the investor is deferring consumption in exchange for the potential for higher consumption in the future. For example, $10 can go towards an individuals’ lunch for the day, or if invested for a long enough period of time, can purchase multiple lunches in the future. The tradeoff is immediate consumption.

Consistent Growth

Consistent, even if small, growth often works best for an investors’ portfolio. Trying to skyrocket a portfolio overnight can be a good way to blow up one’s portfolio, but picking high-quality stocks or ETFs and sticking with them through good and bad markets is often the key to growing a portfolio.

To demonstrate how even a small portfolio can grow much larger over time, we have visualized what a small portfolio of $5,000 invested in the market from 2010 until 2023 would have looked like in both the TSX (XIU ETF) and the S&P 500 (SPY ETF). This example assumes no additional contributions from the initial $5,000 portfolio, and also assumes that the investor did not sell or buy throughout this time.  The result is that after 13 years in the market, a small portfolio that started out as $5,000 would have grown close to $26,000 if invested in the S&P 500 and close to $13,000 if invested in the TSX.

Source: 5i Research

Small Portfolio Growth in Recent Years

Now, not everyone had the capability to invest as early as 2010, and some are just beginning their investment journeys. Let’s also analyze what a $5,000 investment from 2020 to the end of 2023 would look like. If the $5,000 was invested in the TSX throughout this four year period, an investor would have close to $7,000 at the beginning of 2024, while that $5,000 invested in the S&P 500 would be worth close to $8,000 at the beginning of 2024.

Source: 5i Research

Adding Annual Contributions to the Mix

Now, this is demonstrating how a small portfolio can grow with time just by staying invested in the markets. But, let’s look at the positive impact that consistent contributions can have on a small investment portfolio. At a small portfolio stage, even small dollar amount contributions can have a big impact on one’s portfolio. In this example, let’s look at a portfolio that starts at $5,000, but that investor contributes $500 each year. A portfolio invested in the TSX from 2020 to 2023, with $500 contributions each year, would have roughly $9,000 by the beginning of 2024. Similarly, a portfolio that started at $5,000 with $500 annual contributions would have roughly $10,000 by the beginning of 2024 if invested in the S&P 500. Both of these examples display a nearly 2X in portfolio size over a four-year period, just by staying invested, making consistent, small contributions, and following the ‘rules of the game’ by not trying to time the market or skyrocket a portfolio overnight.

Source: 5i Research

Needless to say, picking the ‘right’ stocks can really help to grow a small portfolio, but for the majority of investors, picking high-quality stocks or ETFs, making consistent contributions, staying invested in the markets, and using ‘time’ to one’s advantage can really help grow even small portfolios. 

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Authors, directors, partners and/or officers of 5i Research do hold a financial or other interest in SPY at the time of publishing. The i2i Fund does not hold financial or other interest in the above companies or ETFs at the time of publishing