Asset allocation for a Canadian 10 years into the past

Hanging out with friends. Inas and Daniel

If you have been reading my blog for awhile, you will know that my favorite asset allocation for Canadians is ⅓ Canadian stock, ⅓ US stocks, and ⅓ International stocks.

Let’s say that you met me 10 years ago (October 2007) and you asked me how to invest your money. And let’s say that I gave you the same advice that I give out today. Would you have been a happy investor? Let’s find out.

If you invested on October 2007, you were in for a wild ride. The national and international markets where about to tumble due to the financial crisis of 2008. You would have been looking at your portfolio and calling me a complete idiot, cursing yourself for ever talking to me.

I often say that if you are going to invest in the stock market, you have to have a 10 years outlook and that at the end, if you are well diversified, you should come out fine. That prediction turned out to correct.

The financial products which I use to do my investing are as follows:

  • Canada: The XIU. This represents the 60 biggest Canadian Companies
  • US: VTI. This represents the whole US. Market
  • International: XIN. This represents big size companies from all over the world.

As you can see in the graphs, on 2008 everything dropped. The Toronto and US market lost about 50% of their value while the international index lost about 40% of its value. At this time, many retail investors without a financial adviser would have bailed out.

Let’s say you endured the pain. Where would you be today?

  • Your International exposure would still be negative by 14.7%
  • Your Canadian exposure would be positive by a mere 5.04%
  • But your US exposure would be positive by 67%

Your average of these three investments would be 19.15%.

Divided by 10 years, this will give you about 1.9% per year.

These are not great returns, considering the amount of risk involved. The amount of pain related to seeing your investment dropping by over 50%.

There is a problem with my calculations. I don’t know how to add the dividends earned during these past 10 years. Let’s say that on average you earned 1.5% in dividends. Now your total return per year is 2.4%. This is less bad, but It’s still very poor return. Consider the psychological stress, I would have preferred to lose out to inflation and have my money in cash.

What are the alternatives?

During the same period, bonds have gone down the the less that 1% territory. You might as well keep your money under the mattress.

And real estate, also had a big drop in the States. Since then it has recuperated as well, but let’s be honest, real estate is not a real passive investment. I invest in real estate and believe me, it gives me plenty of headaches.

In conclusion, in spite of a 50% in the stock market. Stocks are still the best place to put your passive money. However, the faith that I once had on the stock market, it has been badly bruised. I feel that 2.4% is not enough compensation for putting my money in harm’s way. I am still investing in the stock market, but I feel a lot less enthusiastic and optimistic than when I first started writing this article.

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