Portpolio allocation - CAD

[imolina]

A small background: we are Canadian citizens (not born there, became citizens after doing university there). We are 40 & 41 y.o, and have 2 small children (3 & 6 y.o). We have lived in the UAE for about 12 years (my husband grew up here but it is not citizen). We are thinking of going back to Canada in about 5 years, and retire there (maybe get a part time job). We don’t know how long we will stay there maybe 10-15 years (while the children do their studies) and after we may stay or move to a cheaper country.

Unfortunately, we discovered MMM, FIRE and index funds late (only last year). We have a net worth of about 1.1 M USD with about 60% real estate and 40% cash investments (it could have been better but made a lot of bad financial mistakes).

Last June, we opened an expat traders account in USA and have been investing. So far, we have put 110K USD, but we will add more as we sell some other investments, properties, etc.

We get paid in UAE dirhams which is pegged to the USD dollar. So, we transfer our money in USD and if we buy CAD funds, we will convert it to CAD.

So far, our allocation is:

55% VWRD (composed of 50% international, 50% USD), in  USD
25% VCN (Canadian index), in CAD dollar
10% ishares CORP (international corporate bond), in USD
10% VAB (Canadian bond), in CAD

So, our portfolio is 65% in USD, and 35% in CAD.

I don’t know if we took a good decision by having some Canadian exposure, the Canadian marker always lags behind USA. For instance VCN performance last year was very flat, while VWRD did great,  plus you have the currency fluctuations.
With the currency fluctuations is hard to keep track of the portfolio. Yesterday, it was negative, due to the Canadian dollar being low. I think, there is a risk with the currency once you start withdrawing during RE, but I don’t want to move everything to Canadian funds as we may not live there forever, and since we get paid in a currency that is pegged to the dollar, I think it makes sense to keep the investments in USD, but should we keep some CAD?.

So, I need advice, should we keep the Canadian part of our portfolio or reduce the allocation?. Thank you

[RichMoose]

First of all, recent performance is not a good way to judge allocation issues. Yes, the TSX has done quite poorly compared to the U.S. market since about 2011. However, it did better than the U.S. market from the mid-2000s through 2011.

Your asset allocation should be determined by the risk you can tolerate and to a lesser extent the kind of currency exposure you want. Canada only makes around 3% of the total world stock market. Any allocation higher than that in a passive portfolio means you are actively making a bet on Canadian stocks and/or the Canadian dollar. Considering you only intend to live in Canada for a relatively short time, have one-third of your portfolio in Canadian markets is a pretty big bet. A lot of prices in Canada (and elsewhere in the world) are dictated by the USD in the long run. That's because nearly all international goods are traded in USD.

Considering you are a more truly global investor, I think there should be a compelling reason for you not to just go with a simple global portfolio in USD (because it's the most easily traded currency). I don't really see that reason myself, but I don't know your whole situation.

[dreadmoose]

I think your total asset allocation would be hard to define without more information. Do you plan on leaving a significant portion in real estate / cash or move it all over to stocks / bonds?

The best reading I've done on the subject seemed to nearly always match up with http://canadiancouchpotato.com/couch-potato-faq/ with the difference being that you could buy the US / Int'l funds as their American counterparts due to your USD pay.

For the record I buy the following right now (would buy VUN instead of VFV if starting again, not too concerned though).

Fund	Market	Target
XEF.to	Int'l	30.0%
XEC.to	EM Int'l	5.0%
VFV.to	US	45.0%
HXT.to	Canada	20.0%

Currently 100% stocks. If I got paid in something matching US dollars I would do all of my investing in that currency, with the only difference being that if I was staying in Canada for my retirement my bonds may be purchased in CAD when I start buying them in 10 years.