I use the Sleepy Portfolio to reflect the asset allocation of our portfolios and to benchmark our returns. The Sleepy Portfolio fulfilled a valuable benchmarking role because I was mostly invested in individual securities. Now, more than 60% of our total portfolio is in index funds and our future portfolio performance will match the Sleepy Portfolio’s.

There have been many changes since the Sleepy Portfolio was introduced. Cheaper ETFs like VWO and VEA are now available. Foreign content restrictions on RRSP accounts have been eliminated. I am now more familiar with ETFs than I was two years back. I am also tweaking the asset allocation slightly so that foreign stocks reflect their respective proportion in world market capitalization, US equity at 23%, EAFE equity at 22% and emerging markets at 5% and reducing allocation to Canadian equities slightly to 20%. To reflect these changes, I am going to clean up the Sleepy Portfolio by making the following transactions:

  1. Sell XMD: The original intention of adding XMD to the portfolio was to complement the XIC, which originally held the 60 largest capitalization stocks in the TSX. Now, XIC tracks the TSX Composite Index and would be a good proxy for the performance of the Canadian equity market.
  2. Replace XSP, IWM and IWR with VTI: The Vanguard US Total Stock Market Index Fund (VTI) has a MER of 0.07% compared to 0.24% for XSP (currency-neutral S&P 500 index fund), 0.20% for the IWM (small-cap index) and 0.20% for the IWR (mid-cap index). The US equity portion is currently split equally among the three funds, over weighting the mid- and small-cap funds relative to the market.
  3. Replace XIN with VEA: XIN is the currency-neutral index fund that tracks developed markets in Europe and Japan. Vanguard recently introduced the Europe Pacific ETF that tracks the same market without currency adjustments and is 0.35% cheaper compared to XIN.
  4. Replace XBB with XSB and XRB: I agree with the contention that long bonds do not have an attractive risk/reward profile. I am further splitting the 20% allocated to XBB into 15% for the XSB and 5% for the XRB. Note that in your personal portfolios, you may want to buy real return bonds directly.
  5. Replace EEM with VWO: The Vanguard Emerging Markets Index fund (VWO) costs less than half that of the current holdings in EEM.

The current holdings of the Sleepy Portfolio can be seen in the following table:

[Table of current Sleepy Portfolio holdings]

This article has 15 comments

  1. Julien Nephtali

    You previously mentioned that you would wait for better buying opportunities for XRE and VWO. Yet I notice they are already in your portfolio. Have you purchased any XRE and VWO recently ?
    Regards,
    -Julien

  2. Canadian Capitalist

    Hi Julien: The Sleepy Portfolio is an imaginary portfolio and already held EEM. I am simply replacing it with VWO.

    I am still waiting for a good buying opportunity in VWO and REITs. Fortunately, looks like we will have an opportunity soon.

  3. Hi CC. The high quality Canadian REITs have come away relatively unscathed in this liquidity crisis. I know this because I’ve been closely watching some of the solid REITs and waiting for an entry point just like you. It seems as though BoC interest rates have more of a negative effect on the high quality Canadian REITs than this current liquidity crisis… Except in a semi-related way, where the plummeting loonie is now giving the Bank of Canada some breathing room to hike interest rates in September.

  4. Canadian Capitalist

    Phil: I’ve been keeping an eye on RioCan but 5.8% is till too low an yield for a REIT, IMO. There will be buying opportunities in the future.

  5. Looks like H&R has a good chance at break it’s 52 week low today. Very curious to see what kind of support it gets. Yield would be around 6.5%.

  6. I don’t buy the fact that ” long bonds do not have an attractive risk/reward profile”..

    This may be true in the short-run, but for long-term investors – longer bonds should outperform short bonds – otherwise there would be no reason for investors to lock up their funds for longer..

  7. Canadian Capitalist

    Joe: Long bonds do provide slightly higher return than short-term bonds but at a much higher risk. The argument goes that for the the same risk level, it is better to take on more equity risk.

    There are times when long bonds would be an excellent choice. Think back to the 1980’s with double digit interest rates. Anyone who bought a 30-year bond then would have done very well.

  8. To CC. I’d have to check the numbers to be sure, but believe that back in the 80’s the yield curve was horribly inverted. I think it was somewhere around a 15% yield on a 1-yr GoC T-Bill, but I believe that the 10-yr long bond was trading way down at an 8% yield. A deep recession followed that period of time (as most inverted yield curves would suggest) and I graduated from university right into that recession. That’s what I remember it – I was a freshly minted unemployed university graduate for a very long time.

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  12. I have never bought ETF’s before and I would like to buy the XIC, XSP, XIN and XBB (50 % of XBB and 16.7% of each of the others). What should I watch out for? Does it really matter when one buys them when one intends to hold them long term (10 – 20 years)? I do not want too much exposure to currency fluctuations. Any advice is appreciated.

  13. Paul M

    You don’t say how much money you are going to invest… Seems most ‘experts’ are predicting interest rates will be rising in next year. You might want to look back and see how much the value/distributions of XBB purchase will go down as rates rise. Maybe this is only a problem if you need to sell. Alternately you go short-term for a few years.

    I’m just looking at individual bonds, haven’t bought any yet. I understand if you buy an actual bond and hold it to maturity you won’t loose principal. I suppose you have a missed opportunity of higher interest rates.

  14. Hi Jay. I have actually started buying XSB units already. I have bought some $18,000 worth so far. I do realize that the XSB unit price will go down when the interest rates go up but I do not want to buy any more equities. Since no one knows when the interest rate will go up, I want to wait until the rates do start moving up, sell the XSB units and buy GIC’s. I don’t know if my approach is sound but that is the best I can come up with at the moment.
    The GIC’s have very low yields now and I do not know what else to do.

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