Am I really doing okay?

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

Post by scoobydoo »

Well so far it seems that most posters think my investment strategy is very risky. I already knew that. I said so in my OP. I also said I am willing to accept the risk. I was hoping I could get an evaluation in the context of my expressed investor profile. I acknowledged that as I get closer to my stated retirement date I do need to shift the portfolio to a more conservative stance.

I'm not playing this like a lottery. I have the emotional capacity to move on from losing everything and have zero responsibilities except for myself. I've done it before and I can do it again. When you lose everything you either give up or keep going. I choose the latter.

Now just to clarify about the pension plan. Indeed I did cash out. In fact I received more money than I currently have invested in the LIRA. I did a quick back of the envelop calculation and realized that by investing just the LIRA portion even conservatively I could do as well or better than the eventual payout from the plan. The extra money I received was put into an RRSP and I withdrew it to fund my education (LLP). I'm currently starting a business.

Given my stated time to retirement when I left the public service, of 18 years, the best conservative approach would have been to keep the the pension vested. That is if I cared about being conservative which I didn't and still don't. As longinvest suggested, I believe I do have the capacity to take this risk. I consider my entire portfolio excess capital. My acceptable future minimum needs are CPP and OAS. I'm retiring later (65ish not 60). But in fact I like working so I will continue to work until I can't. Part of what I am doing now is teaching and I will continue doing that after age 65 which will supplement my income from CPP, OAS, and a RIF if I have one at that time.

So much for the philosophy. Based on the discussion so far this is what I might do:

1) I will sell the two REITs I have: VNQ and VRE because I have enough real-estate in VTI and FXM.

2) I will invest the proceeds from 1 + cash on hand in fixed income ETFs. This should give me about 10%FI.

3) Lower US% to 40% by selling VTI and invest proceeds in something similar to but not EFA.

This will result in 10%FI, 20%CAN, 40%US, 30%INT

Questions:

1) Do I need to be concerned about the value of the loonie now if I want to invest the proceeds of selling VNQ (US$) and purchasing just as an example VAB (CAN$)? Or should I purchase US and CAN FI ETFs instead?

2) Suggestions for fixed income please.

3) Suggestions for international similar to EFA please.

I consider question 1 important because it may also affect at what time I move my holdings from US based to more Canadian based as I approach retirement.
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ghariton
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Re: Am I really doing okay?

Post by ghariton »

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.
How about that. A secret market timer. :D :D :D

FWIW I'm nearly always fully invested. In fact, psychologically I feel uncomfortable when I have a significant amount in cash. I rationalize this with the usual narrative: The market is a random walk with upward trend, time in th4e market is more important than timing of the market, and so on. But to be honest with myself, I find it more painful to be on the sidelines when the market goes up than to be in the market when it goes down. That's just instinct/psychology, not rationality. That said, like most others here, I too have a good chunk of fixed income so as to provide ballast to my portfolio and control its riskiness. But I consider that fixed income to be "fully invested fixed income". I certainly wouldn't sell it and place the proceeds in equities if markets were to crash. Rationally I should, perhaps, but the whole point of ballast (aka fixed income) is to be there when markets crash.


As to the OP's latest questions:
1) Do I need to be concerned about the value of the loonie now if I want to invest the proceeds of selling VNQ (US$) and purchasing just as an example VAB (CAN$)? Or should I purchase US and CAN FI ETFs instead?
I personally think that currency diversification is desirable, i.e. hold some of your portfolio in CAD, some in USD, and, through an international ETF, some in other currencies.

I think that currency movements are impossible to predict, even more so than equities or interest rates. It s true that holding currencies other than CAD exposes you to currency risk, but I think that is more than outweighed by the diversification.

So I wouldn t worry about timing of FX transactions.
2) Suggestions for fixed income please.
I think that depends on your expected holding period. If you will hold for a long time, I would go with individual bonds. I prefer government securities, as I don t think that the premium from corporate bonds is worth the extra risk. But opinions vary. If your holding period is short, I would go with an ETF such as VAB. If your holding period is very short, GICs may be better.
3) Suggestions for international similar to EFA please.
I personally hold VEA and VWO, for historical reasons. Some simplification is possible with VXUS, but the difference is not large enough to worry about.

At least one poster here has all his non-Canadian equity holdings in VT, which is about as simple, and probably as efficient, as one can get.

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AltaRed
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Re: Am I really doing okay?

Post by AltaRed »

I have yet to understand the OP's aversion to EFA. Whether EFA or VEA (domiciled and denominated in USD) or something like XEF (domiciled and denominatied in CAD), they cover essentially the same European and Far East markets (and represents the bulk of ex-North American markets). For most people, this forms their "International" allocation.

Like George, foreign currency exposure is good given the loonie may REALLY be crap someday, but now is as good a time as any to convert some USD to CAD when the loonie is circa 75 cents. That's as low as it has been generally speaking for a number of years, albeit it sure could get lower if we stay in a commodity funk and keep pushing companies out of Canada due to non-competive policy. It is just not worth speculating or worrying about it long term. I've had exposure to USD (and other foreign currencies too) for decades and I most likely will until I die.

Also like George (and others), if the FI component is meant to be longer term (more than 5 years), VAB or XBB is as good as anything.

P.S. For Canadian ETFs, I would stick to one of the big 3 players, e.g. Blackrock (iShares), Vanguard Canada or BMO. The ETF marketplace is getting crowded with a host of other players, some of which surely cannot all survive long term.
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Re: Am I really doing okay?

Post by adrian2 »

AltaRed wrote: 08 Apr 2017 19:41 I have yet to understand the OP's aversion to EFA. Whether EFA or VEA (domiciled and denominated in USD) or something like XEF (domiciled and denominatied in CAD), they cover essentially the same European and Far East markets (and represents the bulk of ex-North American markets). For most people, this forms their "International" allocation.
+1!
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scoobydoo
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Re: Am I really doing okay?

Post by scoobydoo »

AltaRed wrote: 08 Apr 2017 19:41 I have yet to understand the OP's aversion to EFA. Whether EFA or VEA (domiciled and denominated in USD) or something like XEF (domiciled and denominatied in CAD), they cover essentially the same European and Far East markets (and represents the bulk of ex-North American markets). For most people, this forms their "International" allocation.
I've been looking at ETF again and making comparisons. Previously I made a comparison to a wrong type of ETF :roll: But mostly my aversion has been EFA hasn't done as well as my other ETFs. I know thats wrong so I'm gonna leave my EFA as it is and just add a little VWO to make myself happy :) So international holdings will still be at 30%.
AltaRed wrote: 08 Apr 2017 19:41 Like George, foreign currency exposure is good given the loonie may REALLY be crap someday, but now is as good a time as any to convert some USD to CAD when the loonie is circa 75 cents. That's as low as it has been generally speaking for a number of years, albeit it sure could get lower if we stay in a commodity funk and keep pushing companies out of Canada due to non-competive policy. It is just not worth speculating or worrying about it long term. I've had exposure to USD (and other foreign currencies too) for decades and I most likely will until I die.

Also like George (and others), if the FI component is meant to be longer term (more than 5 years), VAB or XBB is as good as anything.
Yeah 75 cents is not bad. So I'm going to make it 10% VAB by converting US$ since I will hold it for the long term. Thx.
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Re: Am I really doing okay?

Post by longinvest »

George,
ghariton wrote: 08 Apr 2017 19:12 A secret market timer. :D :D :D
Nah, not even that. I am just a rebalancer. I have a strict investment and rebalancing schedule in my IPS. I was just trying to use a more colorful language in my "stocks go on sale" statement. :wink:
ghariton wrote: 08 Apr 2017 19:12 FWIW I'm nearly always fully invested. In fact, psychologically I feel uncomfortable when I have a significant amount in cash.
I only keep enough cash to cover anticipated expenses and a small additional buffer. That's a few thousands of dollars; it's nowhere remotely close to AltaRed's $150K!

I also let my portfolio contributions accumulate into a so-called "high interest" :!: savings account until the investment date scheduled in my IPS.
ghariton wrote: 08 Apr 2017 19:12 I too have a good chunk of fixed income so as to provide ballast to my portfolio and control its riskiness. But I consider that fixed income to be "fully invested fixed income". I certainly wouldn't sell it and place the proceeds in equities if markets were to crash. Rationally I should, perhaps, but the whole point of ballast (aka fixed income) is to be there when markets crash.
That's where our approaches differ.

Your approach is closer to market-weight-adapted asset allocation. Here's a link to a paper by Nobel Laureate William Sharpe explaining it: Adaptive Asset Allocation Policies. Mostly, he is not advocating to match the world-wide stock/bond market weights; he is recommending to choose a target allocation, then to let this target allocation fluctuate similarly to the fluctuations of the market weights of the selected subsets of stocks and bonds.

The advantage of market-weight-adapted asset allocation is that it behaves similarly to market-weight indexing, in that one does not need to rebalance when prices fluctuate*; the target allocation moves along with prices. Some mild rebalancing is still required, because of new stock and bond being issued, bonds maturing, bonds being upgraded or degraded across the investment-grade threshold, stocks being delisted, etc.

* That's the similarity with your approach.

I have a different approach. I keep a constant target allocation for four asset sub-classes in my portfolio. I only use indexing within an asset sub-class. My rationale is based on practical and philosophical grounds:
  • Practical: I do not have access to the relative market weights of the subset of stocks and bonds I invest into. In other words, I do not know the market caps of free-float Canadian and international stocks (included into the indices of VCN and VXC) and free-float investment-grade Canadian bonds and real-return bonds. As a consequence, I am unable to calculate a market-weight-adapted asset allocation for my portfolio.
  • Philosophical: Even if I had enough information to make the calculations, on what ground would I select an initial target allocation? In other words, if I selected a 50/50 stock/bonds allocation today, that could mean a 65/35 allocation in three years. Why not go 65/35 today?
Last edited by longinvest on 09 Apr 2017 11:13, edited 1 time in total.
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Re: Am I really doing okay?

Post by longinvest »

Scoobydoo,
scoobydoo wrote: 08 Apr 2017 18:08 As longinvest suggested, I believe I do have the capacity to take this risk. I consider my entire portfolio excess capital. My acceptable future minimum needs are CPP and OAS. I'm retiring later (65ish not 60). But in fact I like working so I will continue to work until I can't. Part of what I am doing now is teaching and I will continue doing that after age 65 which will supplement my income from CPP, OAS, and a RIF if I have one at that time.
Great. This is effectively what I was suggesting that you consider.

I'll just suggest that you not only consider your far away plans, but also the possibility of adverse life events until you get there. (In other words, would you still be OK if somehow you were not able to continue to work until 65?) I am not asking you to answer this on the forum; I am merely suggesting that you don't forget to take Murphy's law into account in your plans, while remaining reasonable about it.

Based on Zvi Bodie's definition of risk, one is free to select any level of risk that matches one's (emotive) taste for risk as long as it doesn't exceed one's (objective) risk capacity.
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Re: Am I really doing okay?

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longinvest wrote: 09 Apr 2017 09:25
ghariton wrote: 08 Apr 2017 19:12 FWIW I'm nearly always fully invested. In fact, psychologically I feel uncomfortable when I have a significant amount in cash.
I only keep enough cash to cover anticipated expenses and a small additional buffer. That's a few thousands of dollars; it's nowhere remotely close to AltaRed's $150K!

I also let my portfolio contributions accumulate into a so-called "high interest" :!: savings account until the investment date scheduled in my IPS.
withdrawal mode is different than accumulation, especially when: 1) spending needs (desires?) can be lumpy from year to year such as a new vehicle, new roof or or an expensive holiday, and 2) when HISA rates can be had that are not much different than what XSB delivers. It also makes a difference when funds are also chosen to be kept in a US domiciled bank account and associated credit card to accommodate International travel.

Most investment advice is to keep X% of cash in one's investment account for investment opportunities. I prefer to keep Y% in cash for variable spending flexibility in my retirement years. The actual cash amount will vary depending on plans and timing of spend.
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Re: Am I really doing okay?

Post by cannew »

Nothing wrong with your strategy, as you have a good pension and time to see your portfolio grow, assuming there is no market crash between now and when you wish to retire. Then its a question of how long it takes to recover.

For us we invested for Income generation. So that each quarter, year, etc we expected the income from our investments to grow, regardless if the market is up or down. That was even the case during 2008/2009 though our portfolio value dropped by 35%, some stocks by more, but our income still grew during those years. I'm not saying its better, just that it worked for us and we are now in our 70's and our income is still growing.
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