Archive | Indexing basics

Podcast 10: MoneySense, We Hardly Knew Ye

If you’ve been a reader for a while, you know that I have a long association with MoneySense, a magazine I contributed to for some 15 years as a feature writer, columnist, and editor. MoneySense didn’t invent the Couch Potato strategy, but the magazine brought the idea to Canada around the turn of the millennium, when index funds were rare and ETFs were almost completely unknown to the public.

But times are tough for print media, and at the beginning of this year MoneySense published its last magazine and made the transition to an all-digital format, including a lineup of free newsletters.

In my latest podcast, I sit down with David Thomas, who was named editor-in-chief at the magazine in late 2015 and still oversees the MoneySense and Canadian Business brands at Rogers Media. We chat about the magazine and as well as the evolving role of the financial media.

Worlds apart

Do you still need international diversification in your portfolio? That’s the question I tackle in this episode’s edition of Bad Investment Advice.

I’ve recently received questions from readers and listeners about whether investors really need international diversification in their portfolios.

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Podcast 9: Finding Common Ground

Does the whole “active versus passive” debate miss a key point about what leads to successful investing? Why do investors focus on “mutual funds versus ETFs” when neither structure is inherently superior? These are some of the topics I discuss with Tom Bradley in my latest podcast:

Tom is the co-founder and president of Steadyhand Investment Funds, based in Vancouver. Steadyhand believes strongly in active management: they even call themselves “undex funds,” because their goal is to look like nothing like the benchmarks. But if you spend any time reading Tom’s articles in the Globe and Mail, MoneySense, and on the Steadyhand blog, you’ll notice there a surprising amount of overlap in our messages. I noted this some six years ago when Tom released the first edition of his book, It’s Not Rocket Science.

Tom and I both understand that, whatever your specific strategy happens to be, the fundamental ingredients of a successful plan are low cost, broad diversification and a disciplined strategy you will adhere to over the long term.

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Model Portfolio Update for 2017

After two years with no changes to my Couch Potato model portfolios, the 2017 edition comes with an update to the ETF version.

Before I get to the details, I feel compelled to stress that if you’re currently using the older ETF portfolio, there is absolutely no reason to change. The funds I’ve swapped here are a wee bit cheaper, but the cost of selling your existing ETFs and buying the new ones almost certainly outweighs the benefits. And if the transactions would involve realizing taxable gains, then making a switch is downright nutty. To put this in perspective, the new portfolios will reduce your management fees by 0.03% annually, which works out to 25 cents a month on every $10,000 invested.

I’ve also updated my model portfolios page with historical returns to the end of 2016. As always, we’ve used actual fund performance wherever possible: for earlier periods we’ve used index data, subtracting the fund’s current MER to account for costs.

With that out of the way, here are the changes.

Zigging over to ZAG

First, I’ve replaced the Vanguard Canadian Aggregate Bond Index ETF (VAB) with the BMO Aggregate Bond Index ETF (ZAG).

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Couch Potato Portfolio Returns for 2016

If you believe the media, 2016 was an annus horribilis: some even dubbed it the worst year ever. I think there were a few years during the Great Depression or World War II that might have been worse, but maybe I’m just being a crank.

In any event, it was actually another solid year for investors—the Canadian equity market soared, and despite the surprising Brexit vote and the election of Donald Trump, foreign equity returns where respectable as well, at least in Canadian-dollar terms. Bonds just inched along, but anyone with a diversified index portfolio—whether conservative or aggressive—saw a nice gain last year.

Here’s an overview of how the major asset classes performed in 2016:

The year started very well for bonds, but interest rates rose late in the year and the broad bond market ended up delivering modest returns. The broad-based FTSE TMX Canada Universe Bond Index finished the year at about 1.7%.
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After a sharply negative 2015 and several years of lagging the US and international markets, Canadian equities rebounded with a monster year, topping 20% for the first time since 2009.

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Are Target Date Funds Right For You?

Think about all the elements you need to be a successful index investor. First, you need to choose an appropriate mix of stocks and bonds, and to adjust that mix as you approach retirement. Your portfolio needs to be broadly diversified and low-cost. You need to save part of your paycheque in a disciplined way, rebalancing your portfolio from time to time, and resist distractions so you won’t be tempted to abandon your plan.

If you have a defined contribution pension plan or group RRSP through your employer, there may be a simple solution: the target date fund. These products were created in the 1990s for workplace investment plans in the US, and they’re now widespread in Canada, with BlackRock’s LifePath and Fidelity’s ClearPath family the most common. These incumbents will now face a challenge from Vanguard, who manages over $358 billion USD in target date funds in the US and recently announced its own series of Target Retirement Funds in Canada.

The idea behind target date funds is brilliantly simple: each one is a balanced portfolio of bonds and global equities in various proportions,

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Calculating Your Portfolio’s Rate of Return

Perhaps no number is more important to investors than the rate of return on their portfolio. Yet this seemingly simple calculation is fraught with problems. If you’ve made contributions or withdrawals during the year, calculating your rate of return is not straightforward. What’s more, there are several ways to perform the calculations: the results can differ significantly, and each method has strengths and weaknesses. No wonder so many investors have no idea how to measure or interpret their returns.

In our new white paper, Understanding Your Portfolio’s Rate of Return, Justin Bender and I introduce the various methods used to calculate a portfolio’s rate of return, explain how and why they can produce different results, and help you determine which method is most appropriate to your circumstances. Justin has also updated his popular calculators, which you can download for free on the new Calculators section of the PWL Capital website.

Time and money

Rate of return calculations fall into two general categories: time-weighted and money-weighted. If a portfolio has no cash flows (that is, the investor makes no contributions and no withdrawals),

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Raining on the All Seasons Portfolio

Investors are hungry for success stories, especially tales that include high returns with low risk. And the investment industry is always happy to stoke that appetite.

One of the most popular stories today is the so-called All Seasons portfolio, whose virtues are trumpeted in the massive bestseller Money: Master the Game, by motivational speaker Tony Robbins. The book has been out since last November and I thought the hype would blow over quickly, but I’m still getting inquiries about it, so I thought I’d take a closer look.

The All Seasons portfolio was created by Ray Dalio of Bridgewater Associates, one of the largest hedge fund managers in the world. It’s based on Dalio’s similarly named All Weather fund, which reportedly has more than $80 billion USD in assets. The portfolio has the following asset mix:

30%      Stocks
40%      Long-term bonds
15%      Intermediate bonds
7.5%     Gold
7.5%     Commodities

In a backtest covering the 30 years from 1984 through 2013, the All Seasons portfolio had an annualized return of 9.7% (net of fees) and only four years with a loss.

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Couch Potato Model Portfolios for 2015

Call off the hounds: I have finally updated my model Couch Potato portfolios for 2015. Full details appear on the permanent Model Portfolios page, but here are the new versions in downloadable PDF format:

Option 1 — Tangerine Investment Funds

Option 2 — TD e-Series Funds

Option 3 — Vanguard ETFs

You’ll notice some significant changes this year:

I have dropped the Complete Couch Potato and Über-Tuber from the lineup. All of the model portfolios now include only traditional index funds tracking the major asset classes: no REITs, real-return bonds, value stocks or small-cap stocks.

The new lineup presents three options, with the key difference being the type of product. Option 1, from Tangerine, is a one-fund solution that’s ideal for investors who value simplicity. Option 2, the TD e-Series funds, offers more flexibility and lower cost. Option 3, built from Vanguard ETFs, is the cheapest option, but also the most difficult to manage for new investors.

None of the options include ETFs traded on US exchanges.

Each option now includes several different asset allocations, ranging from conservative (70% bonds and 30% stocks) to aggressive (10% bonds and 90% stocks).

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Couch Potato Portfolio Returns for 2014

Here are the 2014 returns for my Model Portfolios.

The data below are from the funds’ websites whenever available: otherwise I used Morningstar. All ETF returns are based on net asset value rather than market price. Performance of US-listed funds is expressed in Canadian dollars using noon exchange rates from the Bank of Canada.

 Global Couch Potato: Option 1
%
Return

Tangerine Balanced Portfolio (INI220)
100%
10.4%

.

 Global Couch Potato: Option 2

%
Return

TD Canadian Index – e (TDB900)
20%
10.2%

TD US Index – e (TDB902)
20%
23.1%

TD International Index – e (TDB911)
20%
2.5%

TD Canadian Bond Index – e (TDB909)
40%
8.3%

10.5%

.

 Global Couch Potato: Option 3

%
Return

RBC Canadian Index (RBF556)
20%
9.8%

TD US Index – I (TDB661)
20%
22.9%

National Bank International Index (NBC839)
20%
1.7%

TD Canadian Bond Index – I (TDB966)
40%
7.9%

10.0%

.

 Global Couch Potato: Option 4

%
Return

Vanguard FTSE Canada All Cap (VCN)
20%
9.8%

Vanguard US Total Market (VUN)
20%
22.6%

iShares MSCI EAFE IMI (XEF)
20%
2.4%

Vanguard Canadian Aggregate Bond (VAB)
40%
8.8%

10.5%

.

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