After years of procrastinating, I’ve finally got my finances in order and done my homework on investment. I thought I’d write up a bit of my strategy for anyone interested or wiser than me.
I was relatively uninvested during the Fall 2008 credit crisis, and saw an ideal opportunity to get in and make some money. It was a dangerous time to learn the ropes and I only put money in slowly, with no expectation of “timing” the market’s true low point. As a result, I made nothing off the huge March 2009 dip – but no matter.
I’ve taken a fairly conventional asset allocation strategy – I’m young, and can afford a lot of risk, so my target is to have a high amount in stocks:
- 70% Equities
- 25% Fixed income / bonds
- 5% Cash
I have zero interest in active investing and paying regular attention to this. Therefore, I’ve adopted an entirely passive approach. (Read Fact and Fantasy in Index Investing from U of T finance prof Eric Kirzner if you want to learn more. Many thanks to Eric for first telling me about index funds.) I’m using ETFs for the stocks, since they have lower fees than index funds.
My equity portfolio is aimed at global diversification, weighted by the national/regional allocation of capital:
- 42.3% VTI (USA)
- 40.4% VEA (Europe / Pacific developed)
- 7.3% VWO (Emerging markets)
- 10.0% XIC (Canada)
I’ve increased the weight on Canada from 3.3% (its share of global market capital) to 10% to account for the relative cheapness of investing in Canada for me – no currency exchange fees, dividend tax benefits, etc. This entire strategy was derived with much help from efficientmarket.ca’s Globally Efficient Equity Portfolio page (and its recent update).
For fixed income, I chose to go entirely with short-term Canadian bonds, emphasizing government bonds but with some corporate bonds. I’ve gone with an ETF as the instrument since I don’t have enough money (or energy…) to do a laddered bond system, and bond mutual funds apparently have terrible fees. I might add a GIC ladder at some point if I can figure out the relative merits, particularly with respect to interest rate risk.
The result for now is dead simple:
- 100% XSB
This single ETF essentially does what I want, at least from what I understand so far. I’m grateful to The Radical Guide to Bonds for teaching me about the different types of bonds, and to efficientmarket.ca’s article on XSB for giving some useful Canadian context.
So what are the results? Well, including capital gains, dividends and management expense ratios, but excluding trading fees and taxes, it looked like this for the calendar year of 2009 in Canadian dollars (after accounting for US$ fluctuations):
A total return of 12.2% on a tumultuous year, for very little effort. We’ll see what it looks like going forward.
A few final notes:
- Trading fees seem to add up to about 1% of the portfolio value on buying and another 1% when selling, largely due to ~1.5% currency exchange on the US$ ETFs. With a buy-and-hold strategy over several years, it’s not too much.
- As someone who first invested in GICs, I’m actually particularly enamoured with XSB. It gave a 4.2% annual return with very high liquidity in a year when buying a new GIC would pay only 1-2%.
- See also: canadiancapitalist’s sleepy portfolio and its performance for several years.