Archive | 2016

How Long Will You Wait for Smart Beta to Work?

In my last post I shared some insights from Ben Carlson’s A Wealth of Common Sense, which argues that investors are generally better off keeping their portfolios simple and straightforward. This idea has little appeal for index investors who hope to improve on plain-vanilla funds by using so-called smart beta strategies.

“Smart beta” refers to any rules-based strategy that attempts to outperform traditional cap-weighted index funds. Now more than a decade old, fundamental indexing is the granddaddy of smart beta, while factor-based strategies are the newer kids on the block. In each case, the goal is to build a diversified fund that gives more weight to stocks with certain characteristics (value, small-cap, momentum, and so on) that have delivered higher returns than the broad market over the long term.

Many proponents of passive investing see huge potential in factor-based strategies because they combine the best features of indexing—low-cost, broad diversification, and a rules-based process—with the potential to overcome the shortcomings of traditional cap-weighting. Indeed, many of our clients at PWL Capital use a combination of traditional ETFs and equity funds from Dimensional Fund Advisors (DFA),

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Why Simple Is Still a Hard Sell

Last January, I overhauled my model portfolios to make them simpler. Some of the older options included small-cap stocks, preferred shares, and real estate investment trusts (REITs), but I switched to recommending a three-ETF portfolio covering only the core asset classes. While many readers welcomed the change, several others criticized the new streamlined portfolios as too simplistic. I still get emails from beginners who want to add more ETFs to my recommended model. Simplicity, it seems, is a hard sell.

In his recent book, A Wealth of Common Sense, asset manager Ben Carlson (who writes an excellent blog with the same title) reveals that he’s made the same discovery: investors resist simplicity. Yet Carlson believes it’s the right solution for most of us. “I’ve spent my entire career working in portfolio management,” he writes. “This experience has taught me that less is always more when making investment decisions. Simplicity trumps complexity. Conventional gives you much better odds than exotic.”

A Wealth of Common Sense is one of the wisest investing books I’ve read in the last several years. Some of its arguments are not particularly novel: for example,

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Couch Potato Portfolio Returns for 2015

With 2015 now in the books, it’s time to look back on the year that was.

It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January, and then again in July. That spelled another year for higher-than-expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar.

All in all, a diversified portfolio did quite well in the “year when nothing worked.” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details.

The building blocks

Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios:

TD Canadian Bond Index – e (TDB909)
3.07%

TD Canadian Index – e (TDB900)
-8.51%

TD US Index – e (TDB902)
20.74%

TD International Index – e (TDB911)
Source: TD Canada Trust

18.90%

Vanguard Canadian Aggregate Bond (VAB)
3.48%

Vanguard FTSE Canada All Cap (VCN)
-8.74%

Vanguard FTSE Global All Cap ex Canada (VXC)
Source: Vanguard Canada

17.04%

 

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