Background

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.

The portfolio has a target allocation of 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges. The cash portion is invested in a high-interest savings account that is available through many discount brokers and pays an interest of 1.25 percent.

2Q-2013 Update

The Sleepy Portfolio has gained 6.70 percent year-to-date since my previous update in the New Year.

Here’s how the portfolio looked as of July 9, 2012:

Asset Type Security #s Price Current Value % Portfolio Target % Delta
Cash TDB8150 11501 $1 $11,501 7.47% 5.00% -2.47%
Bonds TSX: XSB 705 $29 $20,128 13.07% 15.00% 1.93%
  TSX: XRB 275 $23 $6,237 4.05% 5.00% 0.95%
Canada Equity TSX: XIC 1445 $19 $27,874 18.10% 20.00% 1.90%
US Equity VTI 440 $85 $39,364 25.56% 22.50% -3.06%
International Equity VEA 945 $36 $36,030 23.40% 22.50% -0.90%
Emerging Markets VWO 170 $38 $6,781 4.40% 5.00% 0.60%
Other TSX: XRE 392 $16 $6,084 3.95% 5.00% 1.05%
Total       $153,998    

This update is a perfect illustration for widely diversifying your stock portfolio across many geographies. Since the inception of the portfolio (excepting the 2008-09 financial crisis), you could count on US stocks to drag down the portfolio. But this year, there has been a change in fortunes. US stocks have YTD returns of 22.8 percent *and* on top of it, the US dollar has strengthened by 6 percent.

The only other asset class in the positive column is Developed Markets excluding North America, which are up 8.8 percent YTD. Emerging markets were down 9.3 percent.

The big story this year has been the recent sharp rise in bond yields (recall that bond yields and prices move in opposite directions) resulting in a sharp drop in the price level of real return bonds and REITs. Fortunately, the bulk of the portfolio’s bond position is held in short-term bonds, which are less sensitive to interest rate movements.

Transactions

With half an year’s worth of dividends, interest and distributions adding up, the cash portion is now significantly above target. Therefore, we will deploy some cash into the two asset classes that are the most out of whack — bonds and Canadian stocks.

Buy 100 shares of iShares (TSX: XIC) at $19.25 plus trading commission of $9.99

Buy 68 shares of (TSX: XSB) at $28.55 plus trading commission of $9.99

Total cash deployed: $3,886

This article has 5 comments

  1. Thanks for these quarterly updates. I like to compare my own portfolio to the sleepy portfolio to see how I’m doing.

    In case you’re wondering, there has been only a very minor annual deviation in our portfolios since inception (in my favour, of course 🙂 ). I suspect that these deviations are due to my holding slightly more equity than you, proportionally (I have no allocation to cash, and almost an identical allocation to bonds), and my equity is slightly skewed towards smaller market-cap and value holdings (but only slightly).

  2. When I think about it rationally, in the end, these minor optimization tweaks work out to an extra poutine at Costco every now and then — which is definitely worth it!

    Raman

    • Canadian Capitalist

      @Raman: Curious as to how you are tilting to value and small-cap. I’ve been looking into this, especially a tilt to small cap but I haven’t had much luck in finding a low-cost product in Canada. Of course, there are plenty of products available to implement a tilt in the US & Developed markets.

      Speaking of poutine, I’m going to replace iShares Canadian ETFs with Vanguard / BMO ETFs in this model portfolio. The savings will be about 4 basis points and should pay for a whole bunch of poutines at Costco after the first year.

      • I only have a small-cap and value tilt for my international (US, EAFE and EM) equities. Like you, I haven’t found good ETFs for these purposes in Canada — the ones I use are all based in the US: VTV and VB for the US equities, and EFV and VSS for the EAFE and EM equities. I don’t know of a good ETF that represents the value-end of EM markets, though.

        For Canadian equities, I find that the ETFs available are quite expensive in terms of their MERs (XCS and XCV).
        Hence, I don’t have such a tilt for the Candian portion of my equities. However, Canadian equities only make up a small portion of my asset allocation (about 14%), and so not having such a tilt for this market doesn’t impact my portfolio dramatically.

        As for your switch from iShares for the Canadian ETFs, the 4 basis points should work out to about 2.5 poutines ever year after the transaction costs have been paid. Not bad! (We should try to get all financial advisors to represent costs in terms of a quantity of poutine — this sort of investor education is probably quite useful to a layman, and much easier to understand than deferred sales charges, management fees, and so on.) 😀

      • Canadian Capitalist

        Thanks Raman. That confirms what I’ve learned looking at these products. Vanguard sliced-and-diced ETFs are cheap but even EFV costs 40 bps. Among Canadian ETFs, FXM sounds intriguing for value but its fees are at nose-bleed levels for an ETF.