Dave at Investing Intelligently noticed that my benchmark Sleepy Portfolio returned a stellar 14.7% in 2006 and asked the obvious question: Why do I even bother with individual stocks instead of taking a passive approach using ETFs? It is a good question and as a matter of fact, I am slowly increasing the percentage of portfolio that is indexed. However, there are some very good reasons why I am not getting there sooner:

  • I still plan to represent the Canadian equity portion of the portfolio using stocks because our capital markets are concentrated in just two sectors: resources and financials. The financial sector can be captured using just a few stocks and I am not very keen on the resource sector for the long-term: it is too volatile and too cyclical.
  • It is possible that my stock selections would be truly awful (I once held Nortel and JDS-Uniphase) but I am willing to live with that. Canadian equities form just more than 20% of my total allocation.
  • Most of our new money is invested through RRSPs, ESPPs and RESPs. I’ve noted before that I invest my RRSPs in a Canadian mutual fund. We do not have much choice in ESPPs and the RESPs are indexed using TD eFunds.
  • I do plan to eventually replace every US stock I hold with ETFs such as VTI, EFA and EEM/VWO. I do not think that it is prudent to sell them en masse but as I sell them periodically, I will buy an index fund with the proceeds.

In a few years’ time, I hope to have a mostly indexed portfolio with a handful of Canadian equities.

This article has 6 comments

  1. One thing you could do with your Canadian portfolio (if you are interested in getting away from stock-picking) is to by a few different Canadian sector ETFs. Or just buy XIC and then offset the weightings to what you want a bit by buying another ETF or two. Just an idea, not sure if that would be a good idea or not. If comissions were $0 I don’t really see what is wrong with it.

    Actually, I just went to the iShares website and noticed XCV which tracks the Dow Jones Canada Select Value Index. I blogged about TD’s similar ETF (which was discontinued) a while back and I’m pretty sure I totally missed the announcement on this one. Might be a better balance in there than XIC, for example… Hmm, looks like it is even more heavily weighted towards banks and financials (55% vs. 30%!) but a bit less energy/oil&gas. Interesting. Interesting that iShares is carrying this ETF now.

  2. Canadian Capitalist

    Dave: iShares introduced a bunch of ETFs recently. I’ve been meaning to write a post on them.

    I think I’ll still pick stocks for my Canadian portion. I’ve owned TD for more than 5 years now and I don’t intend to sell the two banks I hold: TD and BNS. Add in an insurance company, a pipeline utility, maybe one energy name and one or two consumer stocks (I already hold L), I figure I’ll do okay.

  3. I am moving to ETFs too but like CC I keep buying stocks (outside my RRSP). Other than the fact it’s fun, I still hope to learn enough to beat the market once in a while (maybe it will never happen :-).

    One interesting ETF I found for dividends is DOO-N. It’s the 100 highest dividend paying companies worldwide.

  4. Good idea to stay away from the US investment. The value of the US dollar went down 11% over the last year. There’s no sign of recovery.

  5. Canadian Capitalist

    I disagree that investors should stay away from US equities. The laundry list of problems in the US is well known: budget deficits, trade deficits, depreciating currency etc. I think the time to buy is when few others are willing to make the same bet.

  6. CC: Well said.

    The easiest way to time the market without actually timing the market is to rebalance. I would recommend to anyone that they pick an asset allocation and stick with it, rebalancing when things get really out of whack. My ex-advisor underweighted me (at 15%) in US equities because he thought they weren’t going to do so well (he specifically mentioned their depreciating currency). I disagreed with this approach (but let him do it anyway). I would have preferred to just go with 25% US (rather the having the extra 10% in Canadian equities) and rebalance if the US market did indeed fall.