Investment Style - Cdn Equity Portfolio

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Investment Style - Cdn Equity Portfolio

Post by found »

I am at a crossroads in deciding on a investment style for a Canadian equity portfolio. I have a few existing holdings (namely a few banks, railroads and telcos, etc).

A few options:

I could call it a day and invest in an index fund. (eg. XIC or VNC...)
I could mirror an index fund by selecting the top x holdings ordered by weight and then normalize.
I could select the top x holdings ordered by weight for each sector and then normalize. This is done to ensure I have holdings in each sector. For example, Financials, Energy, Materials and Industrials sectors cover 75% of the market.

So, I guess the above methods are an attempt to mirror the market with a manageable number of holdings. Maybe this is folly?

If you invest using a market index then it seems like you're missing out on growth. For example, renewable energy, technology and telecommunication are not represented fairly. BCE and T make a small fraction of the index by weight.

At the moment I am leaning towards a some sort of hybrid approach. Have a portfolio with a handful of holdings in the top 4 sectors weighted by their weight in a market index with a bias towards where I think there is opportunity for growth. Is this nonsense?

I guess easymode is to just pick an index fund that aligns with my interests (growth and low-risk) and go with it.

Thoughts? What is your style?

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Re: Investment Style - Cdn Equity Portfolio

Post by ghariton »

I invest in broad market indexes through a few ETFs. I suppose I could save a bit of money by investing in individual stocks and trying to replicate the indexes myself. But we're talking of hundreds of shares and the trouble just isn't worth it. Plus my portfolio just isn't that big. Some 5 to 10 (up to 25) basis points seems pretty cheap to have someone else do it for me.

If you invest in a broad market index, you will be investing in growth stocks and sectors, by definition. They may not be the ones you personally think have the best chances, but then, are you sure you are right?

Back in the 1990s, I was convinced that technology, and particularly telecommunications, was a growth opportunity. And so it was, for a few years. Then it crashed, and I lost some two thirds of my money. Now I no longer have the confidence necessary to pick particular stocks or sectors. As an exception, I do put aside a little play money to follow my hunches and others' hot ideas brilliant insights. Over the years, this play money account has done much worse than my main, indexed, portfolio.

The above is my personal experience. Others' experience may vary.
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Re: Investment Style - Cdn Equity Portfolio

Post by found »

True, a broad market index may be investing in growth. However, the holdings are weighted to represent the current market and not growth.

Yeah, I can imagine getting burned easily. In Canada there's like 4 publicly traded telecommunication services soon to be 3? Our Tech sector isn't all that impressive either.

Yeah I agree. Not having to manage a big portfolio is a win. The concern I have is there there are holdings in the index that I'd rather not invest in. Like big energy that is coal, or say blackberry. I guess that's a little unrealistic.

It seems to me that by investing in equity you're betting on the future economy. And a broad market index will not factor any such knowledge.

tys for the dialogue.
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Re: Investment Style - Cdn Equity Portfolio

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As George has suggested, how do you know your stock picks will be right? Stock pickers on average cannot do better than the market after fees. That includes professionals with a lot more resources available than the retail investor. On average, they do not beat the market over long periods of time.

You might know what you don't like (and there are stocks each of us don't like for one reason or another) but we don't necessarily know the stocks that will outperform either. There is a whole group of investors who believe in the same things you do. Perhaps the stock prices of those stocks already reflect those views in terms of valuations (relative to the perceived dogs). Is a telecom at a P/E of 20 a better buy than a commodity company with a P/E of 7? That telecom has to grow its earnings a lot faster than the commodity company to make its stock worth a P/E of 20. IOW, valuations of individual stocks already include investor views of optimism and/or pessimism.
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Re: Investment Style - Cdn Equity Portfolio

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I could mirror an index fund by selecting the top x holdings ordered by weight and then normalize.
What does then normalize mean?

I think a lot depends on

- how you embrace active & passive management, yes or no, cap weight, equal weight costs more?
- how big your portfolio is, how big are cost savings compared to maybe semi indexing with something like expensive ETF's (XDV)
- how you are going invest funds, one big lump sum, monthly, what's your time frame and holding period
- how you rebalance IMHO harder with individual stocks
- do you think dividends are good, capital gains, total market return

In1995 when I started my portfolio there wasn't as many good ETF's around as there are now. From my experience as a retail investor buying individual stocks and building a well-diversified portfolio is a waste of time compared to a broad based 3 or 4 ETF portfolio. I have about 70 equity positions, that's about 350 dividend payments to keep track of :cry:

A couple Mers have changed but this may be interesting http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi
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Re: Investment Style - Cdn Equity Portfolio

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Mercy me Brian. How can you get to 70 equity positions?
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Re: Investment Style - Cdn Equity Portfolio

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AltaRed wrote:Mercy me Brian. How can you get to 70 equity positions?
Hopefully you don't DRIP anything in taxable accounts?
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Re: Investment Style - Cdn Equity Portfolio

Post by BRIAN5000 »

adrian2 wrote:
AltaRed wrote:Mercy me Brian. How can you get to 70 equity positions?
Hopefully you don't DRIP anything in taxable accounts?
Example - Can you tell me with reasonable accuracy which bank or insurance company will do well going forward, I can't, so I own most of them and a couple management companies, CWB is a trade. I bought a bank, whichever one, when it went on sale. If you're going to index with individual stocks how many should I have?

BMO BNS CM TD NA RY (6 banks @ equal weight), CWB GS IGM PWF, IAG GWO MFC SLF (4 insurance @ equal weight)


No dripping for a while now but if we have a 30-50% market drop all the drips may be turned on in non-registered accounts. Right now dividends are accumulating for purchases of "stocks on sale" to complete full positions. EG - MG, CNR & AGU looks like I missed completing a full position in SNC.
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Re: Investment Style - Cdn Equity Portfolio

Post by like_to_retire »

BRIAN5000 wrote:If you're going to index...........
Have you kept a record of how you're doing compared to the index?

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Re: Investment Style - Cdn Equity Portfolio

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like_to_retire wrote:
BRIAN5000 wrote:If you're going to index...........
Have you kept a record of how you're doing compared to the index?

ltr
I did up until last year when I made an ill-fated attempt to bottom pick (bring my Energy and material sector to my portfolio weight,10%), now I've just given up doesn't matter anymore, it is what it is.
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Re: Investment Style - Cdn Equity Portfolio

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BRIAN5000 wrote:Example - Can you tell me with reasonable accuracy which bank or insurance company will do well going forward, I can't, so I own most of them and a couple management companies, CWB is a trade. I bought a bank, whichever one, when it went on sale. If you're going to index with individual stocks how many should I have?

BMO BNS CM TD NA RY (6 banks @ equal weight), CWB GS IGM PWF, IAG GWO MFC SLF (4 insurance @ equal weight)
How can you possibly care? I could see maybe 3 banks and 2 insurance companies at most. When you try to mimic an index, you use a sampling.
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Re: Investment Style - Cdn Equity Portfolio

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I care on the BUY, not sure if my heirs will care on the sell. It's my opinion that each bank takes its turn being the best or being under pressure in the short term. When there was a "sale" on one of them I used to buy it. When building my portfolio I knew there would be fairly long periods of time (6 months) when I was busy with work, rentals or life. That's why I wanted stocks with different dividend reinvestment cycles to have automatic reinvestment, each of the banks have slightly different dividend cycles.
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Re: Investment Style - Cdn Equity Portfolio

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AltaRed wrote:
BRIAN5000 wrote:Example - Can you tell me with reasonable accuracy which bank or insurance company will do well going forward, I can't, so I own most of them and a couple management companies, CWB is a trade. I bought a bank, whichever one, when it went on sale. If you're going to index with individual stocks how many should I have?

BMO BNS CM TD NA RY (6 banks @ equal weight), CWB GS IGM PWF, IAG GWO MFC SLF (4 insurance @ equal weight)
How can you possibly care? I could see maybe 3 banks and 2 insurance companies at most. When you try to mimic an index, you use a sampling.
Did you go to the stingy calculator? to replicate 75% of XIU you need 25 stocks, I have 24, plus 12 not in the index for various reasons, IGM, GWO, PWF which basically make up POW is one of the reasons.
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Re: Investment Style - Cdn Equity Portfolio

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Equally weighted indexes tend to perform better than market cap weighted ones over the long term. But funds that follow them tend to do too much trading, in my view, because they rebalance frequently.

Going roughly equally weighted with lazy/no rebalancing seems like a good option to me. For instance, one might start with 20+ stocks (spread out by sector, etc.) and then add more stocks with new cash flows. Costs fall but tracking error against the equally-weighted index increases.
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Re: Investment Style - Cdn Equity Portfolio

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BRIAN5000 wrote:Did you go to the stingy calculator? to replicate 75% of XIU you need 25 stocks, I have 24, plus 12 not in the index for various reasons, IGM, GWO, PWF which basically make up POW is one of the reasons.
It is a matter of perspective what replicating vs mimicing an index means. I don't think replication of an index is that meaingful, nor even mimicing the index, especially the TSX given its perverse sector weightings. I'd suggest 15-20 stocks will get you close enough to the sectors one ultimately wants to hold in the TSX60 to make it meaningful.

Given you said earlier about holding 70 equities, I assume you stock pick ex-Canada too. I'd Index everything ex-Canada (1-3 ETFs) and be done but if that is not your cup of tea, then another 15 holdings or so ex-Canada.

I think I admire your tenacity in booking dividends for 70 holdings year after year, but that would make me throw in the towel.

ADDED: LTR has a good question. How does performance of your holding 70 equities compare to the indices over time? If you are not consistently above the indices by a percentage point or two over a rolling average period, you appear to be dedicating a lot of personal effort and time for negligible gain.
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Re: Investment Style - Cdn Equity Portfolio

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you appear to be dedicating a lot of personal effort and time for negligible gain.
As I said I was keeping track and was at least 2% better till the Energy & Materials debacle. It no longer matters to me. What's done is done and if I want to switch there is capital gains, $150,000 in the Financial sector alone.

Yup 15 is my magic number out of the Dow, well I have MO & PM, once they are at equal weight anymore will go into VYM.

There are good examples and bad examples, the OP can look at what I have done and decide if the effort is worth it. If I had the ETF's that are available now back then and believed in passive investing I think I would do it different.

I used to weight individual banks by my "preceived" risk in each bank but have since gone to approximately equal weight 3.3% 3.4% 2.8% 3.0% 2.8% 3.1% with my last purchase on one of the two 2.8% bank holdings, NA.

The OP could buy CEW and have equal bank and insurance holdings but pay the higher Mer then broad based ETF's.
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Re: Investment Style - Cdn Equity Portfolio

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What I mean by normalize: normalized weight = (weight of individual holding) / (the sum of all the weights).

So _on average_ assumes a rather large time horizon.

The % change of a portfolio of the 5 banks over last 20 years:
S&P TSX Composite Index = 85.25
XIC = 76.75
XIU = 97.55
RY = 552.97
BMO = 398.38
BNS = 819.85
CM = 348.20
TD = 955.66
Portfolio %change assuming equal weights = 615.01

The % change of a portfolio of the 5 banks over last 10 years:
S&P TSX Composite Index = 20.91
XIC = 21.56
XIU = 26.49
RY = 72.57
BMO = 36.09
BNS = 52.28
CM = 28.36
TD = 87.19
Portfolio %change assuming equal weights = 64.30

The % change of a portfolio of the 5 banks over last 5 years:
S&P TSX Composite Index = 2.20
XIC = 3.07
XIU = 4.79
RY = 30.87
BMO = 33.87
BNS = 9.01
CM = 21.74
TD = 35.50
Portfolio %change assuming equal weights = 26.198

The % change of a portfolio of the 5 banks over last 3 years:
S&P TSX Composite Index = 10.23
XIC = 10.58
XIU = 12.47
RY = 24.36
BMO = 31.67
BNS = 7.65
CM = 28.58
TD = 36.28
Portfolio %change assuming equal weights = 25.70

The % change of a portfolio of the 5 banks over last 1 years:
S&P TSX Composite Index = -8.21
XIC = -8.16
XIU = -8.05
RY = -2.34
BMO = 6.31
BNS = -1.32
CM = 7.60
TD = 1.46
Portfolio %change assuming equal weights = 2.34

So this isn't really comprehensive, but I did it to illustrate the growth of the 5 banks over various time ranges. Given this data _on average_ a portfolio of the 5 banks has beaten the broad market index every time. Am I missing something?

Also, I do not intend to imply that the banks will continue this growth into the next 20 years. They may implode. eg. The energy sector has imploded (or at least oil / natural gas).

I am also not interested in 70 holdings (at maximum 10-15 maybe). Or wasting a significant amount of time _picking_ stocks. Ultimately I may decided to invest in a index fund in the future for simplicity. I thought it was time to poll the crowd before I continue investing.
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Re: Investment Style - Cdn Equity Portfolio

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AltaRed wrote: As George has suggested, how do you know your stock picks will be right?
You don't have to be right all the time to outperform the index. You have to be able to admit you were wrong and start over.
found wrote: I am also not interested in 70 holdings (at maximum 10-15 maybe). Or wasting a significant amount of time _picking_ stocks. Ultimately I may decided to invest in a index fund in the future for simplicity. I thought it was time to poll the crowd before I continue investing.
How much time are you willing to spend managing your portfolio?

Stock picking is easy; throw darts if you want to. Managing the stocks you picked is where it gets complicated.

Having the discipline to follow your strategy is the hard part.

You probably don't need more than 10 stocks in a portfolio.
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So this isn't really comprehensive, but I did it to illustrate the growth of the 5 banks over various time ranges. Given this data _on average_ a portfolio of the 5 banks has beaten the broad market index every time. Am I missing something?
Ask someone who had a lot of US banking stocks how they faired over the last 10 years?

So you have varied answers for individual stock holdings from 10 to 20 Canadian and then US or international exposure. William says even 200 isn't enough.

So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market. http://www.efficientfrontier.com/ef/900/15st.htm
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Re: Investment Style - Cdn Equity Portfolio

Post by like_to_retire »

BRIAN5000 wrote:
like_to_retire wrote:
BRIAN5000 wrote:If you're going to index...........
Have you kept a record of how you're doing compared to the index?
ltr
I did up until last year when I made an ill-fated attempt to bottom pick (bring my Energy and material sector to my portfolio weight,10%), now I've just given up doesn't matter anymore, it is what it is.
I have to say it sure matters to me. I track the Index (S&P/TSX60) as a comparison to the CDN individual stocks I own since it would be silly to invest in CDN individual stocks unless I could handily beat the index. Otherwise, why bother. Granted, CDN individual stocks are easier to handle with respect to taxes compared to ETF T3 taxes, but for me, I expect to beat the index quite decidedly or I would switch to ETF indexes.

I stay away from Materials, Information Tech and Health Care sectors (too volatile - good for trading) and only invest in the remaining 8 sectors (Financial Bank, Financial Non-Bank, Energy, Telecom, Utilities, Consumer Discretionary, Consumer Staples, Industrial). This results in ~12.5% per sector, equal weighted, for a total of about 20 stocks. I can't imagine needing any more. No foreign or emerging - not interested since they would have to overcome the tax advantage of the CDN stocks plus forex concerns.

I can click a button on my spreadsheets and see how I am doing at any time compared to the index. If I look at approximately 4 years, plus year-to-date, I am beating the index about 100%. So it shows that 70 stocks aren't really needed to beat the index, but a representative sample will sufice. Certainly 3 banks, and 2 insurance companies should be enough. It must be a tough job to track all those 70 stocks. Kudos to you.
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Re: Investment Style - Cdn Equity Portfolio

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I expect to beat the index quite decidedly or I would switch to ETF indexes.
Well, going forward I may or may not beat the index but my portfolio is built now, over $300,000 in CG should I switch to ETF's now or come up with some sort of hybrid? I think ETFs are "better" but to pay the tax and add the Mer, even though small, doesn't make sense to me.

What am I supposed to be tracking? They go up, they go down, they stay the same. I do have them on a spreadsheet and watch for dividend changes but I really don't even need to do that. I watch for opportunities to add on price weakness or to cull losers on price gains it's automated and colour coded, LOL.
Certainly 3 banks, and 2 insurance companies should be enough.
Not according to Bernie as I posted.
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Re: Investment Style - Cdn Equity Portfolio

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BRIAN5000 wrote:What am I supposed to be tracking?
Against the Total Return indices you seek to replicate. Weight the indices according to your asset allocation and compare away.

P.S. I do understand you are caught in a Catch 22. Too much unrealized cap gain to take the hit. This will happen to all stock jocks over time and after a few decades, keeping track of that starts getting just a bit weary, and a few decades after that (if one is lucky to get that far), cognitive challenges set in. I am 67 and not sure how long I want to continue to track my Cdn asset allocation (all in stocks).
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Re: Investment Style - Cdn Equity Portfolio

Post by like_to_retire »

BRIAN5000 wrote:Well, going forward I may or may not beat the index but my portfolio is built now, over $300,000 in CG should I switch to ETF's now or come up with some sort of hybrid? I think ETFs are "better" but to pay the tax and add the Mer, even though small, doesn't make sense to me.
The ETF's are only better if you can't beat them. You won't know that until you track the index versus your stocks in earnest.

If your stocks are beating the index, then stay the course, if not, then subsequent purchases should probably be made toward an ETF. This would be a hybrid approach that would eventually favour the index. It's just math.

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Re: Investment Style - Cdn Equity Portfolio

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found wrote:I am at a crossroads in deciding on a investment style for a Canadian equity portfolio. I have a few existing holdings (namely a few banks, railroads and telcos, etc).

A few options:

I could call it a day and invest in an index fund. (eg. XIC or VNC...)
I could mirror an index fund by selecting the top x holdings ordered by weight and then normalize.
I could select the top x holdings ordered by weight for each sector and then normalize. This is done to ensure I have holdings in each sector. For example, Financials, Energy, Materials and Industrials sectors cover 75% of the market.
Regarding the investments designed to mirror the index:

Because I pay US taxes and want to avoid PFIC issues, I can't buy C ETFs and must own individual C stocks. I want to simply mirror the S&P/TSX 60. I do the third option (I try to match the industry %s) and have 30 holdings. They're not DRIP'd. I never sell, and I bring things into line by sending new cash flows into the most underweighted stock in the most underweighted industry.

I have found that my portfolio deviates from the index surprisingly quickly. In particular, some new company comes along (e.g. Valeant) which I don't have any of, and the index starts moving in ways quite differently from my attempt to mirror it.

Go "individual stock" if you think you would enjoy the process of trying to mirror the index. I find it kind of fun to figure out the next company to invest in. But then I like building spreadsheets.

If you don't think you would enjoy that, I would just buy the index ETF. MERs are just so low.

Regarding your tilt:

If you tilt away from the index and underperform, will you beat yourself up over that? Maybe more than if you hadn't tilted?

That's a big reason why I don't tilt.

a_l
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Re: Investment Style - Cdn Equity Portfolio

Post by Michael D »

Hi there,

I can echo a lot of comments here. My investment experience started over 20 years ago and I have had bad index mutual funds, expensive actively managed mutual funds, individual dividend growth stocks (2008-2012 :thumbsup: ) and now hold a low cost Canadian mutual fund (good) and a few stocks left from my stock playing days and a couple of healthcare technology stocks which I have swing traded up and down.

Image

I am still working, and do not wish to spend half of my workday watching stock prices (admit, that is my problem and I simply need to remove distractions). Looking at the Canadian equity market, it is very stable in a few key sectors; incredibly risky in others, and volatile elsewhere. Canada has its share of very good high quality growing mid-caps. I think the Venture exchange is a Casino for the most parts. So I am focusing on work, putting money into that big gold line up top.

FWIW this is only my Canadian holdings. In US and International, because of the global scope and volume of research, an index ETF does the trick in the most part (I hold VFV and XMI). I augment with a Global small cap fund. I have spent a lot of time looking at the different ETFs in US and Global areas and If I look at the graphs, I just buy VFV and am agnostic on MSCI indexes (XEF or XMI). International seems to behave differently (active versus passive) than Canadian.
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