Author Topic: My asset allocation for 2013 (Comments/Suggestions encouraged!)  (Read 5549 times)

aclarridge

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My asset allocation for 2013 (Comments/Suggestions encouraged!)
« on: January 04, 2013, 10:12:01 AM »
Hi all,

I'd like to share my asset allocation with you and invite your analysis. I plan on implementing it in the next week or two through my discount brokerage. I live in Canada.

(1) 14% VNQ - US REIT ETF - Trades on US Market, will go in RRSP
(2) 14% VFV - S&P500 Index ETF (TSX traded), unregistered account
(3) 25% VCE - TSX Index ETF, unregistered account
(4) 11% VEE - Emerging Markets ETF (TSX traded), unregistered account
(5) 7% VSC - Short term Corporate Bond ETF, will go in RRSP
(6) 28% Cash - Earning 2% in TFSA, and some in RRSP.

Notes:
- The effective MER of just the ETFs in this portfolio is 0.17%.
- I intend on subscribing to the DRIPs for all applicable ETFs.
- For (1), I intend to use a Norbert's Gambit or DLR to do a currency conversion. My view is that US real estate is cheap, and should improve, and REITs should do well in the coming years. If you agree or disagree, I am interested to hear your reasons.
- The small bond allocation is because I believe bonds are overvalued and produce very low returns right now.
- The high cash allocation is because I want to have enough cash on hand for a down payment on a house (also I can pull out the RRSP cash/bonds using the HBP). I am waiting right now because I believe Canadian real estate is overvalued. I realize the cash allocation is conservative and again, I invite your criticism.
- I tried to use a couple Canadian Couch Potato posts to make my decisions about foreign taxes and registered/unregistered accounts: http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/  http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

Thanks in advance! My hope is that this thread will help me tweak my allocation and also help out others in similar situations.

Budget_Ninja

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #1 on: January 07, 2013, 06:50:48 PM »
Your more aggressive in your investment style than I am.  I'll make some general comments first.  I would first ensure that I had all my consumer debt paid off before putting my money in the markets, I would also want to have some money set aside in the event of emergency.  I would especially want to do this in an aggressive portfolio.  The portfolio should serve you well in the long run, but if you end up having to liquidate your positions early it could leave you with a sizable loss.  When the economy tanks, equities lose value and people get fired.

I like your chose of funds, I am a fan of index investing and the couch potato style.  Why don't you put more into tax free and tax sheltered plans?  Have you maxed those out already?  I think you've made some good choices with a cash position in your TFSA.  I use mine for my emergency fund.  ING has a 90 day GIC offer right now at 2.5% if your interested.

Are you paying fees for purchasing the ETF's?  I am using TD eFunds to build up a sizable position and then selling the position and purchasing Vanguard funds to help keep the transaction costs down.  My 'trigger' to tell me that I have enough is if the MER difference after 1 year is greater than the price to buy the ETF.

What is your currency policy in your portfolio?  I don't hold foreign currency products and chose to hedge all my positions.  My long term outlook for currency 'growth' is zero so to me currency just adds volatility to my portfolio with out the expectation of long term gains.  I chose not to speculate in the currency market.

What is your current policy for re balancing your portfolio and how did you arrive at your bond/equity allocation?  My allocation bond/equity allocation changes with my age.  I am thinking about working in a range around this allocation to allow me to take on more or less equity based on a market level PE ratio - or something like that.  Basically to hold a smaller position in a bubble and a large position in a slump.

We used the HBP, I wish we didn't.  We should have saved the 20% outside the RRSP's but we were in a hurry to get into a home.  I don't regret the purchase just how we did it.

My portfolio philosophy has changed considerably over time.  I have a KISS philosophy and am more protective of my assets.  I also hold a much larger amount in cash and bank accounts than I did even just a few years ago.  (-YNAB-)


I'll share my allocation - not because I think you should use it, but for a comparison.

36% Bonds
12% Canadian Equity
26% US Equity
26% International Equity

My choice for Vanguard funds would be as follows:
Bonds: VSB/VSC in a 60/40 split higher in gov't bonds
Canadian: VCE
US: VUS (Hedged)
International: VEF (Hedged)

If I had money outside of an RRSP/TFSA I would hold CDZ (ishares Canadian dividend Aristocrats) in it to take advantage of the dividend tax credit.

aclarridge

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #2 on: January 08, 2013, 09:49:27 AM »
Thanks for the reply! Very interesting. I'll try to answer your questions.

Why don't you put more into tax free and tax sheltered plans?  Have you maxed those out already?  I think you've made some good choices with a cash position in your TFSA.  I use mine for my emergency fund.  ING has a 90 day GIC offer right now at 2.5% if your interested.

The allocation I've described maxes out my RRSP and TFSA. Definitely I look to use those first. I had an investment go sour in my TFSA last year (fraud), so I lost most of the past contribution room. That's not a bad rate for a GIC, I am too nervous about locking up the cash though because as you mention, the portfolio is aggressive. Yeah, I'd say it's an emergency fund as well.

Are you paying fees for purchasing the ETF's?  I am using TD eFunds to build up a sizable position and then selling the position and purchasing Vanguard funds to help keep the transaction costs down.  My 'trigger' to tell me that I have enough is if the MER difference after 1 year is greater than the price to buy the ETF.

I use TD Waterhouse so it's $10/trade. I think I'll maybe add to the positions or rebalance if needed maybe every 6 months? To keep the costs down. Maybe more frequently if I have a windfall (tax return for one). Your idea of using eFunds is good though, I'll consider that although I'm not totally sure it's worth the hassle to me! I'll do some calculations and find out.

What is your currency policy in your portfolio?  I don't hold foreign currency products and chose to hedge all my positions.  My long term outlook for currency 'growth' is zero so to me currency just adds volatility to my portfolio with out the expectation of long term gains.  I chose not to speculate in the currency market.

I don't consider myself a currency speculator either, I'm just trying to preserve my Canadian dollar purchasing power (because I want to travel a lot) by hedging against other currencies' appreciation against it (USD through VNQ and VFV, and I guess emerging markets currencies through VEE). I suppose I should have some EUR/GBP/JPY/CHF exposure but I don't have much, yet. One thing to note is that in reality you do have currency exposure - for example, you own pieces of several Canadian companies with assets/liabilities which are denominated in other currencies. These companies don't hedge their currency exposure perfectly, so the company value in CAD is affected by foreign currency rates. It's hard to measure the effect of this but I would agree the hedging done in those "hedged" ETFs is more significant. Look into tracking error of those hedged-to-CAD ETFs though...I've heard it's quite high, something to watch out for. Anyway, I don't see the need for the hedging as it's the opposite of the hedging I want to do.

What is your current policy for re balancing your portfolio and how did you arrive at your bond/equity allocation?  My allocation bond/equity allocation changes with my age.  I am thinking about working in a range around this allocation to allow me to take on more or less equity based on a market level PE ratio - or something like that.  Basically to hold a smaller position in a bubble and a large position in a slump.

I think it might change a bit with my age (I'm in late 20s now), and right now the bond allocation is really low just because I believe they are really overvalued now. I would want to be about 30% bonds/cash I think, it just "feels" safe enough. I haven't got any great reason for it. As for rebalancing, I think every 6 months I'll do an asset purchase and attempt to rebalance with that, and then again after a year I'll properly rebalance/purchase again. Trying to time bubbles though is difficult...however if I am very convinced, maybe I would try to tweak the asset allocation like I'm currently doing with the bonds.

We used the HBP, I wish we didn't.  We should have saved the 20% outside the RRSP's but we were in a hurry to get into a home.  I don't regret the purchase just how we did it.

Why do you regret using the HBP? I would have thought anything that allows you to pull from the RRSP for free during your high earning years is a great thing.

36% Bonds
12% Canadian Equity
26% US Equity
26% International Equity

My choice for Vanguard funds would be as follows:
Bonds: VSB/VSC in a 60/40 split higher in gov't bonds
Canadian: VCE
US: VUS (Hedged)
International: VEF (Hedged)

If I had money outside of an RRSP/TFSA I would hold CDZ (ishares Canadian dividend Aristocrats) in it to take advantage of the dividend tax credit.

Very interesting - why do you underweight Canadian equity? Otherwise I guess we are pretty similar although I'm a bit more averse to owning bonds. CDZ would be nice although maybe better to use in retirement for cash flow?

I agree the allocation I've chosen is a bit aggressive, but I figure I have no debt, I'm young enough, there's enough cash and bonds in case I need it, and I have enough discipline to not get scared and sell, so I should be aggressive.

Again, thanks for your reply!

Budget_Ninja

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #3 on: January 08, 2013, 10:52:32 AM »

I don't consider myself a currency speculator either, I'm just trying to preserve my Canadian dollar purchasing power (because I want to travel a lot) by hedging against other currencies' appreciation against it (USD through VNQ and VFV, and I guess emerging markets currencies through VEE). I suppose I should have some EUR/GBP/JPY/CHF exposure but I don't have much, yet. One thing to note is that in reality you do have currency exposure - for example, you own pieces of several Canadian companies with assets/liabilities which are denominated in other currencies. These companies don't hedge their currency exposure perfectly, so the company value in CAD is affected by foreign currency rates. It's hard to measure the effect of this but I would agree the hedging done in those "hedged" ETFs is more significant. Look into tracking error of those hedged-to-CAD ETFs though...I've heard it's quite high, something to watch out for. Anyway, I don't see the need for the hedging as it's the opposite of the hedging I want to do.

Interesting perspective, I can follow the logic.  I plan on the majority of my spending to be done with in Canada.  I hadn't given much thought to the currency exposure with in international corporations, so I guess I am really just limiting my exposure through my hedge policy and not really neutralizing it.  I'm accepting the tracking error as part of my hedging policy and I think it's better than what i could do attempting to hedge them on my own.


Why do you regret using the HBP? I would have thought anything that allows you to pull from the RRSP for free during your high earning years is a great thing.

I regret not having it still in my RRSP growing my retirement capital, and the incentive to pay it back aggressively is low.  I pay the minimums, preferring to put my money into my RRSP contribution room & tfsa first.  It really wasn't feasible at the time to not use it.  We deposited a large chunk of savings into it 90+ days prior to pulling it out for the HBP so we could take advantage of the tax refund as well.  In retrospect I wouldn't have done it any different at the time - but I guess i just wish I was better with our money and could have my cake and eat it too.  This year i hope to max out the RRSP contributions early, then max out the TFSA and hopefully have enough left over to put a decent dent in the HBP repayment.


Very interesting - why do you underweight Canadian equity? Otherwise I guess we are pretty similar although I'm a bit more averse to owning bonds. CDZ would be nice although maybe better to use in retirement for cash flow?

I agree the allocation I've chosen is a bit aggressive, but I figure I have no debt, I'm young enough, there's enough cash and bonds in case I need it, and I have enough discipline to not get scared and sell, so I should be aggressive.

Again, thanks for your reply!

Funny, I think I am overweight in Canadian equity.  I am trying to avoid the home country bias, especially with the small Canadian market that is heavy in resources and financials.  I want the equity in my portfolio to be more like a 'World' index fund weighted by market share.  I overweight because I live here.  If I was living in the US for example I probably wouldn't hold any Canadian index.

I like dividend investing, so the CDZ is my way of keeping a broad portfolio of dividend investments with out holding individual funds.  I would just set them up as DRIP's as I have no current need for the cash flow, and turn off the DRIP when I wanted to take advantage.  My portfolio is more conservative than it would be if I didn't have to consider my other obligations like my family and home.  Not to say that those with an aggressive allocation don't consider those things - I just need to know my money is exposed to less risk.  (My wife does too)

Always interested in others portfolio allocations, I find the theory behind them very enlightening and am always looking to tweak my own portfolio policy.

aclarridge

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #4 on: January 08, 2013, 11:44:07 AM »
I plan on the majority of my spending to be done with in Canada.  I hadn't given much thought to the currency exposure with in international corporations, so I guess I am really just limiting my exposure through my hedge policy and not really neutralizing it.  I'm accepting the tracking error as part of my hedging policy and I think it's better than what i could do attempting to hedge them on my own.

Good point, and to be honest the majority of my spending would happen in Canada too. Gives me something to think about.

In retrospect I wouldn't have done it any different at the time - but I guess i just wish I was better with our money and could have my cake and eat it too.

Gotcha. Just was wondering in case you had some better idea rather than using it.

Funny, I think I am overweight in Canadian equity.  I am trying to avoid the home country bias, especially with the small Canadian market that is heavy in resources and financials.  I want the equity in my portfolio to be more like a 'World' index fund weighted by market share.  I overweight because I live here.  If I was living in the US for example I probably wouldn't hold any Canadian index.

Interesting points. I think the 'World' index fund idea sounds great, but you're Canadian. Don't you like the idea of investing in Canadian businesses from a sense of community or patriotism, and also the fact that you know way more about Canadian businesses than you do about any other countries'? Aside from the tax advantages (although in an RRSP, I guess that's not much) and not getting screwed on fx "friction".

I like dividend investing, so the CDZ is my way of keeping a broad portfolio of dividend investments with out holding individual funds.  I would just set them up as DRIP's as I have no current need for the cash flow, and turn off the DRIP when I wanted to take advantage.  My portfolio is more conservative than it would be if I didn't have to consider my other obligations like my family and home.  Not to say that those with an aggressive allocation don't consider those things - I just need to know my money is exposed to less risk.  (My wife does too)

Yeah, that makes sense. My wife seems to be ok with the aggressive strategy...in theory. It's early days yet, and when we've lost 40% or something we'll see what the reaction is.

Budget_Ninja

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #5 on: January 08, 2013, 12:11:32 PM »

Interesting points. I think the 'World' index fund idea sounds great, but you're Canadian. Don't you like the idea of investing in Canadian businesses from a sense of community or patriotism, and also the fact that you know way more about Canadian businesses than you do about any other countries'? Aside from the tax advantages (although in an RRSP, I guess that's not much) and not getting screwed on fx "friction".


FX 'friction' and the additional cost to invest outside of Canada along with the tax advantages from investing inside Canada is what keeps me over weighted in Canadian equity.  You've got the home bias argument down, I am trying to avoid that for the betterment of my portfolio.  I value risk diversification in my portfolio and think that a high concentration in Canadian equities goes against that. 

I am planning on meeting with a financial adviser this year or next to discuss my portfolio along with my retirement planning, kind of like a checkup to see if my plan and portfolio require attention.  We are at a point now were our contributions to investments will be increasing significantly over what we were doing before.  Now that 'real' money is involved I would like to get a professional opinion.

arebelspy

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #6 on: January 08, 2013, 12:13:36 PM »
(6) 28% Cash - Earning 2% in TFSA, and some in RRSP.

My question is on number 6.

Why?  Dry powder?  Other?

What will trigger you to allocate that?  Or is that your target cash allocation no matter what?
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tooqk4u22

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #7 on: January 08, 2013, 12:35:19 PM »
Overall I like the mix and while the cash may be high for whatever reason it isn't the worst thing sitting there at 2% when CAD inflation is sub 2% so it is holding its own (not an option here in the US).

I also like that half is outside CAD (especially the US) if for no other reason than for the currency trade because there is relative parity between the US$ and the CAD$ currently, this has not been the case most times throughout history.  The US$ is relatively week and has been for a number of years but if our politicians can do anything right growth will come back and the US$ will strengthen and return the currency exchange to historical levels - that it in itself could be worth 30% return.

Could be a ways off though because in case you hadn't notice we have bit of a financial problem and our politicians are fairly dysfunctional. 


aclarridge

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #8 on: January 08, 2013, 12:54:23 PM »
My question is on number 6.

Why?  Dry powder?  Other?

What will trigger you to allocate that?  Or is that your target cash allocation no matter what?

It's so that my wife and I can put a down payment on a house if we want to. I know it's probably costing me but for now, it's an option we want. We currently rent and don't own property. If house prices come down or a good deal becomes available, that would trigger its use.

It's not my target cash allocation - ideally I would want to have a low interest HELOC "emergency fund" and maybe 5-10% in "dry powder", tops. Wouldn't trust myself with more than that.


I also like that half is outside CAD (especially the US) if for no other reason than for the currency trade because there is relative parity between the US$ and the CAD$ currently, this has not been the case most times throughout history.  The US$ is relatively week and has been for a number of years but if our politicians can do anything right growth will come back and the US$ will strengthen and return the currency exchange to historical levels - that it in itself could be worth 30% return.

Could be a ways off though because in case you hadn't notice we have bit of a financial problem and our politicians are fairly dysfunctional. 

Thanks! I hope you're right about CAD/USD, but yeah that's for sure there are some serious problems with government policy and debt for the US to get over. We've got our own set of problems up here though with the consumer debt load and unaffordable housing market (I read an hilarious analogy recently - it's "a fly in search of a windshield").
« Last Edit: January 08, 2013, 01:02:13 PM by aclarridge »

arebelspy

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #9 on: January 08, 2013, 02:01:42 PM »
My question is on number 6.

Why?  Dry powder?  Other?

What will trigger you to allocate that?  Or is that your target cash allocation no matter what?

It's so that my wife and I can put a down payment on a house if we want to. I know it's probably costing me but for now, it's an option we want. We currently rent and don't own property. If house prices come down or a good deal becomes available, that would trigger its use.

It's not my target cash allocation - ideally I would want to have a low interest HELOC "emergency fund" and maybe 5-10% in "dry powder", tops. Wouldn't trust myself with more than that.

Makes sense.

With that in mind, I personally wouldn't count that as part of your "portfolio."  It's a targeted savings account, and putting it in there is skewing the rest of your numbers, IMO. 

I'd take that out, then rerun what percent everything is of your investable assets.
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aclarridge

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Re: My asset allocation for 2013 (Comments/Suggestions encouraged!)
« Reply #10 on: January 08, 2013, 02:37:24 PM »
I'd take that out, then rerun what percent everything is of your investable assets.

Yeah that's how I designed the allocation. If I exclude the cash then:

(1) 20% VNQ - US REIT ETF - Trades on US Market, will go in RRSP
(2) 20% VFV - S&P500 Index ETF (TSX traded), unregistered account
(3) 35% VCE - TSX Index ETF, unregistered account
(4) 15% VEE - Emerging Markets ETF (TSX traded), unregistered account
(5) 10% VSC - Short term Corporate Bond ETF, will go in RRSP

And I think I want to make (3) 30% and (4) 20% to make it less Canadian overweighted.