For years, Canadian stocks outperformed international stocks and Canadian investors were left wondering if diversifying into foreign markets was worth it. Investors who showed patience and kept faith in foreign stocks were handsomely rewarded in 2013. The year was a barn burner for US markets with the S&P 500 gaining 41.52 percent (all returns reported in this post are total returns, which includes dividends, distributions or interest payments). The icing on the cake was provided by the US dollar, which gained 6.9 percent against the loonie. Developed markets also had a strong year, returning 31.26 percent. Canadian markets, by comparison, posted modest returns weighed down by the resource sector.
The tax on Employee Stock Purchase Plans (ESPP) has two components: the difference between the offering price and the fair market value (FMV) of the stock is treated as employment income and the difference between the FMV and the selling price is treated as capital gains or losses.
A reader recently sent in this question on asset allocation:
I’m an investing newbie. Last year, I started investing in all four TD e-Series Mutual Funds in my TFSA on my own after reading your posts. I currently have a 30 percent allocation to bonds. Should I keep investing in TD Canadian Bond Index (e-Series) with interest rates forecasted to go up? Or should I cut down on the bond fund and allocate more into the other stock index funds?
Bonds have been terrific investments for a long time now. As of Sept. 30, 2013, Canadian bonds (as measured by the DEX Universe Bond Index) have returned 5.63 percent over 5 years and 5.22 percent over 10 years. Canadian stocks (as measured by the S&P/TSX 60 Index), on the other hand, had returned 3.72 percent and 8.45 percent respectively during the same time periods albeit at a much higher volatility including a significant stock market crash. Therefore, the natural inclination of many investors would have been to look at the recent past and concluded that they are better off in bonds than in stocks. Asking whether one should avoid an asset class after it has experienced a huge run up if therefore an insightful one.
You or I may never manage a portfolio as massive as the Canada Pension Plan Investment Board’s (CPPIB) 188 billion in assets but we can learn a thing or two on how to invest our own money from the manner in which the CPPIB invests our surplus Canada Pension Plan contributions. Here are some highlights from the CPPIB 2013 Annual Report (available both online and in PDF formats).
I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, which at that time was mostly invested in individual stocks. The portfolio started off with an initial outlay of $100,000 but no new money has been added since. This is not simply a model portfolio; it reflects investment returns that can be obtained in the real world by accounting for costs such as spreads, trading commissions, MERs, foreign exchange conversion charges etc. For example, dividend payments on US-listed ETFs are assumed to incur a foreign exchange fee of roughly 2 percent when they are deposited into the account. Note, however, that the portfolio is assumed to be held in a registered account, so it does not take taxes into account.