Passive Portfolio Performance, 2010

My post last year on my passive portfolio generated a lively conversation, so I thought I’d follow up with a few further thoughts on investment over the last year.

But first, a quick glance at the performance of the portfolio I showed last year:

Weight Asset
   U.S.A. VTI 42.3% 11.2% 10.2% 22.5%
   Europe / Pacific (developed) VEA 40.4% 10.2% 1.9% 12.3%
   Emerging VWO 7.3% 49.7% 12.3% 68.1%
   Canada XIC 10.0% 34.1% 17.2% 57.2%
Subtotal 70% 15.9% 7.7% 24.9%
Fixed income
XSB 25% 4.2% 3.2% 7.5%
Cash 5% 0.0% 0.0% 0.0%
Total Portfolio 12.2% 6.2% 19.2%

Basically, a slower year: 6.2% return overall, with none of last year’s extraordinary post-recession performances, and a drag from the various European crises (VEA).

This is, however, no longer my target portfolio. I’ve made a few minor adjustments:

  • Doubled the Canadian component of the portfolio from 10% of equities to 20%, to take advantage of tax benefits. Dividends from VTI, VEA and VWO all incur U.S. withholding tax in my non-registered and TFSA accounts (but not in my RRSP).  By contrast, dividends from Canadian stocks result in reduced tax in my non-registered account and no tax in my TFSA.
  • I’m now treating XIC (an ETF) and TDB900 (a TD e-series index fund) as interchangeable ways of buying into the Canadian market.  I use TDB900 when I’m making small regular contributions, and XIC for large $5000+ purchases.
  • I haven’t found an equivalent low-cost index fund for the other parts of my portfolio.  I’m particularly cautious about the tax effects of holding Canadian-based funds that just buy an underlying American security.
  • I’ve changed my asset mix to lower the total level of bonds from 25% to 15%.  This follows a discussion last year with both Chris and Jordan suggesting 0% bonds for a young person.  I read Jordan’s suggested book, Milevsky’s Are You a Stock or a Bond? and found it very convincing – my future income stream is already very “bond-like” and really doesn’t require me to own much further bonds in my portfolio. That said, I’m still reluctant to buy stocks on margin, as the book suggests for my situation.
  • On real estate, I’m feeling more comfortable with my current rental situation.  Milevsky has a new book out (excerpt here) with a bit more discussion of real estate. The core of his argument is that real estate performance is closely correlated with the economy of a metropolitan region – and therefore closely correlated with your own future job prospects and future income stream.  Owning a home while young can therefore result in too little diversification in your portfolio, if you include your future income as part of the “full” portfolio.That said, there are many other benefits to home ownership: full control over your environment, a greater range of home choices in the Canadian market where rental pickings can be quite slim, and even a guarantee of non-eviction from a fickle landlord (I’m thinking of Eddy & Angela, who were evicted while 8.5 months pregnant, perhaps so the landlord could avoid having a noisy baby in the building).  But for the moment, I don’t personally feel that I need to own a house… yet.

Finally, I’ve heard a few interesting other reading points over the last year:

  • Hendrik pointed out an article comparing the full return associated with bond ETFs versus holding actual bonds, noting that “return” is more important than alleged “yield.”
  • I looked into (commercial) Real Estate Income Trusts (REITs) briefly, but decided not to buy. There are arguments over whether real estate is actually a “new asset class” distinct from equities. But more importantly, I found a great, detailed, statistics-packed article from Vanguard on the subject.  The article closes with a list of propositions that they suggest an investor should “buy into” in order to justify REITs… and I just wasn’t sufficiently in agreement to add REITs as a separate group in my asset mix.  That said, if I was buying REITs, I’d probably aim to go beyond Canada – the Canadian REIT index is little more than a handful of stocks.

So, that’s my update on finances.  Any reactions?

7 Replies to “Passive Portfolio Performance, 2010”

  1. Thanks for the update. Looks like you are doing well with your investments so far.

    I just had a few questions about your portfolio after reviewing your posts:
    1) Are you completely out of the GIC game? You have 5% cash listed that I think should at least be in a GIC or Money Market fund.
    2) Do any of your funds have any sort of automatic purchase plan? If so, how are you handling that in your calculations?
    3) Are you re-balancing your portfolio to keep the year-end weighting the same?
    4) Have you thought about investing in high-dividend paying stocks?

    I am only now keeping more detailed records of my portfolios. Despite large gains in the past few years, I’m not sure I’m actually on the positive side with my investments.

    1. @ZHZ –

      1) To date, I haven’t really optimized the cash part of my portfolio. I’m usually making 0.7% in a savings account on some of the cash, 0% in a chequing account for much of the rest, and some fragments of cash scattered across my different brokerage accounts (RRSP, TFSA and non-registered). Cash has been my lowest priority for optimization. My top goal is to avoid bank fees by maintaining the minimum balance – bank fees are much higher than any interest I could earn on cash. I will start looking into the various GIC and money market options soon.

      2) The ETFs don’t have an automatic purchase plan. They do offer a Dividend Reinvestment (DRIP) option, which I plan to activate. I may look at an automatic purchase plan for the TDB900 mutual fund, though. This has also been a lower priority for me – my goal has been to first get the overall allocation of assets and diversification right, then get the tax treatment right (putting appropriate assets in the RRSP / TFSA / non-registered accounts), and only then deal with minimizing my cash-on-hand. As it stands, I usually build up much bigger cash allocations during the year, then drop $5,000 – $10,000 on a few ETFs a few times per year to maintain the portfolio balance.

      3) Yes, I keep the year-end weighting the same. The theoretical table above assumes that a rebalance happened at the start of 2010. Because I’m continuously contributing to my actual accounts, I usually just direct funds to whichever part of the portfolio is underweight; to date, I haven’t actually had to sell anything.

      4) I don’t seek out high-dividend stocks. I’ve only real heard of this goal among “income-seeking” investors – usually retirees who want their portfolio to spin out cash on a regular basis. Is there a portfolio reason to desire this class of stocks in particular? In 2010, the returns from the equity component of my portfolio were 70% capital gains and 30% dividends. Honestly though, I haven’t heard a reason to care much other than for tax reasons near retirement – to me, capital gains and dividends are mostly equivalent. But perhaps others have studied this more closely…

      On records – to be honest, I find this very hard to do effectively, especially with an international multicurrency portfolio, in-year contributions, and so on. I find it easier to track a “target” portfolio (like the one above) and do my best to keep my actual portfolio in line with the target. If anyone knows any good, flexible software for managing a portfolio, I’m all ears.

  2. Thanks for posting this, David! Your approach is essentially (philosophically) what I arrived at after a very expensive learning process, though the portfolio I ended up with is a bit different.

    Incidentally, should I assume you’ve read A Random Walk Down Wall Street?

    1. Actually, many thanks to you Eric – I only really started down this path after hearing your advice on index funds.

      I haven’t actually read A Random Walk Down Wall Street – is it that essential?

  3. Random Walk basically gives you the financial equivalent of the laws of thermodynamics.
    – Can’t beat the market with your brain,
    – Can’t even break even because of MERs and fees
    – You have to play the game (or else inflation eats you)

    Fairly standard passive investor philosophy. An alternative is the H.Simpson philosophy –>

    Bart: You make me sick, Homer. You’re the one who told me I could do anything if I just put my mind to it!

    Homer: Well, now that you’re a little bit older, I can tell you that’s a crock! No matter how good you are at something, there’s always about a million people better than you.

    Bart: Gotcha. Can’t win, don’t try.

Leave a Reply

Your email address will not be published. Required fields are marked *