Friday, January 6, 2017

Portfolio anchored by mutual funds may outperform an index ETF one

I have followed index investing for years. I was a bit of a believer at one point. Then I noticed some of my pure stock plays were blowing away my index investments. Slowly I moved away from the index model.

Today, my own portfolio is a hodge podge of stocks, ETFs and mutual funds. I have a reason for investing in all the stuff I own but I must confess all the reasons are not good ones. There are a number of investments I hold that I wish I had never encountered. But even carrying those dogs, my portfolio is in the lead against some index-based benchmark portfolios.

If you are asking, what is your portfolio leading? The answer is the test or research portfolios I created using software available to users of WebBroker. I moved some of these practice portfolios to the trash at the start of the year because they were performing so poorly. If I had a portfolio in real life that was delivering so little, I would liquidate it and move on.

Based on last year's performance, I created two new portfolios reflecting my current feelings when it comes to portfolios that operate in automatic mode. One is based on a balanced portfolio created with TD e-funds and recommended by a financial expert with a very popular blog. The other contains just four holdings, two mutual funds and two ETFs. For a more detailed rundown on these two approaches to investing click the following link: Running a portfolio in auto mode.

Here is the surprise: the mutual fund anchored portfolio is ahead of the balanced ETF portfolio by thousands of dollars. Of course, this will probably change, but it does give me pause.

One final note: I tried to simplify this approach even more and I launched one more test fund. This one was based on one and only one ETF, a complete porfolio in itself, a fund of funds. My first fund of funds came in last, so I tried another. It, too, brought up the rear.


Sunday, January 1, 2017

Running a portfolio in auto mode

Last January I built ten portfolios following the index investing advice I found on the Net. The winner was not one of the ten but was actually my own ragtag portfolio. My personal retirement portfolio produced about 19.65% in 2016. The handsome dividend income it paid will cover my 2017 withdrawals which I must make in order to pay my bills in retirement. My profits from buying and selling Norbord stock were icing on the financial cake.

Still, I keep thinking that as I get older I might prefer a simpler solution. My mess of bank and insurance stocks, REITs and ETFs based on REITs plus much, much more may have done well but it wasn't an elegant solution to investing in retirement. And the small amount of bonds in my portfolio almost guarantees lots of volatility. Do I want to be riding a financial roller coaster in retirement?

I'm tossing the worse performing test portfolios, they soon will be history, and I'm adding two new portfolios today. One is based on a balanced portfolio posted by a well respected expert. It is a balanced approach composed of three Vanguard ETFs:

  • 40% VAB (a Canadian bond index ETF)
  • 20% VCN (a Canadian all cap index ETF)
  • 40% VXC (an all-world ex-Canada index ETF)

The other new portfolio is a mix of two monthly income mutual funds and two income producing ETFs:

  • 55% TDB3085 D-Series fund
  • 20% TDB3086 D-Series US fund
  • 12.5% ZRE (Bank of Montreal ETF)
  • 12.5% XUT (iShares utilities ETF)

I remove about 3.5% annually from my retirement portfolio to cover my living expenses. Neither of these two portfolios provide enough dividend income to cover this expense. They both have yields in the 2% range. If I actually had such a portfolio, I'd been selling a small number of shares and/or units each January.

How did you fare last year? It was a fine year to be in the market for most Canadians, unless you picked some real dogs, which is always possible. Are you smiling as we enter 2017?

With the arrival of 2017, I'm building up my cash reserves. I fear Donald Trump plus the markets are at all-time highs. I believe the markets are ripe for a correction. I want to be ready to buy. I want some cash to move from the sidelines back into the game. (Added the following in mid-November. Here is proof that trying to time the market is a mug's game. The index investors who stayed the course, like the well known creator of the Couch Potato Portfolios, demolished me this year. I am hanging my head in shame. I knew better.)

And I'm still examining my practice portfolios. I'm still looking for clues on how to build the best passive portfolio for me in retirement. I have an idea or two. If my heart doesn't take me out of the game in 2017, I may be to convert my investment ideas into an actual portfolio. It would take a lot of guts and confidence but I may be forced to do it by health issues alone.