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My primary objective is to conserve investment capital through the selection of a sound and diversified portfolio. The underlying message here is that I strive to balance risk to achieve maximum reward by selecting a wide variety of different assets. In addition to my individual dividend stock holdings I use a variety of index funds to ensure I am invested across investment styles and assets. I recently added to my index fund holdings to achieve this goal.[ad#tdg-embedded]
The purpose for the changes I made was to ensure that my portfolio had five types of assets in each of regions I invest in (in addition to my fixed income components). In the Canadian, U.S., and International holdings I incorporated a blended growth/value component, a value component, a small-cap component, an emerging markets component, and a REIT component. The intention is that I can take advantage of each sectors ebbs and flows in the market (i.e. one goes up and one goes down). This should balance my risk and reduce the overall volatility of my portfolio while enhancing returns. There is amble proof that assets types small-caps have provided increased returns but with more risk. Balancing that with the value component will ease that volatility (that is the theory anyway). Adding the REIT’s simply gets me into a whole other type of investment which tends to move differently than stocks while providing more income through dividends and distributions. Overall, these changes were all about diversification and risk reduction.
So, in addition to my individual dividend holdings, my portfolio now contains the following index ETFs across each of the respective asset classes. Please note that the growth component is contains my growth:
Blended Value/Growth
Value
Small-Cap
REIT
Emerging Markets
Fixed Income
Here is how the portfolio looks right now – as you can see I have some work to do to get things in line. That will come with time. The large-cap growth is way out of whack because of a recent stock award I received from my employer. I will focus on bringing this down over time as I strongly beleive it is a huge mistake to hold a disproportionate amount of employer stock.
Of course it goes without saying, this portfolio will work for me. Although I don’t have the ego to expect you would go out and copy me – but don’t. Do your own research on asset allocation and then design a portfolio that works for you. Here is one site to start with: FundAdvice.
I like your holdings. What % of your portfolio is in the REITs though? Have you bought them recently or have they been held for a while? I hope the former.
About international stocks: XIN-T has a MER of 0.49%, whereas VEA-N has a MER of 0.12%. I went for the latter, since I don’t think currency hedging is necessary, especially since the EAFE index is exposed to several currencies, not just one.
About REITs as portfolio diversifiers: well I believed in that too until recently, and I still own some, but compare XRE-T with the S&P/TSX over a one year period and you will see a very good correlation. So owning a basket of REITs has not helped one bit at the time when low correlations were most needed (i.e. a global market crash). Plus, the distribution growth on Canadian REITs is typically very low (in the 3-5% range CAGR over 5 years for the individual trusts I investigated). Thus I have become very skeptical of this asset class (especially since H&R cut their distribution!)
More than the individual stocks and funds themselves, I feel that you provide a valuable framework with which one should look at their investments and diversify across asset classes, sectors and regions. Very useful.
Thanks for the comments everyone. I share your concerns on the REIT activity as of late. It does really make you second guess the asset class. For reasons Bob mentioned, I do hold a Canadian, a US, and an international REIT. I have held the Canadian one for a while now and that hurts but the US and International ones have been more recent.
On thing about investing – the markets keep things interesting!
Div guy,
I like your approach of incorporating indexing strategies with selective stock picking. I’m fully invested in indexs, and hope to one day select a few stocks along the way.
Do you find yourself gradually moving towards indexing as a strategy rather then individual stock picking?