Big disclaimer. This is my personal view of the the financial world. This portfolio is ideal for someone with a VERY high risk tolerance. It has happened during the past few years that I have shared my portfolio with people who don’t have the same risk tolerance and then start calling me when the market goes down a few points or sell their holdings at a lost.
Most financial advisers advocate a mix portfolio of stocks and bonds. The main reason for this recommendation is to reduce volatility. To deal with the human factor. Our reptilian brain goes into panic mode when we see our holding decreasing in value and do a panic sale. Researchers claim that the pain from losing one dollar is twice as big as the pleasure of gaining one dollar, thus it become very difficult to stay in the market as equity prices are declining and to alleviate some of that pain we add bonds to our portfolio.
It has been demonstrated over and over again that stocks outperform bonds by a wide margin. Also, it has been demonstrated that on long periods of time (20+ years) stock are as a safe (if not safer) than bonds. But it takes years (if not decades) of character building to take the downturns of the market as they inevitable happen.
I have to say it, I don’t have bonds in my portfolio, I have built a tolerance for high volatility. I know that the market doesn’t go straight up, there are peaks and there are troughs and I have learned to live with it. I know that over the long term, I am better off holding stocks than bonds.
Fighting the Home bias
Numerous studies have demonstrated that most investors have a home bias. They like to invest in their home territory. Canada is only 2% of the global market. It doesn’t make sense for a Canadian to keep all his money at home. Canada economy is a natural resources economy, greatly influenced by the prices of oil or gold. By investing in the economies of other countries we can reduce risk and reduce the volatility of our portfolio.
Index investing makes global diversification easy.
I believe that index investing is an excellent way to diversify. When you invest in an index, you eliminate the risk of failure of any one company. At times, companies like Nortel and Blackberry were the darlings of most Canadians. Those who had direct ownership of those stocks suffered great losses however; however, Canadians who owned the index, they recuperated completely. Today, almost everyone is in love with Apple inc. Just keep in mind, that Apple is a phone seller, at any given moment, consumers can turn their backs on their overpriced Apple products and many Apple investors will suffer. By owning the index you can eliminate the risk of owning a single stock.
My ideal portfolio
As a Canadian, I like to divide my portfolio in three equal parts, ⅓ Canadian holdings, ⅓ US holdings and ⅓ the rest of the world holdings. My favorite vehicle to achieve this is through ETFs (Exchange Traded Funds) and the leader in the industry, due to its low price is the company Vanguard.
Here are the ticker symbols which best represent Canada, the US, and the rest of the world:
VCN. FTSE Canada All Cap Index ETF. It represents all the big, medium and small companies is in Canada. Its expense ratio is 0.06%. One year return as of June 29, 2017: 9.54%.
VUN. U.S. Total Market Index ETF. It represents the whole US market. Its expense ratio is 0.16%. One year return as of June 29, 2017: 18.15%
VIU. FTSE Developed All Cap ex North America Index. It represents developed markets except US and Canada. One year return as of June 29, 2017: 20.84%.
The average rate of return of these three holdings was 16.17%.
Here is a graph which represents the three different holdings.
Most advisers suggest re-balancing at least once a year. That means, selling some of the big winners and buying some of the big losers. I don’t bother with that. What I do is this. If I have some extra money to invest, I invest it in the one that is lagging. If want to take money out, I do it by selling some shares of the biggest gainer. I do this re-balancing not at particular per-scheduled moment but as the needs of my life changes. Sometimes, if I need money and I don’t want to disturb the balance of my portfolio, I take money out of my line of credit and then I pay it back either by a stock sale further into the future or by making more money in my other activities.
These are my investment principles unique to my circumstances. Your risk tolerance might be totally different. Don’t consider this article as investment advice, consider it as me sharing a snippet of my investment life.