The Foundation - Asset Allocation

I follow a simple and very rigid asset allocation model. A fairly long but readable introduction to asset allocation can be found here. Based on my own tolerance for risk along with my needs for income and capital growth, I have set a specific allocation as follows:

Fixed Income48% 
US Equity24%
Canadian Equity18%
Foreign Equity - EAFE3%
Foreign Equity - Emerging Markets2%
Real Estate5%

I rebalance each quarter to these exact numbers. I do not time the market.  Within a few days of the quarter-end, I re-calculate my asset allocation and promptly rebalance.

If I purchase a stock during a quarter, I sell an equal amount of another stock to keep the allocation intact.

The fixed income portion of the portfolio is simply a ten year laddered bond portfolio, with 10% of the portfolio reaching maturity in each of the next ten years.  When a bond reaches maturity, subject to rebalancing the entire portfolio, the proceeds are simply re-invested in a new bond maturing in 10 years.  I tend to hold all bonds to maturity unless I have to sell in order to maintain my asset allocation.  This way, I really am not subject to fluctuations in bond prices, and also get to average my fixed income investments at differing interest rates. I tend to purchase mainly provincial and municipal bonds, with some high grade corporate bonds also in the mix.  

The equity portion of the portfolio is invested in conservative, generally dividend paying stocks.  About half are U.S. stocks.  My detailed equity portfolio is outlined below.

The real estate portion refers to liquid real estate holdings, generally Real Estate Investment Trusts.

The foreign stock portion are generally ETFs focusing on a particular non-North American region.

I attribute 80% or more of my investment return to this rigorous rebalancing. It has not always been easy (1997 Asian crisis, 2000 internet crash, September 11th,  2008 financial crisis), but it has always turned out well (in the longer run).

Individual Stocks, ETFs, or Mutual Funds?

I like to purchase individual stocks, but I'm not convinced that they necessarily out-perform market index Exchange Traded Funds ( ETFs) or low-cost mutual funds.  I enjoy doing research on companies, as I've spent much of my  business career evaluating businesses.  It does take work, though.  

That being said, I don't disagree with Warren Buffet's advice to his wife on how to invest his billions upon his passing:

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."

I am somewhat intrigued by the recent emergence of "Robo Advisors", in that they follow a very strict asset allocation model using low-cost ETFs.  I have put a small amount of my assets into one of them, Wealthsimple, and I will write about the performance as I start seeing measurable results.

How I Pick Stocks

  1. I have to be able to explain in one sentence why I own the stock.
  2. I plan to hold it forever (although that usually does not happen).
  3. If it does not pay a dividend, there has to be a VERY good reason to buy the stock.
  4. I prefer companies with recurring revenues (such as pharmaceuticals, Starbucks) as opposed to manufacturers and companies where products are purchased sporadically.
  5. I favor companies that take advantage of a major demographic trend (such as Baby Boomers).
  6. In spite of spending most of my life in technology, I don't purchase very many technology stocks.  I own a smattering (Apple, Google), but they tend to be underweighted.  Technology moves too quickly for me and owning a technology stock might violate my first rule above.

Rules I Follow Religiously

  1. I invest first and foremost for total return over my lifetime as opposed to tax-advantages in the short term.  In other words, I let my overall investment strategy set my course.  Once I set my strategy, I do aim for tax benefits, but it never drives my decisions.  I see too many clients investing for short term tax advantages, to the detriment of their long-term wealth building.  For example, many of my Canadian clients have upwards of 90-100% of their equities in the Canadian market, due to the tax benefits of Canadian dividends.  Yet they are missing out on significant gains (and diversification) by ignoring the U.S. and global markets.
  2. The portion of my assets that are in equities are ALWAYS 100% invested in the market.  See the second chart on this page for an explanation why.
  3. I never have more than 5% of my investible assets in any one stock or bond.
  4. I normally buy equal amounts of all holdings except for my "speculative" stocks, which are very small amounts.
  5. My speculative stocks, if any, make up less than 2% of my liquid assets. I currently hold some shares in a private, alternative energy company.
  6. My bonds are high-grade provincial, municipal, and corporate bonds.  I never chase yield, in that the reason I hold bonds is for safety and preservation of capital.  I have never had a bond holding default.
  7. I keep my fees low.  I use a discount broker and simply pay $9.99/trade.  For managed accounts, I try to keep my clients' cost well under 1% of total assets under management, and closer to 0.50% is preferred. In a low interest environment like we have been in for years, you simply cannot afford either direct or hidden fees of 2% or more as you are likely to end up losing money after taxes and inflation.

My Current Portfolio

My portfolio as of January 5, 2017 is shown below.  The year that I first purchased my current holding is displayed, followed by the overall investment return since the stock was purchased, and then the current dividend yield (if any) is shown.  The Canadian side is up a cumulative 100%, while the US side is up 105% (in US dollars - in Canadian dollars it is up close to 140%).  None of this is really brilliant stock selection - rather it is simply "sticking with the plan".  The effect of being a buyer when stocks were way down in 2008 is still evident in the portfolio.  I will update this from time to time.

NOTE: the % yield shown is the current yield.  The actual yield that I am receiving on my original investment is often much greater.  For example, while the TD Bank yields 3.3%, I have owned the stock for so long and it has risen so much since my original purchase that I am yielding more than 11% on my original cost.  Many of my stocks are yielding over 10% on the original cost, and this will only keep going up.  THIS SHOWS THE POWER OF PURCHASING SOLID, DIVIDEND PAYING STOCKS, AND SIMPLY HOLDING ONTO THEM FOREVER!

Symbol Security Year Purchased % Gain % Yield
BCE BCE Inc. 2009 119% 4.7%
BLX Boralex 2017 0% 3.2%
BAM-A Brookfield Asset Management 2002 604% 1.6%
CM Canadian Imperial Bank of Commerce 2009 67% 4.4%
CNR Canadian National Railway 2016 11% 1.7%
EMA Emera Incorporated  2015 4% 4.6%
SU Suncor Energy Inc. 2002 110% 2.6%
BNS The Bank of Nova Scotia 2001 130% 3.9%
TRI Thomson Reuters Corp 2013 65% 3.1%
TD Toronto Dominion Bank 1998 287% 3.3%
TRP TransCanada Corporation 2003 105% 3.7%
MMM 3M Company 2009 190% 2.5%
GOOG Alphabet Inc. (Google) 2008 331%
AAPL Apple Inc 2012 101% 2.0%
JNJ Johnson & Johnson 2008 91% 2.8%
PAYX Paychex Inc. 2009 126% 3.0%
PFE Pfizer Inc. 2009 104% 3.9%
PMD Psychemedics Corporation 2016 76% 2.5%
SCI Service Corporation International 2009 533% 1.8%
SBUX Starbucks  2015 33% 1.8%
PG The Procter & Gamble Company 2009 47% 3.2%
UL Unilever PLC 2008 32% 3.5%
VZ Verizon Communications 2016 15% 4.2%
WM Waste Management Inc. 2008 137% 2.4%
AVB Avalonbay Communities 2009 123% 3.1%
DLR Digital Realty Trust  2013 121% 3.5%
O Realty Income Corporation 2015 31% 4.2%
WRE Washington Real Estate Investment Trust 2011 30% 3.7%
XEF iShares MSCI EAFE  2017 0% 2.1%
EEM iShares MSCI Emerging Markets Fund 2008 5% 1.9%

My Canadian stocks are all very conservative, dividend paying companies.  I take advantage of the dividend tax credit that favors Canadian dividends. My U.S. holdings are more diversified, and while there is no advantageous dividend tax treatment, I have benefited from the overall rise in the U.S. market as well as the rise of the U.S. dollar.  All in all, my U.S. stocks have significantly outperformed my Canadian holdings. The only non-dividend paying stock is Google.  Google is one of my "necessary" technology buys.