Archive for February, 2011

How to Tailor the Sleepy Portfolio for your Investing

February 22, 2011

13 comments

When I started the Sleepy Portfolio, I intended to track it as my personal portfolio benchmark and as such the portfolio allocations reflect my personal investment goals and risk tolerance. I am frequently asked how an investor should tailor this model portfolio to suit their investment goals. In this post, I’ll try and answer some of the questions that frequently arise:

Aggressive Asset Allocation

I started the Sleepy Portfolio in my early thirties and allocating 20% to bonds and 5% to cash is not unreasonable for a young investor. In fact, some would consider the allocation too conservative. Older investors can dial up the “sleep-at-night” quotient by increasing the allocation to bonds. Keeping the age in bonds is a good thumb rule to start with. The bond allocation should then be adjusted for the need, capacity and willingness to assume risk.

Too much allocation to Foreign Stocks

Once an investor has decided how much to allocate to fixed income, the next question is how much to allocate to Canadian stocks. The Sleepy Portfolio allocates 28% of the equity portion to Canadian stocks. Some may consider that too much, others too little (See this post on Portfolio Allocation to Canadian Stocks for some interesting comments). Dan Solin, author of The Smartest Investment Book You’ll Ever Read allocates just 10% to Canadian stocks in his model portfolios based on the belief that investors should hold globally diversified portfolios. Others such as money manager Leith Wheeler say that Canadian investors can get most of the global diversification by allocating half their portfolio in foreign stocks. It is clear that adding some foreign stocks to a portfolio reduces overall risk. Exactly how much is a matter of much debate.

Providing a value and small-cap tilt to the portfolio

The Sleepy Portfolio keeps it simple by holding broad-market, capitalization-weighted indices. There is a large body of evidence that show that investors would have earned a premium for holding small-cap stocks and value stocks in the past. Opinions are divided on whether investors should expect the small-cap and value premiums to exist in the future. I chose to keep it simple in my own portfolios but it is not unreasonable to choose to slice-and-dice equity holdings based on size and value.

The bottom line is that while the Sleepy Portfolio is well thought out (even if I say so myself!), there are not many right and wrong answers in investing. Should you allocate 28% or 35% of your equities to Canadian stocks? Pick one and stick to it. It is impossible to say in advance which option would turn out to be the best answer.

The Claymore Portfolio Index Allocator

February 22, 2011

7 comments

The Claymore Investment website has a nifty asset allocator tool that lets investors construct model portfolios by mixing different asset classes and examine how they would have performed in the past. The tool is similar to the asset mixer available on Norm Rothery’s Stingy Investor website. The Claymore asset allocator tool though includes asset classes such as REITs and commodities not found in the Stingy Investor website. However, Claymore’s asset allocator doesn’t seem to go as far back in time as Norm’s calculator.

I tried out Claymore’s asset allocator because I was interested in finding out whether it would make sense to add commodities to the Sleepy Portfolio. According to the Claymore asset allocator, between 2003 and 1/31/2011, the Sleepy Portfolio (Cash – 5%, Short Bonds – 15%, Real Return Bonds – 15%, REITs – 5%, Canadian stocks – 20%, US stocks – 22.5%, Developed markets – 22.5%, Emerging markets – 5%) returned 6.62% with a Standard deviation of 9.13%. Allocating 5% to commodities and reducing the exposure to Canadian stocks to 15% would have reduced returns to 6.08% and risk to 8.84%.

The report produced by the Claymore asset allocator also contains a very useful table of correlation between various asset classes. The least correlated assets with Canadian equities are Short-Term bonds (-0.17), Cash (0.00) and Real-return bonds (0.32). In the 2003-10 time period, the asset class with the highest correlation to Canadian equities was emerging markets.

Asset allocation tools are useful to see how mixing different asset classes boosts returns or lowers risk but they should be used with caution. Asset class returns and correlations could vary dramatically from one period to the next.

[Quick reminder: The deadline for entering the UFile Giveaway is Tuesday, 8 p.m. EST.]

This and That: Market Rally & UFile Giveaway

February 17, 2011

106 comments

Since the RRSP season is about to hit the home stretch, this week’s video is topical. In it, kids talk about what retirement means to them.

In the news this week

The stock markets hit some significant milestones this week. The S&P 500 has doubled from the market low of March 2009 (not counting dividends). The TSX crossed the 14,000 mark. What does this mean for investors? Other than the fact that stock portfolios are looking much healthier, not much. Just over two years ago, the pundits getting the most air time were those making dire forecasts (here’s one example). Investors who listened to these gurus and hid under their beds missed out on one of the most spectacular rallies. While it’s not clear (to me at least) that market sentiment has completely swung the other way now, it may be time to take a look at your current asset allocation. If your stock allocation is significantly more than target, you may want to sell some stocks and buy the asset classes that are below target.

Link round up will return next week.

UFile Giveaway

Thanks to everyone who entered in last week’s TurboTax Giveaway. The winners picked by a random number generator were Dean and James (comment # 2).

This week, thanks to UFile, I’m giving away 10 vouchers for filing your family’s taxes online at UFile.ca (each voucher is valued at $24.95) to readers picked at random from among those add their comments to this post. Entering your name in the giveaway is, as always, super simple. Just leave a comment in this post (please do not send an entry via email) and don’t forget to include your email address. If you are reading this through your favourite RSS Reader or via e-mail, you have to click on the headline, get through to the website and scroll to the bottom of the page and type in your comment. Some quick rules: (1) Deadline for entries is 8 p.m. EST on Tuesday, February 22, 2011. (2) One entry per person please. (3) Canadian residents only. (4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win. (5) I’ll pick one entry at random and announce the winner after the deadline. Thanks for entering and good luck!