Am I really doing okay?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Am I really doing okay?

Post by scoobydoo »

Moderator W has combined this and Bogleheads 3 fund threads due to duplicative content

Three years ago at ~47 I retired from the public service and had my pension transfer value put into a LIRA. Since then I haven't worked enough to be able to contribute additional funds to a non-locked-in RRSP. I plan to "retire" at age 65. I say quote retire because I plan on working part-time because I like it. Right now I am starting a business which I hope will lead to some nice financial gains and allow me to contribute more to my retirement.

I've invested all the funds in various Canadian and American ETFS. After reading lots of stuff and asking questions here I took what I think is a slightly aggressive investment approach to try and grow my stock portfolio quickly within the first 10 years then slow down and transfer assets into Canadian dollars as I approach retirement. I fiddled around with the allocation for the first year or so, but have pretty much left it alone for the last 2. I think I'm doing pretty good, but I want to get a 3 year reality check. Any comments would be appreciated. Thanks.

Some observations:

1) EFA seem lackluster compared to my other holdings. The 2 year loss of EFA is -4.45%. Though in the past year it has seen a 10.38% gain but I still don't see it gaining overall anytime soon.

2) My US dollar holding are pretty high compared with my Canadian dollar holdings. If you include EFA then my US dollar holdings are almost 70%.

3) VNQ seems very lackluster with 2/1 year losses of -2.64%/-1.17%

4) The 2 year loss of FXM is -1.27%, but the 1 year gain is 15.91% so I'm not sure what to make of it.

5) Overall I would say the majority of gains in my portfolio come from IWM and VTI.

6) At 14% my real estate sector concentration seems high to me.

Starting value: $51K
Current value: $73K
Trailing 12 month return: 20.89%
Cumulative returns (3.25 years): 41.96%
1 year annualized return: 20.89%
3 year annualized return: 9.81%
Since inception: 11.68%

Asset mix:
Cash: 4.3%
Fixed income: <1.0%
Canadian equities: 21.3%
FXM 16.2%, VRE 5.1%
US Equities: 52.1%
VTI 33.2%, IWM 14.1%, VNQ 4.6%
International Equities: 21.0%
EFA 20.9%
Other: 1.1%

Sector mix:
Financial Services: 16.4%
Real Estate: 14.3%
Industrial: 11.3%
Technology: 11.3%
Consumer Cyclical: 10.7%
Healthcare: 9.1%
Consumer Defensive: 7.3%
Basic Material: 7.0%
Utilities: 4.9%
Energy: 4.7%
Communications: 3.2%

Region mix:
United States: 55.1%
Canada 22.4%
Europe: 9.9%
Asia: 6.5%
United Kingdom: 4.0%
Australia: 1.7%
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Re: Am I really doing okay?

Post by AltaRed »

Your annualized return of just under 10% is just fine (I assume you are translating your USD holdings to CAD at the forex rates in effect at the time.....meaning your USD holdings have done better in CAD terms than otherwise. Your EFA performance needs to be similarly adjusted to CAD performance. It is not a USD holding. It is an International holding stated in USD for convenience.

You cannot second guess your geographic allocations over such a short period of time. Europe has had a rough time of it in recent years, but it could break out big time post Brexit. Your might want to lighten up a bit in International in favour of more Canadian equity, but do it because you want a heavier weighting to Canada, not because of past performance.

Not sure how you get to a 14% weighting in RE other than RE that is in your ETFs beyond VRE. If so, I would consider that high and drop VRE in favour of more broad based Canadian equity.

Be careful of being influenced by past performance as some of your comments suggest. What performed well in the past is likely due for a correction. The US markets have dialled in a lot of Trump expectations that are unlikely to happen. Priced to perfection just might be a house of cards.
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Re: Am I really doing okay?

Post by scoobydoo »

Thx for the reply. The Canadian and US dollar values are straight from my holdings page.

So I looked at the RE holdings asset mix and IWM has 10% and VTI/FXM both have about 4%. So I thing I'll drop both VRE and VNQ.

Noted about Trump promises vs eventual realities, but I'm thinking him and his cronies are business men first and foremost.

About EFA not really being in US dollars. I do/don't understand that. I'm guessing that part of the underlying performance is tied to the exchange rates of the various constituent countries, but if I want to get that value into Canadian dollars I still have to do the exchange from US$ to CAN$ because its on the US exchange.

I'm considering dumping the EFA for a something like a total world ETF such as VT.
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Re: Am I really doing okay?

Post by AltaRed »

EFA is priced in USD but the underlying currencies of the holdings are in Euros, yen, etc. What you really have is forex exposure to those currencies, not the USD.

Euro converted to usd (EFA) which is converted to CAD for your actual performance is actually Euro converted to CAD. USD is merely the currency of convenience and you have no exposure to the USD at all.
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Re: Am I really doing okay?

Post by Mordko »

Keep in mind that while 1 or 3 year performance of a particular ETF is interesting, it is not a meaningful number. Take any index and have a look how it performed over 20-30 years. Then try to focus on relative contribution of any 1-year segment within that longer period. Ask yourself whether 1-3 year performance is meaningful or indicative of expected long-term returns.

Your allocations look fine to me. Two suggestions:

- Do you rebalance? If not, then consider rebalancing as it will improve performance a little.
- Is there a reason why you don't have any meaningful fixed income?
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Re: Am I really doing okay?

Post by scoobydoo »

Mordko wrote: 02 Apr 2017 08:01 Keep in mind that while 1 or 3 year performance of a particular ETF is interesting, it is not a meaningful number. Take any index and have a look how it performed over 20-30 years. Then try to focus on relative contribution of any 1-year segment within that longer period. Ask yourself whether 1-3 year performance is meaningful or indicative of expected long-term returns.

Your allocations look fine to me. Two suggestions:

- Do you rebalance? If not, then consider rebalancing as it will improve performance a little.
- Is there a reason why you don't have any meaningful fixed income?
In my OP I said I was taking an aggressive stance to try and grow my portfolio fast. My original time frame 3 years ago was 18 years. That's why I don't have any meaningful fixed income... yet. My time frame to slow down is 10 years (7 left).

No matter how I chart it EFA is under performing compared to all my other ETFs. Significantly I can see that geographic sector has not recovered as fast as others from the 2008 crash. Does having europe and far east in one ETF make sense? Should I split into two?

What would rebalancing do for me right now in this market? My gains are mostly from IWM and VTI which comprise the largest part of my portfolio. Wouldn't reducing them decrease my gains?

I'm looking more to tweak my portfolio right now which is why I'm considering dumping the two REITs (VNQ VRE) and purchasing VT. The 1 year performance of VT is about the same as EFA and the 3/5 year is better.
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Re: Am I really doing okay?

Post by adrian2 »

scoobydoo wrote: 02 Apr 2017 12:41 No matter how I chart it EFA is under performing compared to all my other ETFs.
Irrelevant.
scoobydoo wrote: 02 Apr 2017 12:41 Significantly I can see that geographic sector has not recovered as fast as others from the 2008 crash.
Irrelevant.
scoobydoo wrote: 02 Apr 2017 12:41 Does having europe and far east in one ETF make sense?
Yes.
scoobydoo wrote: 02 Apr 2017 12:41 What would rebalancing do for me right now in this market?
Control risk.
scoobydoo wrote: 02 Apr 2017 12:41 My gains are mostly from IWM and VTI
Irrelevant.
scoobydoo wrote: 02 Apr 2017 12:41 Wouldn't reducing them decrease my gains?
No.
scoobydoo wrote: 02 Apr 2017 12:41 I'm looking more to tweak my portfolio right now
Bad idea.
scoobydoo wrote: 02 Apr 2017 12:41 The 1 year performance of VT is about the same as EFA and the 3/5 year is better.
Irrelevant.
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Re: Am I really doing okay?

Post by Mordko »

You asked for comments. Here are mine, in the order of importance - for what it's worth:

1. No fixed income = mistake. The way you are thinking is a clear indication you should have a decent allocation to FI. People always want lots and lots of risk when the market is doing well; funny how risk perception changes when the markets fall.

2. "Tweaking" = mistake. You are falling for the "buy high sell low" method; not the best recipe for success.

3. Not rebalancing = mistake. Rebalancing improves performance AND reduces risk

The best thing you can do is educate yourself. Invest in 2 books. This will be your best investment with a guaranteed return:

1. Bernstein - Four pillars of investing
2. Zweig - Your money and your brain.
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Re: Am I really doing okay?

Post by scoobydoo »

No worries I got a thick skin and I wouldn't have asked if I wasn't willing to at least consider what you have to say. :thumbsup:

I didn't start my investing with the notion that I was going to get high gains from high risk in a good market. The market was the market when I started. I was and still am willing to accept high risk to grow my portfolio early given my short investment time frame. That being said I now have almost 5% value in cash which has accumulated mainly from distributions etc. I suppose I should put that into FI. Something is better than nothing. I don't know FI at all. Suggestions?

Now maybe I'm not understanding what you meant by re-balancing. What I understand it to mean is to reallocate holdings periodically to stay in line with a specific allocation scheme. My allocation scheme as I've said is aggressive, so except for the proportion of US to Canadian equities not much needs to re-balanced. Is that what you had in mind or something else?

If that's the case how does the low value of the loonie play into this if at all? Thanks.
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Re: Am I really doing okay?

Post by longinvest »

Scoobydoo,
scoobydoo wrote: 02 Apr 2017 21:32 I was and still am willing to accept high risk to grow my portfolio early given my short investment time frame.
To maximize my chances of becoming an instant millionaire, I could cash in all of my portfolio and buy lots of lottery tickets. If I'm lucky, I'll hit the jackpot and be an instant millionaire. The more tickets I buy, the higher my chances. But...

It's risky.

It's very risky.

OK. Let me say it: It's way too risky. I could lose it all!

Don't you agree? I hope so.

Where am I going with this? Here's what I wrote in another thread:
longinvest wrote: 13 Nov 2016 19:45 We've been traditionally taught that once we estimate how much we want to accumulate for retirement, we should estimate the required rate of return then select the investment mix that will deliver this return. That's what some authors call the need to take risk.

Our new approach, based on Bodie's definition of risk, contrasts with the traditional approach to investing; it eliminates the concept of needing to take risk. Instead, it first asks the investor to determine his future minimal needs to draw the line on risk. An investor willing to take risk must first develop the capacity to take risk, either by saving more than strictly necessary, by lowering his future minimal needs, or by planning to retire later.

When reading other books, something always seemed wrong to me when I read that one should to take more risk if one's current savings were insufficient to meet one's objectives. It seemed like hoping that risk would not show up. That's like saying that if you think that you'll be late, you should go faster than the posted speed limit in order to get to your destination on time, ignoring the risk of having an accident or of having a cop giving you a ticket and, as a result, still get late. Sometimes, the right thing to do is just to call and say you'll be late. It is even better to simply leave earlier.
Here's what I'm trying to say: If I was in your shoes, I would carefully consider where to draw the line on risk.

Good luck!
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Bogleheads 3 fund lazy portfollio

Post by scoobydoo »

Moderator W has combined the Boglehead 3 fund thread with this one due to duplicative content

As proposed in the wiki the 3 fund lazy portfolio is: 33% bonds, 34% US stock, 33% international. When looking at this portfolio from the point of view of Canadian investor does the 34% US stock completely translate to 34% Can stock or whatever domestic stock of whatever country I happen to live in? Thanks.
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Re: Bogleheads 3 fund lazy portfollio

Post by longinvest »

Is there a link to that wiki page?
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Re: Bogleheads 3 fund lazy portfollio

Post by Peculiar_Investor »

I believe the OP is referring to https://www.bogleheads.org/wiki/Lazy_portfolios.

I don't believe that the Bogleheads three fund portfolio directly translates to a Canadian version. The US equity market represents roughly 50% of the global equity market, while Canada represents about four percent.

You might want to look at our wiki, in particular the Simple index portfolios page.
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Re: Bogleheads 3 fund lazy portfollio

Post by scoobydoo »

Sorry to be snarky but its too funny :D The link is in your signature. That's where I got it. But I should have included it anyway. Thx for pointing that out.

https://www.bogleheads.org/wiki/Boglehe ... simplicity

Lol someone beat me to it.
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Re: Bogleheads 3 fund lazy portfollio

Post by longinvest »

scoobydoo wrote: 07 Apr 2017 16:31 Sorry to be snarky but its too funny :D The link is in your signature. That's where I got it. But I should have included it anyway. Thx for pointing that out.

https://www.bogleheads.org/wiki/Boglehe ... simplicity

Lol someone beat me to it.
I asked because I thought you were referring to https://www.bogleheads.org/wiki/Three-fund_portfolio, instead. While you could read this Bogleheads wiki page, which explains that the weightings of the three funds is not predetermined ("You must decide for yourself what percentage of stocks to hold..."), I would rather recommend that you read the Finiki page referred by Peculiar_Investor:
Peculiar_Investor wrote: 07 Apr 2017 16:28 You might want to look at our wiki, in particular the Simple index portfolios page.
It explains the use of such simple (yet sophisticated) portfolios in our Canadian context.
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Re: Bogleheads 3 fund lazy portfollio

Post by longinvest »

Scooby,

Selecting a specific asset allocation is a delicate process. To help us help you, you might want to follow the guidelines in the Seeking Advice post.
Last edited by longinvest on 07 Apr 2017 19:50, edited 1 time in total.
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Re: Bogleheads 3 fund lazy portfollio

Post by LadyGeek »

The OP has a good head start here: Am I really doing okay?
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Re: Bogleheads 3 fund lazy portfollio

Post by longinvest »

LadyGeek wrote: 07 Apr 2017 19:45 The OP has a good head start here: Am I really doing okay?
Oh, right! I even posted on that thread. :oops:
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Re: Bogleheads 3 fund lazy portfollio

Post by longinvest »

scoobydoo wrote: 07 Apr 2017 16:07 As proposed in the wiki the 3 fund lazy portfolio is: 33% bonds, 34% US stock, 33% international. When looking at this portfolio from the point of view of Canadian investor does the 34% US stock completely translate to 34% Can stock or whatever domestic stock of whatever country I happen to live in? Thanks.
Scooby,

Now that I have more context for your question, let me try to answer it.

Investing 34% into domestic stocks, for a U.S. investor, does not necessarily translate into doing the same for a Canadian investor. It depends on many factors. But, before discussing that further, I should address a preliminary point: the balance between Canadian and ex-Canada stocks is much less important than the balance between bonds and stocks.

Bonds act a ballast in a portfolio. They might not be the main driver of returns, but their impact on a portfolio is significant. In turbulent markets, they protect the portfolio from big drops. In calmer markets, they often contribute significantly more returns than cash.

A good rule of thumb is to assume that stocks could easily lose 50% of their value any day. So, an investor who cannot afford to lose more than 30% of his portfolio in a badly timed crisis (like a crisis that happens just as one loses his job) should never invest more than 60% of his portfolio in stocks.

After establishing the stocks/bonds ratio comes the time to determine the weighting between domestic (Canadian) stocks and international (ex Canada) stocks. This is a more controversial subject. I'll present three reasonable lines of thought:
  1. There is the pure indexing approach which assumes that market weighting is best. With that view, the Canadian allocation should be its market weight (3% of stocks), with the remaining 97% of stocks invested internationally.
  2. There is the traditional 1/3 Canada, 1/3 U.S., and 1/3 Rest-of-The-World approach, often used by Canadian index investors.
  3. Some consider international stocks as a distinct sub-asset of stocks due to the impact of currency fluctuations on their returns, and so go 50/50 domestic/international in their stock allocation.
There is not simple choice between these points of view. One could easily argue that the traditional approach is a good compromise between the single asset view (Canada = 3% of stocks) and the distinct sub-asset view (Canada = 50% of stocks).

Hoping this helps.

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Re: Bogleheads 3 fund lazy portfollio

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The equity/bond split also depends on now much pension income one has (will have). CPP and andy DB pension income is ballast as well and for a 65 yr old a multiplier of 15-20 might be a useful rule of thumb to value that pension (e.g. $12k/yr pension income x 20 = $240k present value). Those with very good DB pensions can probably do without almost any separate fixed income in their investment portfolios (emotional ability to stand a 50% loss in portfolio value in any given major market crisis notwithstanding). Trouble is, no one knows if that good DB pension will actually be there until one qualifies for it.

P.S. When I retired 11 years ago, I had the option to take much of my DB pension in a lump sum which would have allowed me to invest it instead. Since there was no guarantee that I could be certain I could replace that income with certainty, I kept all of it as pension income. That allowed me to be more aggressive in my equity allocation in my investement portfolio.
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Re: Bogleheads 3 fund lazy portfollio

Post by SQRT »

AltaRed wrote: 07 Apr 2017 20:55 The equity/bond split also depends on now much pension income one has (will have). CPP and andy DB pension income is ballast as well and for a 65 yr old a multiplier of 15-20 might be a useful rule of thumb to value that pension (e.g. $12k/yr pension income x 20 = $240k present value). Those with very good DB pensions can probably do without almost any separate fixed income in their investment portfolios (emotional ability to stand a 50% loss in portfolio value in any given major market crisis notwithstanding). Trouble is, no one knows if that good DB pension will actually be there until one qualifies for it.

P.S. When I retired 11 years ago, I had the option to take much of my DB pension in a lump sum which would have allowed me to invest it instead. Since there was no guarantee that I could be certain I could replace that income with certainty, I kept all of it as pension income. That allowed me to be more aggressive in my equity allocation in my investement portfolio.
Yes, I agree. I have a good DB pension (currently receiving) that allows me to forgo any fixed income in my portfolio. If I notionally capitalize the pension it would be about 35% of the total. Aggressive but reasonable I think.
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Re: Am I really doing okay?

Post by longinvest »

I contribute to a pension plan. Yet, I also have bonds in my portfolio. That's because even if I was to try very hard, I would be unable to sell parts of my pension to buy stocks, when stocks go on sale.

Having a pension or not might help draw a different line on risk, though. (See my previous post).

For example, if one has 100% of his minimal needs covered by OAS, CPP/QPP, and an inflation-indexed government pension, one can put all of his portfolio into risky assets without taking undue risk.

I have yet to read somewhere that the OP has access to such a nice pension plan. Actually, unless I misunderstood, he seems to have exited a pension plan to invest the money within a LIRA with a lot of success (11.8% annualized return since inception).

I don't know enough about the overall financial picture of the OP (e.g. does he have a house, rental properties, a mortgage, a business, business debt?) and about his minimal needs in retirement to express an opinion about the adequacy of his current portfolio or about a new asset allocation if he was to switch to a simple index portfolio.
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Re: Am I really doing okay?

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longinvest wrote: 08 Apr 2017 12:03 I contribute to a pension plan. Yet, I also have bonds in my portfolio. That's because even if I was to try very hard, I would be unable to sell parts of my pension to buy stocks, when stocks go on sale.
Doesn't matter. Fixed income isn't necessarily for buying equities on sale. Re-balancing is a different issue, and quite frankly isn't important in withdrawal.
I have yet to read somewhere that the OP has access to such a nice pension plan. Actually, unless I misunderstood, he seems to have exited a pension plan to invest the money within a LIRA with a lot of success (11.8% annualized return since inception).
Doesn't matter either. That is additional information in the event the OP does have pensionable income (can simply be CPP and OAS someday). Both can have present value at retirement time especially and be considered part of the FI component.
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Re: Am I really doing okay?

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AltaRed,
AltaRed wrote: 08 Apr 2017 12:43
longinvest wrote: 08 Apr 2017 12:03 I contribute to a pension plan. Yet, I also have bonds in my portfolio. That's because even if I was to try very hard, I would be unable to sell parts of my pension to buy stocks, when stocks go on sale.
Doesn't matter. Fixed income isn't necessarily for buying equities on sale. Re-balancing is a different issue, and quite frankly isn't important in withdrawal.
It might not matter to you, but it matters to me. It's my portfolio, after all. :wink:
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Re: Am I really doing okay?

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longinvest wrote: 08 Apr 2017 13:00 It might not matter to you, but it matters to me. It's my portfolio, after all. :wink:
Indeed. Different strokes for different folks. I do have residual cash sitting in my 2 brokerage accounts and in a HISA...... the former primarily to fund my ongoing monthly cash flow requirements, less so to buy any new equity. The latter (the HISA) is for things like a new roof this year, an expensive vacation, or similar. That's circa $150k all together.
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