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moneysense.ca, 6/03/07
The Smartest Investment Portfolios
Daniel Solin recommends in his book, The Smartest Investment Book You’ll Ever Read (review), that investors with less than $1 million should implement one of the following four portfolios without relying on the advice of any broker or investment advisor:
- Low risk: 2% XIC, 10% XSP, 8% XIN, 80% XBB.
- Medium-low risk: 4% XIC, 20% XSP, 16% XIN, 60% XBB.
- Medium-high risk: 6% XIC, 30% XSP, 24% XIN, 40% XBB.
- High risk: 8% XIC, 40% XSP, 32% XIN, 20% XBB.
For those who are not familiar, the symbols represent exchange-traded funds from iShares that can be purchased on the TSX through a discount broker. I would substitute VTI for XSP and EFA for XIN but these “lazy” portfolios are a good starting point for smart investors.
moneysense.ca, 6/03/07
CC,
Why VTI instead of XSP?
FT
I assume this is good for someone who will invest yearly rather then monthly? I have a TD efunds account and invest bi-weekly, monthly. If I did want to get some ishares what would the best way to invest in them and how often?
Tyler, you have to be careful with ETF’s if you invest bi-weekly as you will be charged a commission on EVERY transaction unlike index funds.
FT: VTI captures the whole US stock market instead of just the S&P 500. Also, the MER for VTI is crazy low and for a long-term investor, I think the currency hedge has a dubious benefit.
Tyler: TD eFunds is perfect for regular investments. If you are with TD Waterhouse, you could periodically cash in the mutual funds and buy the corresponding ETF and save a little bit on the MER. But the difference is not that big.
I find the low ratio of XIC in all of these portfolios very interesting. Even the most bullish, riskiest portfolio caps at 8%. Certainly food for thought. Doesn’t jibe with what I suspect the majority of Canadian portfolios look like — and one that many people may be reminded of during the inevitable pullback of our domestic market
GIV: Dan Solin explains in his book that in his opinion allocating 10% of the equity exposure to Canadian stocks is appropriate because:
1. Historically, foreign stocks have provided a higher return at lower risk compared to Canadian equities.
2. Canadian stocks make up less than 3% of the global stock capitalization.
I don’t really buy #2 as a good reason, but it is undeniable that the Canadian market is concentrated in just two sectors: financials and resources and hence offers poor diversification.
What about Claymore Investments ETF solutions? They are also offered on the Toronto Stock Exchange, and they have a growing variety.
What’s neat about them is that they are not based on market capitalization. They use Fundamental Indexation as a solution, meaning they weights its constituents based on company fundamental factors including dividends, total sales, free cash flow and book equity value. This way each variable is not dependant on the fluctuations of the market valuation. Fundemental Indexation seeks to identify the true ‘fair value’ of each company.
Stephanie: I am aware of fundamental indices (FI) and have posted many times about them. Fundamental indexing does have its share of detractors and I don’t want to rush to join the bandwagon and wait for a few years to see how the dust settles.
I generally agree with the portfolio allocation options but disagree with the risk characterization of the portfolio names.
The Low Risk portfolio implies that it is the least risky portfolio. That may be true in the short term (5 years) and would be fine for someone requiring therir cash in the short term. However, over the long term (over ten years) I think the “Low Risk” portfolio is actually at least moderate risk because of the near certainty that a greater allocation to the equities would yield a better return.
XIC is not a great choice for capturing the canadian market. It is very illiquid meaning that if you needed to sell in a hurry, you may have trouble getting decent value for your stock, and based on current volumes, you could easily take a 2 or 3% hit depending on how quickly you want to sell. Also, purchasing requires limit orders with a lot of patience to avoid getting slaughtered on the spread. XIU is profoundly more liquid, and is a better choice IMO.
My New Passive Index ETF Portfolio…
Unfortunately this is the second time my portfolio has changed in the past two years. The first change was when I moved from a TD Mutual Funds account to Clearsight last year. My advisor had great plans for my portfolio. He wanted to eventually have me…
[...] Success by David Swensen, The Smartest Investment Book You’ll Ever Read by Daniel Solin (allocation overview here) and The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. [...]
can you explain why xsu is far below the Russel 2000 index’s anual rate of return and even xsp lags the s&p index’s anual rate of return year after year