Comments on: Portfolio Case Study 1, Part 2

By: Weekly Dividend Investing Roundup - July 18, 2009 | The Dividend Guy Blog

Weekly Dividend Investing Roundup - July 18, 2009 | The Dividend Guy Blog — Sat, 18 Jul 2009 11:02:05 +0000

[...] Portfolio Case Study 1 [...]

By: Russell O'Connor

Russell O'Connor — Thu, 16 Jul 2009 01:28:08 +0000

I want to also reiterate that you should not “hold out” to break even on old investments. Generally speaking, the right behaviour is to totally ignore your historical transactions, losses or gains. Your decisions should be based on what allocation you want now, and completely ignore what your current allocation is or previous allocation was. Then simply calculate the most efficient way to get from what your portfolio is to what you want it to be.

By: Chris

Chris — Tue, 14 Jul 2009 19:23:03 +0000

@Phil, I worry more about the high cost of hedging, and tracking error observed in hedged Funds. I believe that the drag on performance over 20-30 years is a far greater risk than currency fluctuation.

In fact, I think that exposure to several currencies is a form of diversification. Yes, I will retire on Canadian dollars, but who knows what Canadian dollars will buy in 2035? As it stands ~ 45% on my portfolio is held in Can$ (equities and GICs) which seems like a lot of exposure to one currency already.

One more thing to point out: VEA (and similar international equity products) does not expose you to the US dollar, even though it is denominated in US dollars. The actual stocks held in these funds are held in the currency of the local stock market. So VEA primarily exposes you to fluctuations in the Euro and the Yen. Again diversifying your currency exposure.

By: Dan B

Dan B — Tue, 14 Jul 2009 16:28:30 +0000

Just one suggestion that I haven’t seen made yet. Have you considered Claymore’s two bond ETFs, CBO and CLF? The usual knock against Claymore is that the fees are higher than the iShares couterparts, but in this case, Claymore is cheaper. Their government bond ETF (CLF) charges just 0.15% and the corporate bond ETF (CBO) is 0.25%.

What I also like about these products is that they are nicely laddered (25 securities, with five maturing each year for the next five), and that you can set them up with a DRIP.

Just a thought for the fixed income portion of your portfolio.

By: Sampson

Sampson — Tue, 14 Jul 2009 16:16:55 +0000

Re: inflation risk eating into bond returns. I mitigate as much risk as possible by holding only short-term bonds. Even if you are locked into some low % coupons, 2-5 year turnover means you’ll get out of those soon enough.

I absolutely agree with holding bonds directly vs. funds, and for me the trade-off is that my bond allocation is so low, I wouldn’t be able to get adequate diversification if I held them directly.

I’m not too concerned with inflation overall. Since you’ve got ~70% equity allocation, these should at least keep up or slightly outpace inflation – but going forward who knows. Lots of people are starting to say returns will not be what we once thought they were.

Regarding alternative investments, hot sectors and emerging markets. When the house is in order, maybe you can be a little more risky with your stocks. The 5 CAD companies you listed are all well represented in your ETF’s, so maybe you can start an account where you make 0.5-1% (total portfolio bets). You don’t want to get so bored with ETF’s that you lose interest/focus in your portfolio.

Sounds like you’re doing great! Congrats.

By: Phil

Phil — Tue, 14 Jul 2009 15:58:42 +0000

@All, many thanks again for all of your comments.
@CC, XEG was indeed a bet on energy. I work in the energy field and am very bullish on oil. As for fixed income, I am indeed trying to reduce volatility but also trying to generate some income. Corporate bonds seem attractive right now given very low gov’t bond yields. As for GICs, I consider short to mean cashable to 1 year, medium to mean 2-3 years and long 4-5, so as you point out this is a different time scale than bonds.
@Steve, I’ve decided to switch out of CBQ. Happily, I got into it at a low price so can sell for profit. The general takeway from all contributors is to apply the KISS principle and forego some of the more esoteric ETFs.
@Cam Birch, I can’t say my target asset allocation has been carefully crafted in the sense that it wasn’t quantitatively determined. I’ve simply applied some rules of thumb (e.g. % fixed income exposure should be your age, etc) coupled with some personal observations about the market. I’m comfortable with a 50-60% equity allocation going forward.
@Chris, thank you very much for your suggestion. As for your suggestions, I appreciate the simplicity of your figurative portfolio. Can I ask, would you be concerned about currency exposure over the long run (e.g. risk of a collapse in the US dollar, which would drag on VTI and VEA). I agree predicting currency movements over 30+ yeas is impossible, which is why I’ve tried to structure the portfolio so as to get both CAD and USD exposure under US equity/Int’l Equity/EM equity. Perhaps this additional layer of diversification to protect against currency risk is unnecessary but I just don’t feel comfortable having all US and Int’l equity in USD. Thoughts?
@Simple Approach, yes I do have a mortgage and since I’m debt-adverse I typically avail myself of about 75% of the annual pre-payment room. Thanks for your idea of using this as the bond component of my portfolio, that had not occurred to me.
@Sampson, would you be concerned about holding XCB or XSB over long run given that these ETFs do not offer principal protection? There’s an enormous literature on direct bonds vs. bond funds and I find myself sitting in the middle – I see benefits on both sides.
@CC, I’ve decided to scrap the esoteric Claymore plays on agriculture, water, etc.

By: MJ

MJ — Tue, 14 Jul 2009 15:53:17 +0000

I’d echo other commenters in saying that you probably have way too many ETFs in your target allocation. Although I’m assuming you can buy and sell for $9.99 or less, with regular contributions and rebalancing, your transaction costs could easily amount to hundreds or even thousands of dollars per year.

For equities, I would pick one ETF only for each region. E.g. for US exposure, I’d go with the S&P 500 as that provides excellent diversification that can be had at a very low MER. Anything more than that is of dubious value, IMO. Picking sector ETFs starts to sound more like active investing than passive investing to me.

For fixed income, do consider what I and others have already posted re: the benefits of paying down your mortgage in lieu of making fresh contributions to fixed income. I don’t like the fixed income space at all right now. The returns are generally quite meagre, and the risks of loss are great if inflation returns in force. You would be hard pressed to make more in fixed income right now then you would by paying down your mortgage principal, at least in my opinion.

If you’re especially concerned about inflation, you could ramp up your exposure to RRBs in your existing fixed income portfolio, and/or purchase a REIT ETF in your equity portfolio. Gold is another option I suppose, but not one I’m fond of for many reasons.

By: Canadian Capitalist

Canadian Capitalist — Tue, 14 Jul 2009 14:40:54 +0000

@Simple approach: Thanks for your explanation but I did understand your original comment correctly. What I meant is that I won’t go to the extent of calling the bank to reduce the monthly payment to keep the amortization same as it was before the pre-payment. Instead, I’d go for killing off the mortgage sooner and then start assembling a taxable portfolio. The reason is that I don’t think most investors can do better than a guaranteed, after-tax return equal to their mortgage rate (unless they have one of those crazy Prime minus 1% mortgages).

By: Simple approach

Simple approach — Tue, 14 Jul 2009 14:33:26 +0000

Correction to the above: “meaning 18 more years from today” should have been “meaning 21 more years from today”

By: Simple approach

Simple approach — Tue, 14 Jul 2009 14:32:29 +0000

@Canadian Capitalist
I did not mean to suggest resetting the amortization; not sure if it is even possible without breaking the mortgage. Let’s say one is 4 years into a 25 year amortization. Let’s assume, a $30,000 prepayment shortens the amortization to 18 years (18 – 4 = 14 years left if the payment stays unchanged). Then my mortgage company would be only too glad to lower my payments so that my amortization is back to 25 years starting four years ago (meaning 18 more years from today). The amortization always stays 25 years, but the payments get lower and lower to the point that you either just ignore it or you just payoff the remaining balance when it is very low.
The prepayment amount is 15% of the original mortgage, so instead of increasing your payments just increase the one-time pre-payment amount. It will work the same way…