# Single etf portfolio



## Shaun80 (Oct 22, 2016)

If you are a passive couch potato index investor with a 25 year window why not invest in a single broad etf such as the S and p 500 vfv voo xus in registered accounts . Long term you will save time and fees rebalancing . You will probably make the same if not more return then if you add Canadian international and bonds . Only issue is tax .other then that why not


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## Spudd (Oct 11, 2011)

Because you don't know if long term, you will make the same if not more return. The point of the couch potato is that it's diversified, you spread your risk out. 

If you look at the Japanese stock market history, their market is still significantly below where it was in 1989-1990. If the same happens in the future to US stocks, you will be sad you placed your entire portfolio in US stocks. (In the link below, set the time-scale to "all time".)
http://www.tradingeconomics.com/japan/stock-market


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## Shaun80 (Oct 22, 2016)

S and p has a return of 7 per cent per year since inception ?


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## Spudd (Oct 11, 2011)

The Japan stock market had an awesome track record too, till 1990 or so. You can't predict the future by looking at the past.


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## jargey3000 (Jan 25, 2011)

I've wondered if 'diversification' is over-rated? Isn't it kinda like a ying & yang effect? if X in a divers. portfolio goes up, then Y goes down etc. Wouldn't that tend to lean towards kinda middlin', bland results - over the long-term... with increases & decreases kinda cancelling each other out?


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## Shaun80 (Oct 22, 2016)

Yes I thought of that too ,.when diversified wouldn't long term return be brought down by a poor performing fund or stock at any given point in time . So yes you would be middling ?


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## zylon (Oct 27, 2010)

*Catherine Austin Fitts*

US markets:
- short term negative; long term positive
- 25% correction, then a "crash-up" - whatever that is.

[video]https://youtu.be/IeYDHfp9P_g?t=11m11s[/video]


ADDED:
http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=4&mn=11&dy=22&id=p86138492432&a=446479615


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## Shaun80 (Oct 22, 2016)

S and p 500 is 500 large cap us stocks correct . Wouldn't that be enough diversification . Also isn't your aim to get a return similar to the index when you invest passively ? I notice when I'm diversified i am getting beaten easily by the S and p 500 Also didn't Warren buffet say put your money in the s and p and leave it. For curiosity has anyone beat a 7 percent return yearly for the past 20 to 30 years through diversification. ?


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## Shaun80 (Oct 22, 2016)

Asian markets like Japan are historically more volatile then north America so it wouldn't be smart to put your money in a Nikkei index etf. But let's talk s and p


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## Spudd (Oct 11, 2011)

Americans tend to believe that the American stock market will always go up. But the point is that there is no guarantee of that. By diversifying, you reduce your risk that something bad happening to one area (e.g. America) will take down your whole portfolio. Yes, you will get lower overall returns than if you invested in only the best-performing sector. But the point is that there is no way to predict which sector/geography will do best, so you hedge your bets by just buying all of it. 

If you feel super confident that the S&P 500 will continue doing 7% a year until you retire, by all means, put your whole portfolio in it.


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## Shaun80 (Oct 22, 2016)

Hi spud 

I understand your point . I guess I'm asking for too much . It just seems recently us and Canadian equity seem to be doing pretty well when international and emerging bring it down somewhat. I am not an expert but I may take a gamble maybe do 70 percent vfv or voo and 30 percent vcn ans leave out bonds and international see how that goes . Is that too risky for long term .


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## andrewf (Mar 1, 2010)

Shaun80 said:


> Asian markets like Japan are historically more volatile then north America so it wouldn't be smart to put your money in a Nikkei index etf. But let's talk s and p


*woosh*


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## Spudd (Oct 11, 2011)

It's totally up to you, of course. Personally, I go with a little bit of everything, because I follow the theory that I can't predict the future. 

There's something called "reversion to the mean" which means that things that have been doing great lately are probably due to come down a bit, and things that have been sucking are probably due to start doing better. 

I do feel like bonds are probably not going to have a good time over the long term because interest rates are in such a low now. If you wanted to leave out bonds I think you would have some rationale to back that up (this is arguable, I have seen arguments for both sides). But for global stocks I don't think you can really predict which ones will do better in the future. One advantage of American stocks is that many of them are multi-nationals so they will be able to take advantage of global trends. But similarly, a lot of foreign stocks are also multinationals, so who knows?


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## CalgaryPotato (Mar 7, 2015)

If I lived in America I could imagine going with the single ETF approach. Problem is living in Canada with the Canadian dollar you get two choices. You can either invest 100% in the Canadian stock market which is tiny by any estimation. Or you can invest in a single totally different currency. To me that is a lot of risk I'm not willing to take. I'm sure you could find some examples in Europe where doing a similar strategy over the last few decades of investing solely in a different countries funds would have devastating effects on your returns.


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## james4beach (Nov 15, 2012)

If you do a survey of major international stock indices, you'll see that long term returns (we're talking 20+ years here) can vary quite widely between countries. The long term performance has ranged from about 2% to 10% annual. The global average was around 5% to 7% return. If you choose just ONE country, you are going to get one of those outcomes. Get lucky and you end up with the 10% return. Get unlucky and you end up with the 2% return.

That's the point of global diversification, to achieve that global average.

It's easy to think that the S&P 500 is the only thing you need after this history of great performance, but you just don't know what it will do in the future.


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## james4beach (Nov 15, 2012)

And by the way, Canadian returns haven't been bad. Very long term data (see Credit Suisse's Global Investment Returns Yearbook) shows that Canadian long-term performance has been very similar to US performance.

Also see XIU performance since inception in 1999. Annual performance is 6.9% per year, which is about the same as the S&P 500.


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## GreatLaker (Mar 23, 2014)

There are several reasons why investors should avoid investing in a single index:

_Recency Effect:_ Investments tend to move in long cycles. While the S&P500 has performed well the past 4 years, it has had periods of significant underperformance. This chart shows a period starting in 2000 where it was in the bottom half of major asset classes 8 of 9 years, and finished dead last twice. Investors love to buy things that have gone up a lot recently, which tends to be buy-high behaviour.

_Currency Risk:_ 100% S&P 500 exposes the entire portfolio to the US$. With the C$ at its highest point in more than a decade, there is a considerable level of downside risk if the C$ appreciates vs. the US$. Sure, investments can be hedged against currency fluctuations, but hedged ETFs tend to have higher tracking error that lowers overall performance.

_Volatility:_ an all equity portfolio might have higher performance, but with higher volatility. When measured in C$ the S&P500 dropped a cumulative 32% from 2000 to 2002. If you started with $10,000 at the beginning of 2000 and withdrew 4% per year you would have $6030 by the end of 2002. It dropped a cumulative 31% in 2007-2008, and took 6 years to recover. I still hear people complain about how much they lost in 2008. Most investors don't recognize their tolerance for volatility until they experience a bad bear market, and then it's too late. 

_Taxation:_ If you have a non-registered account, qualified dividends from Canadian equities get preferred tax treatment, whereas dividends from US equities are taxed at your full marginal rate.

A balanced, globally diversified portfolio would be significantly less volatile and avoid much of the currency risk and recency effect of an S&P500 portfolio. On the other hand if the recent outperformance of the S&P 500 and weak performance of the C$ persist for 20 or 30 years it will be a great choice. I wouldn't bet my retirement on it.

Canadian Couch Potato, Million Dollar Journey, Finiki.org and Canadian Portfolio Manager Blog all recommend more diversified portfolios. If investing 100% in the S&P500 is smart what does that make those guys? 

If you want to learn more about diversification and asset allocation check out the following books:
The Four Pillars of Investing by William Bernstein
All About Asset Allocation by Rick Ferri.


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## james4beach (Nov 15, 2012)

GreatLaker, I agree with everything you said except about diversifying for less volatility. Global stocks have incredibly high correlations; they all pretty much trade in lock step. This was crystal clear during the 2007-2008 bear market when virtually ALL global stocks and indexes followed daily gains and losses in lock-step.

I think a driver of that is the rise of ETFs and an indexing approach to all investment. When an investment bank decides it's time to "sell stocks", they really sell all stocks at once: they will dump SPY, EFA, EEM at once (or the index futures). Think of the global VT as the epitomization of this. Lots of hedge fund activity comes down to: are you buying or selling VT ? Buy it, and everything in the world goes up together.

Globally, different markets are highly correlated so you don't gain protection from volatility.

If you want less volatility and want to limit your maximum losses, then the proper way to diversify is by adding other asset classes: bonds, gold, cash. Luckily for you, practically all of those classes (other than stocks) are out of favour right now. Bonds are unpopular and investors are fearful, gold is very broadly disliked, and cash is disliked too.


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## andrewf (Mar 1, 2010)

If you were to invest in just one index, it should not be something like S&P 500. Maybe a total world stock etf. But really, you should probably invest in at least 2: stocks and bonds.


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## Argonaut (Dec 7, 2010)

I posture that one could do well sticking to Canada and the S&P 500. The good stocks in Canada are well complemented by what sectors the S&P 500 is over-represented by (technology, health care). I'm skeptical of the rest of the world's markets. Europe and Japan have no real growth and are out of options as they flirt with negative interest rates. Australia is similar to Canada. There could be some growth coming from emerging markets, but I don't really trust their stock markets. S&P 500 has companies that can benefit from a global footprint. 

Splitting both stocks and cash into US and Canadian baskets gives you diversification that smooths out returns. Yeah, you're only in the markets of two countries that are touching each other, but I can't really make a case for anything more than a small sample of the rest of the world. Plus it makes things simple regarding taxes. US stocks in RRSP, Canadian stocks anywhere else.


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## mordko (Jan 23, 2016)

If one has a crystal ball then they should invest in a single company which is going to provide the best return and not bother with countries or ETFs.

Otherwise - buy the world. There is no way of telling what will happen over the next 10 years. Companies like Nestle or Alibaba may well turn out tomorrow's workhorses or winners, whatever the European economy is doing. 

In the 70s US stock market sucked. So did Canadian stocks. The rest of the world did OK. Ten years is a long time to not earn any profit.


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## Shaun80 (Oct 22, 2016)

Argonaut said:


> I posture that one could do well sticking to Canada and the S&P 500. The good stocks in Canada are well complemented by what sectors the S&P 500 is over-represented by (technology, health care). I'm skeptical of the rest of the world's markets. Europe and Japan have no real growth and are out of options as they flirt with negative interest rates. Australia is similar to Canada. There could be some growth coming from emerging markets, but I don't really trust their stock markets. S&P 500 has companies that can benefit from a global footprint.
> 
> Splitting both stocks and cash into US and Canadian baskets gives you diversification that smooths out returns. Yeah, you're only in the markets of two countries that are touching each other, but I can't really make a case for anything more than a small sample of the rest of the world. Plus it makes things simple regarding taxes. US stocks in RRSP, Canadian stocks anywhere else.



Good points,makes sense.


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## Argonaut (Dec 7, 2010)

mordko said:


> In the 70s US stock market sucked. So did Canadian stocks. The rest of the world did OK. Ten years is a long time to not earn any profit.


In the 70s one would have rode out the period holding that dirty little four letter word in the investment arsenal: gold. It's a much better diversification holding than international stocks. Correlations between international and North American stocks are much higher these days as well.


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## mordko (Jan 23, 2016)

Yes, gold. And history may repeat itself. Or it could be that with US going isolationist and strong dollar, gold will stay low but Asia/Pacific will clump together because of the common need destroy the trade barriers and prosper. There is no way of knowing what tomorrow will bring, now less than ever.


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## GreatLaker (Mar 23, 2014)

james4beach said:


> GreatLaker, I agree with everything you said except about diversifying for less volatility. Global stocks have incredibly high correlations; they all pretty much trade in lock step. This was crystal clear during the 2007-2008 bear market when virtually ALL global stocks and indexes followed daily gains and losses in lock-step.





> If you want less volatility and want to limit your maximum losses, then the proper way to diversify is by adding other asset classes: bonds, gold, cash. Luckily for you, practically all of those classes (other than stocks) are out of favour right now. Bonds are unpopular and investors are fearful, gold is very broadly disliked, and cash is disliked too.


James, yes, absolutely that's what I was trying to say but you stated it better. Anyone that isn't sure they can withstand the volatility I mentioned should have some fixed income. And unless you have lived through a crash like 1987, 2000 or 2008 you don't know if you have that fortitude and are at risk of bailing out at the wrong time.

I do agree that during market crashes all equities plus high yield bonds and some other assets crash together. But I also think that asset classes and geographic regions go through long-term secular trends that may not be correlated. Witness how strong the US market has been for the last four years, and now people are asking why anyone would invest anywhere else. That's usually the time to limit your exposure to those markets. Emerging markets are especially prone a couple of years of really good returns, followed by a bad crash. Who enters those markets just before the crash? Newbie investors. Similar a decade ago, people were piling into international developed and emerging markets, and asking why anyone would ever invest in the USA.

One of the best ever examples of that is the Fortune Magazine cover story "The Death of Equities" in 1979, just before the start of one of the biggest equity bull markets of all time.


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## james4beach (Nov 15, 2012)

The best one ETF portfolio I can think of is *VT* alone, for world exposure. But you'd probably want more Canadian exposure.

A great two ETF portfolio is: *XIU & VXC*, where XIU gives you Canada and pure eligible dividends with their big tax breaks, and VXC gets you the rest of the world. As an added bonus, you can put XIU in non-registered. Simply tune the ratio to your liking...

Argonaut -- I am also sympathetic to your idea that Canada & US exposure alone is good enough. I agree with your arguments. So I really could see myself focusing entirely on say XIU & ZSP (or equivalents)


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## Shaun80 (Oct 22, 2016)

So the single etf may have a bad few years but in the long run won't it still balance out ir do better then with a diversified


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## Shaun80 (Oct 22, 2016)

Like I said is anyone doing passive index investing long term beating a 7 percent average annual return ? Is there a historic comparison of a diversified portfolio vs a single us market index ?


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## mordko (Jan 23, 2016)

I have 8 percent since 2002 but the purpose isn't to beat 7 percent. 

The way use of different regions and assets classes works isn't just "buy and hold forever"; there is also rebalancing, which enhances performance.


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## Eclectic12 (Oct 20, 2010)

Argonaut said:


> I posture that one could do well sticking to Canada and the S&P 500.
> 
> The good stocks in Canada are well complemented by what sectors the S&P 500 is over-represented by (technology, health care). I'm skeptical of the rest of the world's markets ...


There's also the international exposure that buying Canadian stocks may or may not bring. 

BNS ... last I checked one third of their business was mostly coming from Latin America, Africa Oil ... a high percentage oil in Africa, Emera ... not sure of the percentages but I can recall them buying major US hyro assets that came with twenty year contracts. CN rail has been buying US assets like Wisconsin Central, Great Lakes Transportation which owned things like the Bessemer & Lake Erie Railroad.

A Canadian stock does not necessarily mean "Canada only".



Cheers


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## Shaun80 (Oct 22, 2016)

8 percent that's really good mordko since 2002 with the 2008 crash that's impressive. I guess people have mixed feelings about the impact of international diversification


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## mordko (Jan 23, 2016)

The logic is that the world economy will grow but we don't a priori know where this growth will come from. Sure, European economy sucks and EM has risks but that's already factored into the price. Remove some of the problems (anything's possible long term) and that's where the future growth will come from.


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## andrewf (Mar 1, 2010)

Also, GDP growth and stock returns are only weakly correlated.


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## james4beach (Nov 15, 2012)

Shaun80 said:


> Like I said is anyone doing passive index investing long term beating a 7 percent average annual return ?


Anyone who bought XIU for a passive holding 15 years ago has enjoyed 7.41% annual return over this long term
http://quote.morningstar.ca/QuickTakes/ETF/etf_performance.aspx?t=XIU&region=CAN&culture=en-CA

Unfortunately I don't have figures on the return of a globally diversified portfolio. These index ETFs don't go very far back in history, so you're not going to find a _real_ number. You could find performance figures from globally diverse mutual funds with long histories.


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## Spudd (Oct 11, 2011)

james4beach said:


> Anyone who bought XIU for a passive holding 15 years ago has enjoyed 7.41% annual return over this long term
> http://quote.morningstar.ca/QuickTakes/ETF/etf_performance.aspx?t=XIU®ion=CAN&culture=en-CA
> 
> Unfortunately I don't have figures on the return of a globally diversified portfolio. These index ETFs don't go very far back in history, so you're not going to find a _real_ number. You could find performance figures from globally diverse mutual funds with long histories.


You can use Norm Rothery's asset mixer. 
http://www.ndir.com/cgi-bin/downside_adv.cgi


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## Argonaut (Dec 7, 2010)

Spudd said:


> You can use Norm Rothery's asset mixer.
> http://www.ndir.com/cgi-bin/downside_adv.cgi


Been playing around with this excellent tool. It definitely shows that the Couch Potato approach to investing is pretty poop in general. It really is a cult I think. Diversifying away to international stocks isn't going to do much for you. In all portfolios I tried, adding gold instead of international provided so much more benefit. It cut down the standard deviation, smoothed returns, and limited drawdown. The fabled Permanent Portfolio only had one down year: 1981 when it dropped a mere 5%. Meanwhile with a generic Couch Potato you're going to have a lot of down years, and they're going to entail drops of 20%. Why bother taking on that much risk when you don't have to?


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## mordko (Jan 23, 2016)

First of all, permanent portfolio usually has international stocks, just like a global couch potato. Both variations of asset allocation can exclude international stocks if they want to introduce the recency bias. 

Secondly, Faber's Global Asset Allocation provides a nice comparison between PP, CP and a bunch of other diversified portfolios. They show almost identical performance over long periods of time. PP does have a little less volatility. Also a little less growth.


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## mordko (Jan 23, 2016)

Worth noting that while there is nothing wrong with permanent, all season and other similar portfolios, they are very hard to stick to. Not many people have the psychology to keep putting large amounts of cash into gold given that it often delivers negative returns over 30 year periods at a time.


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## Nerd Investor (Nov 3, 2015)

Not sure if this has been posted yet but https://www.portfoliovisualizer.com/ is pretty awesome. 
Besides testing different static allocations you can also play around with different timing and relative strength models.


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