Archive | September, 2013

Your Guide to the (Even More) Perfect Portfolio

I’m pleased to announce that the 2013 edition of The MoneySense Guide to the Perfect Portfolio is now on sale. The book is available wherever you would buy MoneySense magazine, including newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. You can also order it online at the Rogers Publishing e-Store. The book retails for just $9.95, or about the cost of a single ETF trade at your discount brokerage. We’re hard at work on e-book versions for Kindle, Kobo and Apple devices and I’ll let readers know as soon as these are available.

This is the third edition of my guide for do-it-yourself index investors, which was first published in 2011. Most of the content is the same—the fundamentals of smart investing don’t change—but this edition has been thoroughly updated. The most significant change is the final chapter, which now includes a version of the ETF All-Stars article I wrote for the February/March issue of MoneySense. (The full article is available in PDF format from the Rogers Publishing e-Store for $2.99.) This includes a list of 21 ETFs that can form the building blocks of virtually any Couch Potato portfolio.

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How Not to Prepare for a Bear Market in Bonds

The risk of rising interest rates has become an obsession in the financial media. Those risks are undeniably real: it’s quite possible that broad-based bond funds will see multiple years with negative returns. (As I illustrated in a previous post, that would likely occur if rates across the yield curve rose 1% annually for three years. This article by Dan Hallett also includes some possible scenarios.) But these risks need to be kept in perspective: if you hold a bond fund with a duration shorter than your time horizon, your capital is not at risk. And if you’re a decade or two from tapping your portfolio, rising rates should even be welcomed.

And yet the bond bears just keep on roaring. The latest example is an advisor featured in a Globe and Mail article this weekend. “For the first time in my entire career,” he says, “bonds are in my opinion riskier than stocks.” He’s recommending his clients abandon the asset class altogether. Whenever articles like this are widely read, I get contacted by worried readers who are ready to follow suit. So here’s my preemptive response to what I believe is dreadful,

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Ask the Spud: Should I Fear Rising Interest Rates?

Q: Recently the bond market—and 40% of my Global Couch Potato portfolio—has dipped significantly. I understand swings like this occur from time to time, but with interest rates moving higher would it be wise to decrease the percentage in bonds to say, 20%? Or maybe temporarily stop my monthly contribution to bonds and instead put it in equities? — C.P.

I’ve received some variation of this question almost every day since interest rates began to spike in May. The unit price of the iShares DEX Universe Bond (XBB), which tracks the most widely followed bond index in Canada, is down about 5.5% on the year, and it could fall further if rates continue to tick upward.

It’s easy to understand the discomfort investors are feeling. After all, Canada has not had a year with negative bond returns since 1999. We’re accustomed to bonds delivering steady returns year after year, and we don’t know how to respond to a sharp decline in price. Our instincts seem to be to stop buying them, and maybe even to sell the ones we already own. But if you’re a long-term investor, that’s getting things exactly backwards.

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The One-Fund Solution

[Note: This post was updated in May 2014, when the former ING Direct changed its name to Tangerine.]

What’s the best way to get started with index investing? That’s the question Justin Bender and I ask in our new white paper, The One-Fund Solution. In our opinion, if you’re new to self-directed investing and you have a relatively small RRSP or TFSA, the place to begin is the Tangerine Investment Funds.

I’ve written about the Tangerine funds (formerly the ING Direct Streetwise Portfolios) before, and I often get pushback from readers. They point out these balanced index funds carry an MER of 1.07%, which is expensive compared to my ETF model portfolios, and even the TD e-Series funds. But most of this criticism comes from experienced do-it-yourselfers who forget that reading this blog means they’re among a small minority who consider investing something of a hobby. Most Canadians are not like them. Most people, even if they are good savers—and that’s the most important characteristic of a good investor—would rather watch Say Yes to the Dress than use a rebalancing spreadsheet.

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Is Your Portfolio Just a Pile of Parts?

Is there difference between a diversified portfolio and a collection of investments? That’s an insightful question Chris Turnbull asks in his new book Your Portfolio is Broken: Who’s to Blame and How to Fix It.

Turnbull is a portfolio manager with The Index House, an Edmonton wealth management firm. In his self-published book (available from Amazon), Turnbull explains that when he worked as a broker he would “recommend stocks, bonds, mutual funds, preferred shares, structured products, term deposits, new issues, and other types of securities, according to client preferences.” Often the clients would make their own suggestions, and those would end up in the portfolio, too. By the time he decided to end his career as a broker, his clients “collectively held 185 different mutual funds plus hundreds of stocks, bonds, and other securities.”

In other words, his clients didn’t have diversified portfolios: they simply had collections of investments. Turnbull uses an apt metaphor: “If, over many years, you acquired all the parts you thought you needed to assemble a car and you piled them up in your garage, would it be a car?

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Deep Thoughts on Diversification

Just shy of two years ago—in October 2011—I wrote a post that laid out the year-to-date returns for the Complete Couch Potato portfolio. If you can remember that far back, the third quarter of 2011 was truly ugly. The European debt crisis was all over the news, the US government’s credit rating was downgraded, and the global economic outlook was bleak. If you held a diversified portfolio, your equities were in the toilet, but you were saved by a solid performance from REITs and outstanding returns from bonds, especially real-return bonds. Overall, the portfolio experienced a small loss over the first nine months of the year:

January–September 2011
Ticker
 %
Return

iShares S&P/TSX Composite
XIC
20%
-12.02%

Vanguard Total Stock Market
VTI
15%
-5.26%

Vanguard Total Int’l Stock Market
VXUS
15%
-13.82%

BMO Equal Weight REITs
ZRE
10%
5.77%

 iShares DEX Real-Return Bond
XRB
10%
9.53%

 iShares DEX Universe Bond
XBB
30%
7.20%

Total

-1.6%

Now let’s look at how the Couch Potato has performed so far in 2013. Here are the returns as of August 30:

January–August 2013
Ticker
 %
YTD return

iShares S&P/TSX Composite
XIC
20%
3.2%

Vanguard Total Stock Market
VTI
15%
20.8%

Vanguard Total Int’l Stock Market
VXUS
15%
5.6%

BMO Equal Weight REITs
ZRE
10%
-10.5%

 iShares DEX Real-Return Bond
XRB
10%
-10.5%

 iShares DEX Universe Bond
XBB
30%
-2.1%

Total

1.9%

How’s that for an about-face?

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