Investing

This is why I index

  • Last Updated:
  • Jun 12th, 2017 9:04 am
Tags:
None
Jr. Member
Feb 26, 2017
135 posts
31 upvotes
Jungle wrote:
May 15th, 2017 9:59 pm
If this is accurate then I guess, but has anyone verified what they report is accurate to XIRR? ( I don't use TD )

However their return doesn't blend spousal accounts. A BIG XIRR of all accounts blended will show total return as one big portfolio. (especially if accounts have different weighting)
This is worth it. This stuff is really important. Best not to pretend or lie to yourself.
I realized after a bit of back and forth that I was arguing that I didn't need accurate information on my returns. My reasoning was basically not wanting to spend the time on it (not a very good reason). I've been off this week and I ended up using the spreadsheet that Freilona linked to which took about 3 hours. It was a good exercise as my previous numbers were several percentage points different than what I previously had for my returns. It was also nice to look back as my results have been pretty mixed so far this year.

Below are my returns for all my accounts since 2011 only excluding my kids RESP accounts. I started investing for a second time in 2010 with with 10k in my RRSP (as it was mid year I don't have a rate of return for that year).

2011 25.9%
2012 6.8%
2013 33.4%
2014 20.5%
2015 0.0%
2016 25.3%
YTD 3.7% (As of Apr 30th)

IRR: 16.89
Deal Addict
User avatar
Apr 12, 2012
1317 posts
239 upvotes
Toronto
freilona wrote:
May 19th, 2017 10:39 pm
Anybody with a Globe & Mail Unlimited subscription? Wonder what numbers Gordon crunched as his portfolios were usually beating the index:

Gordon Pape: I’ve crunched the numbers. It’s true. ETFs are usually better
GORDON PAPE
Published Friday, May. 19, 2017 09:56AM EDT
Last updated Friday, May. 19, 2017 02:28PM EDT
If you can’t beat them, join them.

That’s the approach being taken by a growing number of traditional mutual fund companies as they expand into the ETF (exchange-traded funds) business.

Mackenzie Financial, AGF, Dynamic, RBC, and TD have all launched new ETFs in the past couple of years. In April, Manulife and Desjardins entered the field. Fidelity has started an ETF line in the U.S. and it’s probably only a matter of time until Fidelity Canada does the same. During March and April, 24 new ETFs were launched in this country.

Mutual funds still dominate in terms of assets under management (AUM) by a wide margin. As of the end of April, the ETF industry reported AUM of $126.3-billion. That was up $3.3-billion from the previous month. The traditional mutual funds business is more than 10 times as big, with assets of $1.3-trillion as of the end of March. You might think the mutual fund companies would just dismiss ETFs as a bothersome fly.

But ETFs are growing at a faster rate and no wealth management company can ignore that for long. At the end of 2006, Canadians had only invested $15.2-billion in ETFs. A decade later, that figure was $113.6-billion. That’s an annualized growth rate of more than 22 per cent.

Investors are opting for ETFs for three reasons. First, they are relatively easy to understand. Second, they are cheap – some funds charge management fees of less than one-tenth of a per cent. Third, they are liquid. You can buy or sell at any time either on-line or by calling your broker.

But how do they fare in investment terms? We keep reading stories about how index funds continually outperform actively managed funds. Is that really the case? I did an analysis of three of the most popular ETFs and this is what I found.

Canadian equity funds: The most widely held ETF that tracks the full TSX Composite is the iShares S&P/TSX Capped Composite Index ETF (XIC) with assets of more than $3 billion. It has been around since 2001, so we have a decent track record with which to work. As of April 30, this ETF was showing a 10-year average annual compound rate of return of 4.34 per cent. That is much better than the 3.18-per-cent average for the Canadian Equity category, as reported by GlobeFund, which comprises both mutual funds and ETFs.

There are a few actively managed mutual funds available to the general public that have beaten XIC over that period. They include Mawer Canadian Equity (up 7.97 per cent over the decade), Beutel Goodman Canadian Equity Fund (6.15 per cent), BonaVista Canadian Equity (5.88 per cent), and Fidelity Disciplined Equity (4.71 per cent). However, most actively managed funds fell well short of matching XIC’s returns.

(Note that I did not included F-series funds or those with unusually high minimum investment requirements in this analysis.)

U.S. equity funds: The iShares Core S&P 500 Index C$-Hedged ETF (XSP) is the leader here in terms of assets at $4.1-billion. However, the falling loonie has compromised its returns, which averaged only 9.81 per cent over the past three years. There is a smaller unhedged version of this fund that trades under the symbol XUS. It shows a three-year average annual gain of 18.37 per cent.

That’s almost the same as the BMO S&P 500 Index ETF (ZSP), which is the largest unhedged U.S. equity ETF. It has a three-year average annual compound rate of return of 18.35 per cent.

To compare these to actively managed funds on an apples-to-apples basis, we need to take currency variations into account. The return on the both the unhedged ETFs is impressive and there are only a few U.S. dollar-denominated mutual funds with the same general mandate that beat them. They include the TD U.S. Blue Chip Equity Fund (up 19.33 per cent over three years), the Beutel Goodman American Equity Fund (up 18.9 per cent), the CIBC American Equity Fund (up 18.72 per cent), and the Mackenzie U.S. Dividend Fund (18.55 per cent).

Global equity funds: The BMO MSCI EAFE Index ETF (ZEA) is the leader here in assets under management. It tracks the performance of large and mid-cap stocks in countries around the globe except the U.S. and Canada. It recently passed its third anniversary and showed an average annual compound rate of return of 8.39 per cent over the three years to April 30. That is comfortably ahead of the group average for the International Equity category of 7.09 per cent but there were several actively managed mutual funds that bettered it by a wide margin.

One of the most impressive was the Trimark International Companies Fund, which posted a three-year average annual compound rate of return of 14.51 per cent. This was despite having a much higher management expense ratio of 2.98 per cent compared to only 0.22 per cent for ZEA. Sometimes you do get what you pay for.

The bottom line: Based on this small sample, ETFs are doing the job for investors. Unless you are very skilled (and lucky) at picking actively managed mutual funds, you will probably do as well or better by investing in a comparable ETF. If you want to know why this segment of the wealth management industry is growing so fast, there’s your answer.
Sr. Member
Jan 27, 2015
826 posts
277 upvotes
Edmonton, AB
rodbarc wrote:
May 20th, 2017 2:33 pm
The Medallion Fund is still an impressive fund. Best example of how powerful quant investing can be.
Again, compare that against many other hedge funds that have come and gone. This may be the top 0.001% of all funds in the world. Makes it extremely unlikely for a retail investor to get in on it.
Newbie
User avatar
Sep 15, 2016
20 posts
14 upvotes
@treva84: Just a couple of items:
1. I generally like your initial criteria and won't add suggestions about the criteria
2. Instead of assuming you'll need to constantly add new holdings, narrow it to a group you like, say 5, 10 or 15
3. Then one would no longer be stock picking, but just adding funds to the ones you like,
4. Like indexing you would want to invest when the price drops, but instead would invest in one from your list when its price is down (don't worry about re-balancing)
5. Now you can concentrate on the Income your holdings generate, not price
6. If you want to compare it to Indexing than look at how much Income the index would have provided for the same $ holdings
7. Down the road, once a year or whenever, look at Total Return, but the key to DG is how much income is being produced and is the Income growing.
8. I'm at the stage where I don't even look at price anymore, just Income and smile.
[OP]
Deal Addict
Nov 9, 2013
1673 posts
512 upvotes
Edmonton, AB
cannew90 wrote:
May 22nd, 2017 9:32 am
@treva84: Just a couple of items:
1. I generally like your initial criteria and won't add suggestions about the criteria
2. Instead of assuming you'll need to constantly add new holdings, narrow it to a group you like, say 5, 10 or 15
3. Then one would no longer be stock picking, but just adding funds to the ones you like,
4. Like indexing you would want to invest when the price drops, but instead would invest in one from your list when its price is down (don't worry about re-balancing)
5. Now you can concentrate on the Income your holdings generate, not price
6. If you want to compare it to Indexing than look at how much Income the index would have provided for the same $ holdings
7. Down the road, once a year or whenever, look at Total Return, but the key to DG is how much income is being produced and is the Income growing.
8. I'm at the stage where I don't even look at price anymore, just Income and smile.
Great advice, thank you for the suggestions.

I've been thinking a lot lately about how I frame my thinking about stocks because it changes my decision making. At the end of the day, my ultimate goal is to produce income via my portfolio that I can live off of. When I first started indexing, my plan was to go for total return and once I reached my magic number I'd sell, buy income producing securities and then live off that income. I know people will counter with "just sell part of your portfolio and live off that" but then during a bear market you're a forced seller at depressed valuations, which I don't like.

Part of my transition from indexing to stock picking was essentially "If I'm going to live off investment income in the future, why not just start the process now?". Therefore I think I would benefit from refocusing and not only using dividends as a way to avoid panic selling a stock but to manage my emotions around my portfolio in general.

I also like your idea about whittling down the number of securities I hold. I've realized it can be a bit much to track so I'm actively consolidating.
Newbie
User avatar
Sep 15, 2016
20 posts
14 upvotes
treva84 wrote:
May 22nd, 2017 12:32 pm
Great advice, thank you for the suggestions.

I've been thinking a lot lately about how I frame my thinking about stocks because it changes my decision making. At the end of the day, my ultimate goal is to produce income via my portfolio that I can live off of. When I first started indexing, my plan was to go for total return and once I reached my magic number I'd sell, buy income producing securities and then live off that income. I know people will counter with "just sell part of your portfolio and live off that" but then during a bear market you're a forced seller at depressed valuations, which I don't like.

Part of my transition from indexing to stock picking was essentially "If I'm going to live off investment income in the future, why not just start the process now?". Therefore I think I would benefit from refocusing and not only using dividends as a way to avoid panic selling a stock but to manage my emotions around my portfolio in general.

I also like your idea about whittling down the number of securities I hold. I've realized it can be a bit much to track so I'm actively consolidating.
I was convinced about DG before, but 2008/2009 solidified by belief in the process. My portfolio lost over 40% in value and stayed down for a few years, but my annual income grew even during the worst of it. I hesitated to buy when it kept going down but finally jumped in and bought a lot more of what I already owned at bargain prices, even if not at the lowest point. When the they continued to increase the div and the banks started in again it was a joy to see how quickly the income grew.
Deal Addict
Jul 23, 2007
3162 posts
1044 upvotes
I just checked yesterday. My own yield from distributions in the indexed portfolios is 2.2%. In the individual Canadian dividend growth portfolio it's 3.2%. I know there will be many others who have a higher yield in their active portfolios, but personally I'm not seeking ultimate yield. If I only stuck to equities with say a dividend yield of over 3% then I would have missed out on a number of great opportunities in the last few years.

Yes, a lot of investors like the idea of a concentrated portfolio, and nothing wrong with that, but I have a preference for being quite a bit more diversified than fifteen. It's taking me no more time to run the dividend portfolio than the indexed. An occasional weeding in the dividend equities, but that's about it. Otherwise the active portfolio is mostly passive.

I just count the bounty from dividends at the end of the year, and it just seems to increase year by year.
Deal Addict
Oct 1, 2006
1590 posts
490 upvotes
Montreal
"Charlie Ellis very famously said you can win the investment game in one of three ways: You can be smarter, you can work harder or you can be more disciplined than anyone else. The problem is, the first two things are impossible because Wall Street attracts the best and the brightest. You’re not going to be the hardest working because there are people working 100 hours a week in financial trades on the other side of you. The way you can stay in the game is by being psychologically disciplined. It’s being able to look at the news and say, “Oh my God, China is imploding,” and you have to be able to tune that news out and ignore it. That’s the discipline game. And you really have no idea, no idea at all, until you actually start investing with real money, how good you are at that head game."
Deal Addict
Jul 23, 2007
3162 posts
1044 upvotes
I don't own common shares in U.S. stocks, so this is timely article as to why I'd prefer to just purchase a low cost broad based U.S. index.

In age of 'superstar firms,' index investing logic holds: James Saft

Even in the age of “superstar firms,” the logic of index investing holds.

New research details how a small number of companies - think Google, Amazon and Apple - have come to dominate their sectors, capturing a growing share of revenues and helping to create an economy featuring high corporate profits but a lower share of the pie for workers.


https://www.reuters.com/article/markets ... SL1N1IV08A
Sr. Member
Dec 3, 2014
771 posts
111 upvotes
Stryker wrote:
May 30th, 2017 3:08 pm
I don't own common shares in U.S. stocks, so this is timely article as to why I'd prefer to just purchase a low cost broad based U.S. index.

In age of 'superstar firms,' index investing logic holds: James Saft

Even in the age of “superstar firms,” the logic of index investing holds.

New research details how a small number of companies - think Google, Amazon and Apple - have come to dominate their sectors, capturing a growing share of revenues and helping to create an economy featuring high corporate profits but a lower share of the pie for workers.


https://www.reuters.com/article/markets ... SL1N1IV08A
I don't follow the logic of the article. The author seems to suggest that identifying investments like Amazon or Facebook before 2017 is some sort of unachievable goal, which is comical. Any investor who has missed the run in these companies has not been paying attention to the world.
Deal Addict
May 31, 2007
3914 posts
986 upvotes
I regards to our discussion above where some fantastic returns are posted from dividend investors, I wanted to add that one might be able to do similar approach could also be obtained using index fund.

For example:

Posters above (including myself) had doubled, tripled down when a dividend stock was cheap. Such a large contribution, depending on the size of your portfolio, this was a return booster.

If you did the same with lets say (XIU) purchase (double, triple down) it can achieve similar results.

Using this strategy to buy in depressed market in the past, it appears common dividend stocks (BCE, RY, ENB, CNR,) did outperform the index, but might be somewhat close to XIU if you used similar purchase in depressed market. (with less risk). And there's no guarantee you can't pick a bad stock.
Last edited by Jungle on May 31st, 2017 12:42 am, edited 2 times in total.
Deal Addict
May 31, 2007
3914 posts
986 upvotes
treva84 wrote:
May 22nd, 2017 12:32 pm
Great advice, thank you for the suggestions.

I've been thinking a lot lately about how I frame my thinking about stocks because it changes my decision making. At the end of the day, my ultimate goal is to produce income via my portfolio that I can live off of. When I first started indexing, my plan was to go for total return and once I reached my magic number I'd sell, buy income producing securities and then live off that income. I know people will counter with "just sell part of your portfolio and live off that" but then during a bear market you're a forced seller at depressed valuations, which I don't like.

Part of my transition from indexing to stock picking was essentially "If I'm going to live off investment income in the future, why not just start the process now?". Therefore I think I would benefit from refocusing and not only using dividends as a way to avoid panic selling a stock but to manage my emotions around my portfolio in general.

I also like your idea about whittling down the number of securities I hold. I've realized it can be a bit much to track so I'm actively consolidating.
You could possibly use the distributions of index funds during a downturn, so at least you don't have to sell any shares.
And with a balanced portfolio, you can always cash more from bonds section until equity market recovers.

Top