David Pritchard's Personal Website

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 Weight	Return 2009	Return 2010	Return 2009-10
Equities
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?