Investing

portfolio design, 5-year horizon, 5%+ target return

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  • Feb 20th, 2020 11:46 am
[OP]
Member
Mar 20, 2018
262 posts
165 upvotes

portfolio design, 5-year horizon, 5%+ target return

Hi all,

I would love to hear everyone's opinions on how to construct an optimal portfolio with a 5-year horizon with the expected return of 5% or higher.

In my understanding, such a portfolio would consist of bonds, properly chosen Canadian dividend stocks and preferred stocks. Here are my other thoughts:

1) In present finacial conditions (low-rate environment), investing in bonds would make little sense. Perhaps, cash/cash equivalents should comprise the income part of the portfolio.
2) Canadian dividend stocks would include mature companies that are market leaders and delievered consistent financial results. What would be the right amount of stocks for, say, a 50k portfolio?
3) I am not sure what the right mix (given input parameters) of asset classes is.
4) I don't have experience working with preferreds. Is it possible to avoid them in my setup? What would be the best resource to learn about this asset subclass?

Your input is appreciated.
20 replies
Deal Addict
Nov 9, 2013
4939 posts
5664 upvotes
Edmonton, AB
Why is your time horizon 5 years? (i.e. what do you need the money for in 5 years).

Assuming your time frame is fixed and you have a big liability coming up (house, education, etc) then your primary focus should be on capital preservation and downside protection, rather than rate of return. The market doesn't care about what you want and will do what it will do.

To get 5% you'll have to move up the risk scale and this exposes you to more downside potential. You may get your return for 4 of the 5 years (50k --> 60K) but if in the final year there's a 20% crash in your portfolio (60K --> 48K), was it worth it?
Buy quality. Keep calm and go long
Deal Expert
Aug 2, 2001
18110 posts
9166 upvotes
treva84 wrote: To get 5% you'll have to move up the risk scale and this exposes you to more downside potential. You may get your return for 4 of the 5 years (50k --> 60K) but if in the final year there's a 20% crash in your portfolio (60K --> 48K), was it worth it?
You make a good point, and it's important to note that even with typical Canadian "blue chips" this can and has happened. It's a big problem with such a short time frame. In the long term you have time to recover from these sort of crashes but when you have such a short term like 5 years you could easily hit a downward trend when you need the money and have not had the number of years needed to begin to weather it.
[OP]
Member
Mar 20, 2018
262 posts
165 upvotes
treva84 wrote: Why is your time horizon 5 years? (i.e. what do you need the money for in 5 years).

Assuming your time frame is fixed and you have a big liability coming up (house, education, etc) then your primary focus should be on capital preservation and downside protection, rather than rate of return. The market doesn't care about what you want and will do what it will do.

To get 5% you'll have to move up the risk scale and this exposes you to more downside potential. You may get your return for 4 of the 5 years (50k --> 60K) but if in the final year there's a 20% crash in your portfolio (60K --> 48K), was it worth it?
My time frame is not fixed. Nor do I have a big liability coming up. My goal was to set some money aside to enter the real estate market. At the moment, it is makes more sense finacially to continue renting. My goal to preserve or increase the purchasing power of the capital. In the event of a severe recession, the real estate market will likely experience a correction as well. If nothing happens, the portfolio will continue to grow at the same pace as or faster than the real estate market. This is my reasoning. What do you guys think?
Deal Addict
Jul 27, 2017
2180 posts
949 upvotes
FarmerHarv wrote: XTR maybe? One stop shopping fund of funds with a mix of everything you mentioned, although 20% US exposure included. 5%+ return, .61% MER.

https://www.blackrock.com/ca/individual ... ts/239495/
https://www.blackrock.com/ca/individual ... -en-ca.pdf
^^^ agree, I like this one based on income & growth

only thing to consider are the total fees mgt 0.55% + mer 0.61%, other than that ... looks good

anyone have any other suggestions?
Newbie
Oct 18, 2019
68 posts
65 upvotes
porticoman wrote: ^^^ agree, I like this one based on income & growth

only thing to consider are the total fees mgt 0.55% + mer 0.61%, other than that ... looks good

anyone have any other suggestions?
I think the 0.61% MER includes the 0.55% Management Fee:

"As reported in the fund's most recent Semi-Annual or Annual Management Report of Fund Performance. MER includes all management fees and GST/HST paid by the fund for the period, and includes the fund’s proportionate share of the MER, if any, of any underlying fund in which the fund has invested."
Deal Addict
Jul 27, 2017
2180 posts
949 upvotes
OP, 'another one to look at' that someone gave me a few years back is TSX listed DFN.PR.A, just the preferred with an almost guarantee of capital based on $10 issue price, rollover every 5 years. Little to zero growth.

since 2004 has paid consistently as well as survived the rocky roads for the past 16 years

https://www.quadravest.com/dfn-fund-features

5%+ distributions (tax eligible dividends) DFN.PR.A only

https://www.quadravest.com/dfn-distributions
Deal Addict
Jul 27, 2017
2180 posts
949 upvotes
OP maybe a mix & match of some of the ideas posted above so far, include a look at the following

https://canadiancouchpotato.com/model-portfolios/


https://web.tmxmoney.com/quote.php?qm_symbol=ZWE

https://web.tmxmoney.com/quote.php?qm_symbol=PWF.PR.I

https://web.tmxmoney.com/quote.php?qm_symbol=TF

https://web.tmxmoney.com/quote.php?qm_symbol=ZJK

TSX listed LFE.PR.B just the preferred 6%+, (similar to DFN.PR.A mentioned previously), 5 year rollover, almost 100% guarantee capital based on $10 issue price, distributions paid consistently since 2005

https://web.tmxmoney.com/quote.php?qm_symbol=lfe.pr.b

https://www.quadravest.com/lfe-fund-features

https://www.quadravest.com/lfe-distributions [only the preferred]
Deal Addict
Jun 15, 2012
2837 posts
1010 upvotes
Saskatoon
Physical gold +8% YTD
Just saying.
No need to type thank you; upvote=thanks.
Buffett, investors are focusing “not on what an asset will produce but rather on what the next fellow will pay for it.”

“Because gold is honest money it is disliked by dishonest men.” – R. Paul
Deal Fanatic
User avatar
Dec 14, 2010
6894 posts
8908 upvotes
ukrainiandude wrote: Physical gold +8% YTD
Just saying.
The portfolio design proposal is for 5 years, not 2 months.

Bitcoin is up 41% YTD. Many stocks are up by double digits YTD. What is your point and how is 2 months relevant to investing for the long term?


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
[OP]
Member
Mar 20, 2018
262 posts
165 upvotes
rodbarc wrote: The portfolio design proposal is for 5 years, not 2 months.

Bitcoin is up 41% YTD. Many stocks are up by double digits YTD. What is your point and how is 2 months relevant to investing for the long term?


Rod
Rod, do you have any suggestions? How would you approach this problem?
Deal Fanatic
User avatar
Dec 14, 2010
6894 posts
8908 upvotes
stanleyinfrared wrote: Rod, do you have any suggestions? How would you approach this problem?
Timeframe on when you need the money defines the strategy. You have mentioned that you want to increase your purchasing power overtime, so equities are a great way to do that. The focus is on long term, potentially longer than 5 years, because the market can fluctuate a lot in the short term and a recession would degrade that purchasing power in the short term.

My approach is always to be fully invested at all times, but that's because I choose individual business that has a strong quality tracking record and which I believe to be fairly valued given how much the business is estimated to grow and priced at the moment. The more you buy companies with this approach, the better margin of safety you build on your portfolio when partnering with these businesses. Overtime, your portfolio performance will be a function of how these businesses perform. Price might oscillate in the short term and a recession will likely cause these companies to trade below their true worth, but overtime, perhaps on a time frame larger than 5 years, they will follow business performance. So I think it makes sense to be fully in equities at any moment, because in any market, there are always bargains to be found.

Now if you are not buying individual companies, you could index. Market is expensive, which is an added risk, but the principle is to keep averaging down and sticking to the plan. Overtime, you will notice that you will average up. It's better to index than to not have any exposure to equities.

Regarding your 4 points:

1) Regardless if you build your portfolio a company at the time or if you are indexing, in a way or another, you are partnering with companies that keep producing and growing cash flow. Fixed income can't keep up with inflation. So I would only own fixed income if I absolutely need to protect capital. I personally see no need to reduce volatility if the goal is for the long term. So unless there's a portion that you want to protect the capital, I wouldn't hold cash and equivalents because you want time on your side to work for you.

2) That depends. If your goal is total return, then a concentrated portfolio on companies estimated to grow above average that are fairly valued or undervalued would be the best setup. If your goal is resilience of income, then you might want more companies on your portfolio, from multiple sectors, to afford the odd company that might be severely affected by a recession or some other challenges. When it comes to dividends, I prefer the latter approach, since my goal is growth of income stream and resiliency of that income growth. But you need to be able to track and understand what you own and why you own. For capital appreciation, I rather setup a growth portfolio tailored to capital appreciation. So it all depends on your goals, risk tolerance and timeframe.

3) That's a personal choice. Some people have a mix because it's hard to endure the volatility. Some people have a mix because there's a portion of capital that must be protected. And some people are fully on equities. Do you need to reduce volatility? Do you have a certain amount that you must protect for the short term (up to 5 years?)

4) Preferreds is a whole different world, and that can be a good strategy depending on your objectives. Check this article out as a starter. You will see that the concept of valuation also applies (calculated via a different way than common stocks), and that many quality Preferreds at a lower valuation is a great way to build a decent total return.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.
Deal Addict
Jun 15, 2012
2837 posts
1010 upvotes
Saskatoon
porticoman wrote: lets take this one step further.

to be fair, what about a comparison of the % performance of Gold vs S&P over a 5 yr, 10 yr, 25yr timeframe

if you can find it, please post back the results.

was gold the winner?
Past Performance Is No Guarantee of Future Results.
Golden rule of wealth preservation.
1 gram gold was enough in all times to sustain a living of one for one day.
Can you say the same of one unit of currency?
No need to type thank you; upvote=thanks.
Buffett, investors are focusing “not on what an asset will produce but rather on what the next fellow will pay for it.”

“Because gold is honest money it is disliked by dishonest men.” – R. Paul
[OP]
Member
Mar 20, 2018
262 posts
165 upvotes
rodbarc wrote: Timeframe on when you need the money defines the strategy. You have mentioned that you want to increase your purchasing power overtime, so equities are a great way to do that. The focus is on long term, potentially longer than 5 years, because the market can fluctuate a lot in the short term and a recession would degrade that purchasing power in the short term.

My approach is always to be fully invested at all times, but that's because I choose individual business that has a strong quality tracking record and which I believe to be fairly valued given how much the business is estimated to grow and priced at the moment. The more you buy companies with this approach, the better margin of safety you build on your portfolio when partnering with these businesses. Overtime, your portfolio performance will be a function of how these businesses perform. Price might oscillate in the short term and a recession will likely cause these companies to trade below their true worth, but overtime, perhaps on a time frame larger than 5 years, they will follow business performance. So I think it makes sense to be fully in equities at any moment, because in any market, there are always bargains to be found.

Now if you are not buying individual companies, you could index. Market is expensive, which is an added risk, but the principle is to keep averaging down and sticking to the plan. Overtime, you will notice that you will average up. It's better to index than to not have any exposure to equities.

Regarding your 4 points:

1) Regardless if you build your portfolio a company at the time or if you are indexing, in a way or another, you are partnering with companies that keep producing and growing cash flow. Fixed income can't keep up with inflation. So I would only own fixed income if I absolutely need to protect capital. I personally see no need to reduce volatility if the goal is for the long term. So unless there's a portion that you want to protect the capital, I wouldn't hold cash and equivalents because you want time on your side to work for you.

2) That depends. If your goal is total return, then a concentrated portfolio on companies estimated to grow above average that are fairly valued or undervalued would be the best setup. If your goal is resilience of income, then you might want more companies on your portfolio, from multiple sectors, to afford the odd company that might be severely affected by a recession or some other challenges. When it comes to dividends, I prefer the latter approach, since my goal is growth of income stream and resiliency of that income growth. But you need to be able to track and understand what you own and why you own. For capital appreciation, I rather setup a growth portfolio tailored to capital appreciation. So it all depends on your goals, risk tolerance and timeframe.

3) That's a personal choice. Some people have a mix because it's hard to endure the volatility. Some people have a mix because there's a portion of capital that must be protected. And some people are fully on equities. Do you need to reduce volatility? Do you have a certain amount that you must protect for the short term (up to 5 years?)

4) Preferreds is a whole different world, and that can be a good strategy depending on your objectives. Check this article out as a starter. You will see that the concept of valuation also applies (calculated via a different way than common stocks), and that many quality Preferreds at a lower valuation is a great way to build a decent total return.


Rod
Rod, thanks for your excellent post. The article on preferreds is very educational.
Do you need to reduce volatility? Do you have a certain amount that you must protect for the short term (up to 5 years?)
My goal is to have the lowest volatility with the target return of 5%. I plan to enter the real estate market in a few years, but I don't have definite plans. I want to have exposure to equities while waiting.

How did you protect a chunk of your portfolio that was supposed to be used a downpayment? Was it just invested as fixed income?
Deal Addict
Jul 15, 2009
2729 posts
1952 upvotes
ukrainiandude wrote: Past Performance Is No Guarantee of Future Results.
Golden rule of wealth preservation.
1 gram gold was enough in all times to sustain a living of one for one day.
Can you say the same of one unit of currency?
Nobody is suggesting to stuff loonies in your mattress as an investment.
Deal Fanatic
User avatar
Dec 14, 2010
6894 posts
8908 upvotes
stanleyinfrared wrote: Rod, thanks for your excellent post. The article on preferreds is very educational.

My goal is to have the lowest volatility with the target return of 5%. I plan to enter the real estate market in a few years, but I don't have definite plans. I want to have exposure to equities while waiting.

How did you protect a chunk of your portfolio that was supposed to be used a downpayment? Was it just invested as fixed income?
So the issue here is that there are little mechanisms to control volatility with equities, because when the market reacts to the news, usually all sectors are affected from a stock price perspective, even if the business doesn't get affected. The best way to tackle that is to have a mixed portfolio with fixed income. I would approach it by having 40% of the portfolio in stocks, 30% on fixed-maturity laddered corporate bonds and 30% on fixed-maturity laddered high yield bonds. The portfolio of stocks would be chosen on companies that belong to recession-proof sectors, like Consumer staples, telecom, utilities, along with real estate income trusts and some pipelines. I would add some industrials (railroad, waste management) and some banks and insurance too. Many of these companies are expensive now, so I would wait until they are fairly valued first, while cash can be parked in a HISA type of ETF like CSAV while you wait. And for the laddered bond portfolio, I would use Invesco ETFs designed for this, holding 1, 2, 3, 4 and 5-years fixed-maturity term bonds for both categories (corporate and high yield). This setup might yield a bit less than 5% annual returns, but it has a better protection to capital, which is something that seems important to you. To increase the total return, you can do a 50% stocks and 50% bonds or 60% stocks and 40% bonds, but the higher you allocate to stocks, the higher the volatility you are exposed to. Therefore, make sure to acquire these stocks at fair valuation or below, to maximize your margin of safety. If it's acceptable to go beyond the 5 year mark, then a 60% / 40% setup would be comfortable to me, as you can always cash out the winners and let the underperforming ones remain invested.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:
Investing strategy based on dividend growth

Trading strategy based on Graham principles.

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