If you have been reading my blog for a while, 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 in October 2007, you were in for a wild ride. The national and international markets were 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 forever 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 in 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 a 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 less than 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 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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