Monday, November 10, 2014

Revisiting my imaginary portfolios

Would I have done better investing in ETFs rather than using my present approach -- a mix of stocks, ETFs and mutual funds. To get a handle on this question I designed a number of imaginary portfolios using software available to users of WebBroker.

For a good part of the year, I did quite nicely. But I have had some setbacks. There were two big ones that did a lot to deflate my investment balloon. One was actually made late last year. I sold most of my American holdings: a big mistake. One must adhere closely to one's portfolio allocation. That investment blueprint, carefully worked out, should not be changed on a whim or a fear. I feared what financial havoc the Republicans might cause if they shutdown the U.S. government as threatened. I was snookered by their bluff.

A wise financial adviser at the TD Bank once told me to always have some money in the American market. It dwarfs the Canadian market. Its size and success is not to be ignored. I ignored his advice and I ignored the U.S. market and I missed some remarkable gains.

The other killer was my investment in PennWest. I've never liked PWT. Years ago I liked a junior oil company called Canetic. Unfortunately, PWT also liked Canetic and bought it and I ended up with some PennWest stock when the dust settled. I should have sold those shares immediately. I didn't. I held them, watched them lose value and when they seemed to have reached a bottom, I bought more. I caught the falling knife, as they say.

When the news broke that PWT had problems with its past bookkeeping practices, I began reading about lawyers and lawsuits. I watched the price tumble even farther. That stock has hit lows that were unimaginable just a few months ago.

Never buy a company that seems bent on growing by acquisition. It is too complicated a game. It is no wonder there were problems with the books. Now, I am holding on, hoping the new management will be successful at getting PennWest back on track. There are still a lot of questions surrounding this company. How this will play out is anyone guess. On the bright side there is new management in place and this company may yet become a winner.

So, what was the best investment approach? Drum roll, please. And the winner is:

TD Monthly Income fund (TDB622): A+

Yes, the TD Monthly Income fund easily outpaced the entire field. Despite a MER of 1.48 percent and no American exposure or international investments to speak of, TDB622 won. It had a gain of  9.7 percent.

This soundly trounced the FPX Income benchmark which is up 8.2 percent for the year (Nov. 10, 2014).

Canadian Pension Strategy: A-

While I was still working, one of the editors at the paper gave me a book on investing in retirement. Using that book as a guide I devised a portfolio allocation for retirement:
  • XIC - 10 percent
  • XSP - 10 percent
  • XIN - 10 percent
  • XSB - 20 percent
  • XRB - 25 percent
  • XRE - 20 percent
  • Cash - 5 percent
The big whallop of REITs and the inclusion of real return bonds are what sets this portfolio apart. The cash is shelved in an investment savings account paying 1.25 percent annually. Here I uncovered the first weakness to the imaginary portfolio software. It calculates stock and ETF market increases and adds the correct dividends but it does not calculate the interest earned by cash stashed in an investment savings account like TDB8150. This mean that this portfolio actually earned a few hundred dollars more than the software recorded.

The money weighted return for this portfolio is shown as 8.1 percent. Compared to the FPX Income Index which delivered 8.2 percent YTD, it was almost a photo-finish. A damn fine showing earning an A-. One thing I appreciated about this portfolio was the larger than usual dividend payouts. The XRE holding was responsible for this, I believe.

TD e-Funds Portfolio: B+

In truth, this is not an ETF-based portfolio but a mutual fund-based one. One must have an online self-directed account with TD in order to buy e-funds which have very low, almost ETF-low, MERs.
  • TDB909 - 40 percent (Bonds)
  • TDB900 - 32.5 percent (Canadian Equity Index fund)
  • TDB904 - 15 percent (U.S. Equity Index fund)
  • TDB905 - 7.5 percent (International Equity Index fund)
  • Cash - 5 percent
The money weighted return for this portfolio is 7.8 percent. This fund missed the benchmark by almost half a percent. For this, I dropped the grade to a B+.

Classic ETF Portfolio: B

This ETF-based portfolio was  inspired by investment advice I read some years ago. It required investing in just three ETFs:
  • XIC - 40 percent
  • XSP - 20 percent
  • XSB - 40 percent
Not shown, is the cash. There was a small amount of remaining cash which was placed in an investment savings account (TDB8150).

The money weighted return for this portfolio is 7.5 percent. I dropped the grade to a B+. Still, I hate to admit it, but the Classic is even beating my portfolio. This year is not going to go down as one of my best when it comes to investing. My missteps were few but my PennWest one was a doozie.

I tested some other ETF mixes I but they didn't perform nearly as well as the ones mentioned.

Am I going to immediately dump my approach and buy the TD Monthly Income fund. Maybe I should, but I'm going to wait a year and see if PennWest recovers somewhat. Even a small recovery would go a long way to putting my portfolio back into the game.

In the meantime, I'll test a few other ETF portfolios posted on the Net. A lazy-man's portfolio that holds an American ETF like SDY would be fun to chart. American ETFs were driven higher by the market and the collapsing Canadian dollar. It was a win-win situation for ETFs like SDY and others like it.

I'll keep you posted.

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