What do you do with that Canadian equity allocation?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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What do you do with that Canadian equity allocation?

Index it with a percentage equivalent to Canada's size in the world economy
3
4%
Index it with an "overweight" percentage reflecting my home bias
32
45%
Stock pick it primarily with a growth slant.
1
1%
Stock pick it primarily with a value slant.
4
6%
Stock pick it primarily with a dividend slant.
30
42%
Ignore it: who needs it?
1
1%
 
Total votes: 71

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Descartes
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What do you do with that Canadian equity allocation?

Post by Descartes »

Mentioned in the investing styles topic. Curious what the current profile is here.
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Re: What do you do with that Canadian equity allocation?

Post by Spudd »

I'm none of the above. I index it primarily with an allocation higher than Canada's weight in the world economy, but I also stock pick as well. I'd probably be better off just indexing but I enjoy the thrill of the stock picking.
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Re: What do you do with that Canadian equity allocation?

Post by DenisD »

I'm several of the above. I just picked the option with the highest weighting in my Canadian equities.
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Descartes
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Re: What do you do with that Canadian equity allocation?

Post by Descartes »

If you are several then please select the one that primarily represents what you do. Thanks.
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Re: What do you do with that Canadian equity allocation?

Post by longinvest »

I overweight the allocation to the domestic market within my portfolio's stock allocation, 50% instead of 3%, using a cap-weighted total-market index ETF.

Foreign investments are traded using foreign currencies and their dividends are paid using foreign currencies. To buy foreign investments, my money has to go through currency-exchange markets. Reinvesting dividends means subjecting dividends to two currency conversions (given that I use domestic-based ETFs). Worse, I have to pay taxes on any profit (dividend, capital gain) in Canadian dollars. So, I really have no choice, when investing abroad, to subject my money to the vagaries of currency-exchange markets.

Foreign dividends are subject to unfavorable foreign taxes, such as withholding taxes (even in registered accounts). The risks of confiscation are higher (foreign withholding taxes are a mild form of this) and legal protection is lower (it is more difficult to seek justice abroad).

Some people hedge currency through the use of derivatives. But, derivatives come with fees. Also, in the aggregate, derivatives don't generate a return. The party and the counterparty, collectively, make no return on the derivative; they collectively pay a fee for it. For one party to make a profit, the other has to experience a loss. It's a zero-sum game before costs. Worse, if the derivative ever happens to fail, it will most likely be exactly when it is most needed, when a foreign currency significantly drops.

It must be noted that currency hedging doesn't eliminate the currency conversions necessary to buy and sell foreign investments, the double conversions of reinvested foreign dividends, nor the withholding taxes on foreign dividends. Hedging derivatives are additional contracts which must be bought, hoping to find a financially-sound counterparty willing to participate. (Of course, this is all done behind the scene in currency-hedged international stock ETFs).

On the other hand, the dividends of domestic stocks are subject to a favorable tax treatment, unavailable to foreign investors.

So, while allocating domestic and international stocks according to market weight would theoretically seem attractive, it ignores the above real practical aspects which put domestic investors in a favorable position relative to foreign investors.

In other words, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.
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Re: What do you do with that Canadian equity allocation?

Post by Spidey »

I picked "Stock pick primarily with a dividend slant" as it was closest. Probably one-third index and two-thirds stock picking for my Canadian portion whereas internationally I"m mostly indexed. I have higher percentage of CDN equities than Canada's weight in the world economy due to the ease of investing and familiarity of home-grown companies and also my desire to keep a percentage of my portfolio in REITs.
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Re: What do you do with that Canadian equity allocation?

Post by Descartes »

Surprising to me so far is the strength of indexing and the barest sliver of majority for dividend stock picking.
I guess the former just don't speak up too much: a passive approach to discussion as well as investing.

The retirement poll confirms expectations, however: 7 out of every 10 who voted are retired.
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Re: What do you do with that Canadian equity allocation?

Post by Mordko »

I index, with an allocation of about 30% (28% to be precise) of the total stock portfolio.

Why more than 3%? Preferential tax treatment and a bit of extra anchoring to the portfolio, given that I will be spending in Canada.

Why less than 50%? The reason I index is because I like diversification. At 50% Canada, the portfolio would be too dependent on a handful of industries and a relatively small number of companies with correlated performance (e.g. Canadian banks). At about 30% Canada I am still a bit overweight in financials/energy and a bit short of healthcare/technology, but at least I have a meaningful allocation to all industries.

Currency risk creates an occasional drag on the overall performance, but actually adds stability to the portfolio (through same old diversification) and enhances long-term performance through rebalancing. Which is why I am OK with it.
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Re: What do you do with that Canadian equity allocation?

Post by AltaRed »

Descartes wrote: 08 Oct 2017 11:59 Surprising to me so far is the strength of indexing and the barest sliver of majority for dividend stock picking.
I guess the former just don't speak up too much: a passive approach to discussion as well as investing.

The retirement poll confirms expectations, however: 7 out of every 10 who voted are retired.
I think indexers just don't have as much to talk about as those with 20-30 stocks in their portfolios. Only so much can be said about 2-5 ETFs and that about covers the discussion. It may also be because indexing has lagged some in performance in recent years over a stock portfolio that doesn't include many/any commodities. You don't hear much from those with significant holdings in the commodity sector these days either.
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Re: What do you do with that Canadian equity allocation?

Post by Mordko »

AltaRed wrote: 09 Oct 2017 23:52
I think indexers just don't have as much to talk about as those with 20-30 stocks in their portfolios. Only so much can be said about 2-5 ETFs and that about covers the discussion. It may also be because indexing has lagged some in performance in recent years over a stock portfolio that doesn't include many/any commodities. You don't hear much from those with significant holdings in the commodity sector these days either.
- Not as much to talk about - yes.
- Indexing has lagged in performance in recent years - not at all.

a) Indexers buy the world rather than just Canada. Commodities don't change the weather.
b) Recently very few funds beat the index over a meaningful period of time like last 10 years. I don't trust what individuals report all that much; people tend to count in the way that favours gains; but one has to assume that with few exceptions armatures underperform experienced fund managers.
c) Conversely, a lot of people who claim to "index" tend to mess with the method to try and "juice" their returns; consciously or not.
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Re: What do you do with that Canadian equity allocation?

Post by AltaRed »

I was talking about Canadian equity allocation only, i.e. the thread topic. Broad market indexing, e.g. XIC and XIU, have lagged individual stock picking because of the energy component that has been dragging since mid-2014. Rollercoaster price swings on potash, coal and base metals have not helped either. That will change again in the not too distant future when commodities come off their bottoms, albeit days of the super commodity cycle as it stood in the last decade are likely gone forever.
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