My Portfolio - Seeking advice, please help

[davemon]

Hello,
I am a newbie to actual DIY investing. I have been lurking here for a while and now have gotten the confidence to post here. I went thru Bylo, Shake and Norm's websites Your information is great

I have a general question and your assistance would be appreciated.

My asset mix and situation is almost the same as the example in ED'S portfolio on Shakes site (40% bond and 60% equities). I am setting up an index based portfolio (with TD funds "i" version) in a GRSP at work. The problem (so i believe) is the bond portion

Since I am in my thirties does it makes sense to maybe have my allocation tweaked to 30%/ 70% instead? I know it is up to me to decide my risk, but the reason I ask is because 1) I am thinking that Interest rates will rise (in time). Then does having a large portion in the TD bond Index fund make a suitable choice or does a short term bond fund? 2) Since I have approx 25 yrs plus till retirement does it even matter?

Currently my allocation is:
40% Td cdn Bond Index
30% TD cdn Index
15% TD International index
15% TD US Index

A colleague at work is using the same portfolio but he is using the TD real return bond fund. I mentioned the high MER, but he states that it will be better with such a small amt then my choice.

I just never knew how hard it is being a DIYinvestor.I am not daunted but rather pleased that there exists a site that I can pose my questions.

Look forward to your reply,

Davemon

[Norbert Schlenker]

Since I am in my thirties does it makes sense to maybe have my allocation tweaked to 30%/ 70% instead?

Being in your 30s isn't that important. What sort of volatility you can stand is. Bumping up the equities to 70% raises the chances of bigger interim drops in overall portfolio values. If you can live with that risk, you are likely to get paid extra for bearing it. Only you can decide.

1) I am thinking that Interest rates will rise (in time).

This is called market timing and not many people are all that good at it. How confident are you in your own predictive abilities?

2) Since I have approx 25 yrs plus till retirement does it even matter?

Not much. With that long a time horizon and with the bond component likely to roll three or four times, a rise in interest rates in, say, the next five years is pretty much irrelevant to long term performance.

I just never knew how hard it is being a DIYinvestor.I am not daunted but rather pleased that there exists a site that I can pose my questions.

Welcome and keep asking good questions.

[davemon]

Thx for the reply Norbert

I will stick with my asset mix of 40/60 . My hope was to answer how much does one get in risk vs return value for an increase to a 30/70 mix. Just a thought.

Also can you or any advise what benchmark I could use for this portfolio to compare against.? (eg like FPX balanced)

Davemon

[Bylo Selhi]

Welcome aboard

I will stick with my asset mix of 40/60 . My hope was to answer how much does one get in risk vs return value for an increase to a 30/70 mix. Just a thought.

It depends

After the bubble burst, the FPX Balanced performed better than Growth for several years, even though the latter held more equities. (FPX Income did even better than the other two.) Over the long term, though, one should expect a higher return from more equities. Whether that happens and by how much is an open question. Ya pays yer money and ya gtakes yer chances. At least with an indexed portfolio you don't have to assume any manager risk and you have a ~2% head start returnwise.

Also can you or any advise what benchmark I could use for this portfolio to compare against.? (eg like FPX balanced)

FPX Balanced is a good benchmark, especially since it's only 50/50. You should be able to do someone better with 40/60 over time. (If not, then you should have just mirrored FPX Balanced in the first place )

[like_to_retire]

I am setting up an index based portfolio (with TD funds "i" version) in a GRSP at work

I am assuming that the i-series is a requirement since it's through your workplace? If not, why have you not considered the e-series funds at TD that offer a much reduced MER (at least half of what you'll pay for the i-series). It would make quite a difference over the long time frame you have....

Then does having a large portion in the TD bond Index fund make a suitable choice or does a short term bond fund?

Short term bond fund would only be suitable if you had a short time frame before needing the funds. This is not your case - go with the bond index and ignore the drop in the NAV when (and if) interest rates rise. It will work itself out in time and your return will be greater over the long
term.

Since I am in my thirties does it makes sense to maybe have my allocation tweaked to 30%/ 70% instead?

So you're assuming equities will outperform bonds going forward for the next 30 years? If so, and you can sleep with the added volatility, then it's a good bet. Not having a crystal ball, I tend to agree with your present allocation - others may disagree.

A colleague at work is using the same portfolio but he is using the TD real return bond fund

The MER is quite high (1.62%) - yikes........ scroll down here and see that RR bonds paying 1.89% today.......

ltr

[_PK_]

A colleague at work is using the same portfolio but he is using the TD real return bond fund

I suspect your colleague doesn't understand real return bonds

[Norbert Schlenker]

I will stick with my asset mix of 40/60 . My hope was to answer how much does one get in risk vs return value for an increase to a 30/70 mix. Just a thought.

Don't have 30/70 at hand but I do have 50/50 and 40/60 and 25/75. Recent history is not that kind to equity heavy portfolios. Using nominal returns, nominal volatilities, broad asset classes rebalanced annually for the 25 year period 1980-2004 inclusive, naive 50/50, 40/60, and 25/75 portfolios all had compounded annual returns of 12.0%. Average volatilities were 10.0%, 10.8%, and 12.1% respectively.

If you look at the 35 years 1970-2004 inclusive, you get an extra 0.2% per year out of 75% equities against 50% equities, but the volatility difference is 2.6% per year.

The bottom line is that, for the last 25-35 years, no diversified investor got paid much for taking the extra risk of high exposure to equities. Of course, past performance is no indication of future performance. [/list]

[Shakespeare]

Consider Table 2 (scroll down), taken from Bill Bernstein.

[_PK_]

for the 25 year period 1980-2004 inclusive, naive 50/50, 40/60, and 25/75 portfolios all had compounded annual returns of 12.0%. Average volatilities were 10.0%, 10.8%, and 12.1% respectively.

Wow, I didn't know the target was so big. How much farther towards a bond tilting can you go before risk/reward characteristics diverge?

[Norbert Schlenker]

for the 25 year period 1980-2004 inclusive, naive 50/50, 40/60, and 25/75 portfolios all had compounded annual returns of 12.0%. Average volatilities were 10.0%, 10.8%, and 12.1% respectively.

Wow, I didn't know the target was so big. How much farther towards a bond tilting can you go before risk/reward characteristics diverge?

Define "diverge".

It was a great 25 years for bonds. A portfolio as conservative as 25% bills, 50% Canadian bonds, and 1/3 of the rest in the TSX, S&P 500 and EAFE, again rebalanced annually, returned 11.4% with an 8.0% standard deviation.

[Shakespeare]

It was a great 25 years for bonds.

The problem is the next 25 years.

[Norbert Schlenker]

It was a great 25 years for bonds.

The problem is the next 25 years.

Heartily agreed. In fact, if you take the returns posted on my website and put them all in Excel to optimize for risk-adjusted return (I use the Sharpe ratio as a proxy), what pops out for the last 25 years is 100% SCM Universe.

That's a ludicrous portfolio for the next 25. IMO, of course.

[davemon]

Like_ to _ retire --- I can only choose "i" series thru work. The good thing is if I leave, both "employee & "er" sums are not locked in. I can then swtich to " e" funds directly with TD.

Shakespeare- I saw that table on your website , but Norm's figures are what I was really looking for. Although all figures are from the past, ithe finding puts it into perspective. BTW thanks for the reminder to read Bernstein's book

The problem is the next 25 years

.

Again as a newbie , please enlighten me as to what you or anyone think will transpire

I have read past posts referring to W. Buffet indicating a future of single digit returns.

Many thanks again for everyones replies

[Bylo Selhi]

Again as a newbie , please enlighten me as to what you or anyone think will transpire I have read past posts referring to W. Buffet indicating a future of single digit returns.

Buffet and others think the market, as a whole, is still overpriced despite the severe correction of 2001/2002. As a result they [s]predict[/s]guess that stock market returns will be below long term averages for the next decade or more until valuations return to more reasonable levels. Of course that could also happen much sooner if we have another bear market or it could take longer. No one knows.

In any case that shouldn't concern you too much because you have a long time horizon before retirement. (That's not the case for people nearing or in retirement who had expected higher returns.) In fact, someone in your situation should be cheering for moderate or even negative stock market growth. Take Buffet's Quiz to learn why.

[jellyfish]

Hi again to all,

Thanks for all your previous advice. I've been reading many of the things suggested. Just got through "the four pillars" thanks Bylo....you are right it will stay on my shelf. I'm definitely convinced that keeping costs down is an intricate part of making money investing.

I want to keep it simple. I'm looking at a 40-60 bond/stock mix.

1st Question:


Need some recommendations for asset allocation. I own a triplex that is paid for, and have 4 years sitting in a pension plan from work, on top of my investments. I'm thinking about something like this:

40% Bonds (Corporate +non)
20% Europe, Asia + emerging markets
20% Canadian
20% US

I'd like to keep fees as low as possible and invest in emerging markets, pacific, US and Canadian indexes if possible. Can anybody recommend some low cost options available to Canadians.

2nd Question:

Can somebody recommend a way to keep tax exposure down?


Any advice (for us Canadian investors) about how I might limit my tax exposure?

3rd Question:

any advice about which bonds to use? I like the idea of a corporate bond fund. Are there any with low MER's available to us? If so would putting half my bond allocation in something like that be unwise? What might I do with the other half?

Sorry if my questions are ignorant. I'm just trying to learn as I go.

Thanks for any help you can give.

[Bylo Selhi]

I'd like to keep fees as low as possible and invest in emerging markets, pacific, US and Canadian indexes if possible. Can anybody recommend some low cost options available to Canadians.

See http://www.bylo.org/idxfunds.html TD eFunds are probably your best bet but they have neither a corporate bond fund nor EM fund. CIBC have an EM fund but the MER is rather high at 1.24%. For EM consider ETFs like EEM or VWO which trade in US$ on US exchanges.

Can somebody recommend a way to keep tax exposure down?

In general, fixed income should be inside an RRSP and equities outside. See Shakes' Primer for more info: http://www.shakesprimer.com/

any advice about which bonds to use? I like the idea of a corporate bond fund. Are there any with low MER's available to us? If so would putting half my bond allocation in something like that be unwise? What might I do with the other half?

Although government and CDIC-insured debt pays rather paltry interest, it's a good idea to have a substantial amount of the "risk-free" component of your portfolio invested in it. Inside an RRSP it all grows tax-free, so even if you get only 4%, it's still a good 1% more than inflation.

Corp bonds entail some risk (see the GM thread.) That's one reason why their yields are higher (even before they descend into "junk" status ) I'm not aware of any Can corp bond index funds or ETFs. Perhaps someone else can suggest a low-cost corp bond fund. PH&N have a high-yield fund but they require a minimum $25k account.

[Shakespeare]

I like the idea of a corporate bond fund.

Consider just sticking with a total bond fund like TD e or ETF like XBB, since that will have a significant corporate content.

[optionable68]

I'd like to keep fees as low as possible and invest in emerging markets, pacific, US and Canadian indexes if possible. Can anybody recommend some low cost options available to Canadians.

2 key elements for cost reduction in your portfolio:

1/ ETFs

2/ Interactive Brokers


Assuming you have a sizable portfolio, combining these 2 elements will reduce your MER expense below any index fund available in Canada.

[jellyfish]

Thanks for the replies.

Shakespeare is there a specific TD Bond fund that you're talking about?

What do you think of the asset allocation?

[like_to_retire]

Shakespeare is there a specific TD Bond fund that you're talking about?

I suspect he was talking about TD e-fund TD Canadian Bond Index which tracks the Scotia Capital Universe Bond Index. MER 0.48

or

iunit ETF XBB which tracks the Scotia Capital Universe Bond Index. MER 0.30%

ltr

[Shakespeare]

a specific TD Bond fund

TD e-bond tracks the SCM Universe. If you check the holdings of XBB, which also tracks that universe, you will see the following:

Code: Select all

Sector    as at Mar 31, 2005
Cash    0.00%
Canada    46.09%
Provincial    26.70%
Corporate    27.21%

So a total-index bond fund will have ~27% corporates.

[Brix]

So a total-index bond fund will have ~27% corporates.

Not necessarily. CIBC's Canadian Bond Index fund, which also claims to track the SMC Universe (whose composition data is unfortunately no longer accessible gratis, methinks) currently looks like this:

Code: Select all

Corporate     47.96
Canada        25.91
Provincial    22.63
Municipal      1.66
Cash/equiv.    1.64
MBSs           0.20

Without commenting on the accuracy of CIBCs numbers, ISTR that surprise was expressed recently hereabouts over how the composition of the Canadian bond market had changed, with much less GoC participation than a certain school of political rhetoric had been suggesting.

Funds claiming to track the same index may be affected by their history (e.g., having recently changed from being a GoC fund to an SMC Universe tracker), a policy of performance-juicing, or what have you. As if it's not enough that active managers can be closet indexers...

[Bylo Selhi]

PH&N Bond (a closet indexer)

Code: Select all

Asset Mix (%) As of March 31, 2005       
Federal Bonds        31.3       
Provincial Bonds     20.8       
Corporate Bonds      38.3       
Mortgages             0.6       
Cash & Short-term     9.0

[Brix]

One can, by roundabout means, discover the recent composition of the S&P/TSX Canadian [total market] Bond Index:

Code: Select all

April 29, 2005

Canadas               48.37
Provincials           23.47
Municipals             2.01
All Corporates        26.15


I should be spanked. CIBC's Canadian Bond Index fund manager, too, maybe.

[Shakespeare]

Looks like XBB - which is sampled - is pretty close to the index composition.