Monday, March 7, 2016

Volatility: a hard mare to ride

I like to say that I can ride out volatility. I like to claim that the rises and dips mean nothing to me. But I may be overstating my position. Putting too positive a spin on the reality of my fears. Look at the following chart.



The purple line is my TFSA portfolio. In just the last month it has recovered from being down about 7.5 percent to climbing well into the black. It is now approaching a gain of 10 percent.

I confess: When my investments are down so far that I must look up to see the bottom of almost every other benchmark that I follow, I feel uneasy. It is tough holding firm while one's investments are tanking. I admit it. I don't like it.

The main reason I am able to hang on while navigating the deep troughs of my oh-so-rough financial seas is my wife. She has nerves of steel. She worked for stock brokers twice when she was young and she learned firsthand that markets go up and down. She also learned that the smart money sells a little when the market is soaring and buys a little, or maybe a lot, when the market is tanking.

One reason my portfolio is so volatile is that it is almost devoid of bonds. The only bonds I hold are contained in the monthly income funds I own. I don't own near enough bonds to cushion my falls or dampen my peaks. I'm on a wild ride and considering this is my retirement income, it is a wee bit disconcerting.

Then again, I do get a rush from hitting the peaks. But, and this is a big but, but some of the benchmarks I follow have absolutely soared by my peaking portfolio. I don't have enough exposure to the U.S. and when the market in the States takes off, I get left somewhat behind.

I've decided to give some thought to switching my investments from my oh-so-messy present portfolio to one based on a fund of funds ETF: an ETF wrap. My idea is to find a good fund of funds that approximates my personal portfolio allocation and then bring it into line with my goals by adding a little here and there. I will personalize the fund of funds.

I made a crude attempt at investigating this approach at the first of the year. I set up a faux porfolio based on the iShares Balanced Income Core Portfolio (CBD). I added some XRE and XUT and I believe I should eventually add some extra U.S. equity exposure.

As the fixed income portion of CBD is 43.81 percent today, I can let this percentage shrink as I add more ETFs to my holdings. I do not believe I'll have to shore up the fixed income exposure as I this is already more than I wish to allocate.

The CBD/XRE/XUT faut portfolio is first bar on the graph above. My portfolio is the last bar on the graph. As of today, the two bars are almost equal. The nice thing about the three-ETF-portfolio is that it not only does not exhibit the same volatility as my present portfolio but that it pumps out enough dividend income to cover my expenses in retirement without selling my income producing investments.

I even have hopes that there will be times when the faux portfolio will surpass my own portfolio. I see the fund of funds possibly being propelled forward by its larger exposure to the States and to international markets.

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