Monthly Archives: April 2017

How I deal with not having bonds in my portfolio

New year party with friends

I want to share what are my market expectations and how I deal with not having bonds in my portfolio.

Ever since I started studying finance I have learned a few recurring themes:

  1. Over the long run, stocks outperform bonds
  2. People add bonds to their portfolio to reduce volatility
What are my portfolio expectations

A few research papers suggest that on average, the stock market (Canadian/US) goes up about 10% per year. Other researches say that the market has become more competitive and now we can expect returns of about 8% per year. Taking all this information, I have decided that I will be happy if my overall return is 6% per year. If I earn more, great. If I earn less, I will be disappointed.

This is a weekly graph of the the TSX for the past 12 month. The blue line represents the ups and down of the Toronto Stock Exchange, the red line represents my expectations from the market which is the 6% line.

During the past 12 months I have built a margin of safety of 5.8%. The TSX had gone up 11.8% and I would have been happy with a return of just 6%. This means that If the TSX drops tomorrow by 5.8%, I am still good. At the same time, if the market doesn’t drop, I feel as if I had won the lottery. Imagine that one day the insurance company calls me and tells me: “Ever since we have been insuring you, you haven’t had any accidents, we would like to give you your money back.” This is the same idea. I imagine that the money above the 6% is NOT my money, it’s the insurance’s money, but if nothing happens, I get to have my money back.

When people invest in bonds, they are reducing their volatility, but they are cutting their returns as well. I believe that if they just change their mindset, they will be able to better handle volatility. Remember bonds ARE NOT safer than stocks, they are lest volatile. Over the long run, stocks are as safe as bonds.

Let’s face it, over the last year bonds had a yield of about  2%, the TSX had a return of about 12% and the S&P had a return of about 12.5%. If had a 50-50 portfolio, my return would have about 7%. Good, but nothing to brag about. .

As for my real portfolio. I am ⅓ in Canadian stocks, ⅓ in International stocks and ⅓ in US stocks. My total return for the past 12 months was about 11% and my margin of safety is 5%. In my mind I have gained 6% and I have a 5% insurance policy.

In my next blog I will talk about how to reduce overall portfolio volatility by adding an assortment of uncorrelated assets.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Passive investment outperforms active managers in and outside Canada

Going to the movies with friends.

The robots are outperforming the humans. According to SPIVA, a research group which measures the performance of mutual funds managers vs passive index,  the Canadian Index (S&P/TSX) has beaten active mutual fund managers hands down.

This is how the S&P/TSX had has out performed active managers.

  • 1 year: 73.5%
  • 3 years: 76.9%
  • 5 years: 71.2%

There are many reasons for the index outperforming:

  • Management fees are 2% to 2.5% versus 0.10% for index funds. That is a  2% difference. This is a big drag on performance.
  • Many managed mutual funds are closet indexers. This mean that they tell the public that they do active management but most of the stocks they own are the same as the stocks in the index. So their portfolio is similar to the index and then they slap a 2% markup to compensate for their salaries and marketing expenses.
  • Cash drag. Managers keep a portion of their portfolio in cash, they do this to have money for redemption or to be ready for opportunities. Either way, cash money is money that is not working for you.
  • Trading expense. It costs money to buy and sell stocks, even in today’s low commission environment, when you buy/sell millions of dollars in stocks, this will add up to the cost.
  • Buy & sell spread. When you buy stocks you buy them at the price which they are offered and when you sell them, you sell the at the price some one else is willing to pay for them, this spread between buy and sell is small in big companies and larger in smaller companies, but it is there, always creating a drag on your performance.
  • Trailer fees. I call this the kickback which mutual funds pay to advisers who recommend their fund. If an adviser sells you fund XYZ, he will get compensated, every year, for as long as you keep your money in that fund. The trailer fee is generally 1%. This is one percent which doesn’t add to your performance, it goes straight to the adviser’s pocket.

Many investors are waking up to this reality. Thousand of people are dumping their actively managed fund and buying whichever index best represents their investments goals.


If over 70% of actively managed mutual funds don’t beat the index, why pay for inferior performance? Get an index fund and dump your actively managed fund.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Investing in the US for Canadians

Eating with friends before going to the movies. Dec 20/2016

My portfolio is ⅓ Canadian, ⅓ US and ⅓ international. In addition, the US portion is in US dollars.

Most investors, all over the world, have a country bias. They like to invest in what they know and of course, they know their national companies therefore that’s where they invest.

It is important, specially for investors of small (economically speaking) countries such as Canada (Canada is only 2% of the global economy) to diversify outside of their country’s economy.  A person invested exclusively in Canada, is a person who is under diversified and is highly exposed to Canada’s specific risks. In fact, the Canadian economy is mostly dependent in natural resources, in particular oil. A big drop in oil prices could be devastating for the Canadian economy.

The first step towards diversification ( for a Canadian) should be to invest in the US. The US has a more mature economy, it is broadly diversified and we are already familiarized with most major US companies.

The most efficient way of investing in the US is by buying broadly diversified ETFs or mutual funds which represent the whole US Economy. With one click you can buy the S&P 500 index which represents the largest 500 companies in the US. Or the Total US market index.

The next question should be: If I invest in the US market, should I do it in US Dollars or Canadian Dollars. For most Canadian, investing in Canadian Dollars should be good enough.

How do we invest in the US?

I like investing through a company called Vanguard. They have built a great reputation of low cost and reliability. Another leader in the industry is Black Rock. But be aware that all major Canadian banks offer similar ETFs and Index funds.

Which one are my favorites?

In US Dollars I like Vanguard’s VOO which represents the S&P 500 and it has an expense ratio of only 0.04%. This means $4 for every $10,000 invested. I also like VTSMX which provides exposure to the whole US stock market. This one has an expense ratio of 0.15%.

If you invest in Canadian Dollars, I like the VFV (S&P 500) with an expense ratio of 0.08% and the VUN (Total US market index) with an expense ratio of 0.16%.

Disclaimer. Please note that I am sharing my personal situation with my personal risk tolerance. Don’t blindly follow what I share in this article. Talk to a “fee only” financial adviser and share the idea of diversifying out of Canada with them.

Pay lower taxes by investing in Index funds

Celebrating Christmas with my friends.

Taxes is our biggest expense

Our biggest expense is neither food, nor housing, nor transportation. No, our biggest expense is taxes.

Here in Canada, we have many privileges not found anywhere else in the word. We have a stable government, low crime, acceptable medical service, job opportunities, etc. But we pay dearly for all those benefits, we pay some of the highest taxes in the world.

There are ways to pay less taxes

The first thing is to take advantages of all the tax shelters offered by the Canadian government. Some of those tax shelters are RRSPs, RRIFs, RESPs and TFSA. We will talk about each one of those in future posts, but in general, you can eliminate completely, or postpone for many years, taxes on the money earned within those tax shelters. The biggest problem with those tax shelters is that there is a limit on how much money you can put in them. For example, I can only put $5,500/year in my TFSA.

How can we invest the money that can not be protected from taxes?

Stay away from bonds or any kind of interest revenue. This kind of revenue is taxed as regular income. You pay more taxes on $1 earned from interest income that in $1 earned from dividend income of capital gain income.

The income which is taxes at the lowest rate is capital gain income.

Then problem arrives when you buy actively managed mutual funds. Those mutual funds have a lot of buying a selling within them, and you the investor, you are responsible for paying for those capital gains. This is surprising for most investors because as far as they know, they are not actively buying and selling, they are buying and holding. It is very unpleasant to see a tax bill at the end of the year.

The best way to lower your tax bill or  is to invest in Index of ETFs.

Index funds are highly tax efficient because there is not an active manager constantly buying and selling securities. The index fund represent a basket of stocks which mostly stay the same.

For example, the Index fund which represent the 60 biggest Canadian companies is composed of the 60 biggest Canadian companies. The Index fund which represents the Dow Jones industrial Average, always has the same 30 companies. There is no much change in one of those indexes from one day to the other, for the most part, the index fund, never buys and never sells.

Index Funds and ETF not only offers the highest returns in the stock market, when compared against mutual funds, but also offer the most tax efficient way to invest in the stock market.

I think that we should forget completely about actively managed funds and embrace completely Index funds.

Do you own any actively managed funds? Any index funds? Let me know in the comments.