# Asset allocation critique



## pablito (Apr 3, 2009)

Hi:

In a previous post, I mentioned that as part of a consolidation effort I currently find myself with most of our assets in cash that I want to ease back into the market. I'd appreciate feedback on my asset allocation and reasoning behind some of my choices. In terms of background, my wife and I are around 40 so I'm looking at a 15-20 year investment time frame. Everything is in RRSPs with TDW though about 9% is in a LIRA at TD Bank.

Here is what I'm thinking to target at the moment:

Bonds - Real Return ----- 5% ----- XRB
Bonds - Short Term ----- 20% ---- XSB
Canadian equities	------- 15% ---- XIC
Canadian real estate ---- 5%	----- XRE
US - Large Caps -------- 20% ---- VTI & TDB902 (11% & 9%)
US - Small Caps --------- 5% ---- VBR
Global (Developped) ----- 22% --- VEA
Emerging Markets ------- 8% ---- VWO​
Self-critique and comments:

The above allocation is the ultimate target. However, given the recent run up I feel uncomfortable going all in for fear that I'll not be able to take advantage of an upcoming correction (2011?, beyond?). So I'm thinking I might park 10% or so in a high interest savings fund (e.g. CIB519 or RBF2001). The remainder would be allocated as per the above allocation.

Given the current low interest rates, allocating my 25% fixed income into XRB and XSB doesn't feel like the best idea at the moment. I'm contemplating extra CIB519 and/or GICs for the next year or so or until yields start looking more attractive. That said, I've seen a few mentions of PHN110 with favorable comments a few times in these forums. It's consistent track record and relatively low cost is encouraging. Though not the case yet, once my holdings reach a large enough size, I'm thinking a proper bond ladder will be the way to go though between now and then I need to become more comfortable with purchasing bonds.

What are people's thoughts on replacing XRE with VNQ?

An item missing from my mix that I'm wondering about is some sort of resource fund/ETF (precious metals and/or energy). Granted, XIC provides some exposure, but should I be overweiging this further? I see that some of you feel strongly about gold and precious metals so I'd appreciate your comments.

A few weeks back, I met with an advisor (was contemplating going the service route, but opted not to) and he suggested 10% Emerging markets. Though this first seemed high to me, it encouraged me to move up from 5% to 8%.

The choice of VBR over a Canadian equivalent is simply down to the larger more diversified US market.

I also intend to use value averaging with new contributions quarterly using low cost mutuals (e-Series, CIB519 for EE, etc.) and transfering to ETFs every 12-18 months. This unfortunately means that I'll be somewhat out of wack with my target during the year (e.g. TD US e-Series is the not the same as VTI+VBR) but it will have to do.

I'll hapilly admit that my allocation is greatly influenced by Bernstein's Four Pillars of Investing, Canadian Capitalist's Sleepy portfolio and a few other sources along with my with a few adjustments of my own.

Thanks to all that offer thoughts and suggestions!

Cheers,
Pab


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## hypo (Aug 11, 2010)

Great job doing a thorough think-through your plan. I tend to agree with what you wrote about your bond hesitation.

A couple things came to mind as I read through it, just things to think about:

- Are you aware of VSS for small cap

- Also if you want things to be simpler, Vanguard offers VXUS which covers the entire world (excluding USA) 

Now normally I don't pay too much attention to timing the market, but due to the recent earthquake, the US dollar is gonna sink a bit as corporate assets priced in US dollars get exchanged for Yen to pay for Japanese insurance claims and US Treasuries get sold by the government to provide liquidity to the Japanese economy. 

While our dollar is doing great against the US right now, its fair to expect that the US dollar is going to drop some more given these recent events. The question really is the timeframe and depth of this drop, which nobody really knows. Just keep this in mind since when you make your Vanguard buys, they will all be in US dollars obviously.


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## larry81 (Nov 22, 2010)

Just two quick comments:

You already have some smallcap with VTI, i dont see the need to add a specific smallcap fund...

You are right about bonds, with current interest rate, it would be foolish to allocate a large position of bonds right now.


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## MikeT (Feb 16, 2010)

I'd just hold RioCan outright rather than XRE. No management fee and essentially the same thing since riocan is so big.

I'd add precious metals. Maybe 'Central Fund of Canada' CEF.a. 50/50 gold and silver mix. Up to 10%. (trades at a 8-9% premium now, so pick a better time).

Take the allocation for that from your global developed which is waaaay too high at 22. Large cap us stocks are the same category as global developed for all intents and purposes.


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## Belguy (May 24, 2010)

The Japanese stock market has just experience a two day loss of 16 percent!!

This is an example of what equities can do when the news turns out to be bad enough.

Imagine what would happen to stocks should some terrorist set off a dirty bomb in the middle of some large American city killing thousands of people!! President Obama has said that that is his biggest worry and causes him to lose sleep some nights.

And, that is why you need a bond component in your portfolio and the older you are, and the shorter your time line, the bigger fixed income component you should have.


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## HaroldCrump (Jun 10, 2009)

Belguy said:


> Imagine what would happen to stocks should some terrorist set off a dirty bomb in the middle of some large American city killing thousands of people!!


BG, please don't tempt fate.
We've had enough disasters last 2 years.
Actually, since 9/11 it's just been one thing after another.
So don't give her any more ideas.


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## Belguy (May 24, 2010)

The world is a very dangerous place and each and every danger can cause the equity markets to go down under certain circumstances.

That is why you need a balanced portfolio if you want to be able to sleep soundly and come through the next great crisis in relatively sound condition.

Getting your asset allocation right in the first place is perhaps THE most important factor in developing your portfolio.

To thine own self be true. Know yourself and what your risk tolerance really is in both booming and crashing markets.


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## Four Pillars (Apr 5, 2009)

I love your asset allocations - very similiar to my target.

I also share your fear of buying right now. I have way too much cash. Maybe I need to set up a DCA program to get to my target allocation. Maybe you should too?

I suspect VNQ is a better choice. XRE has a high MER - might be better off just directly buying the top one (RioCan) or two securities in that index. REITs are a bit of a mystery to me - I used to own REI.UN but ended up selling it since I didn't feel good about REITs in general. #irrational

XIC has a lot of resource and energy companies so you are covered there.


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## larry81 (Nov 22, 2010)

i dont understand why everyone is so concerned about XRE poor diversification and 0.55% MER. Its not like REIT should be a big part of your asset allocation anyway.

For anyone with a portfolio of >50k, the simplicity of holding XRE should be the main reason you accept the MER and dont care about the fund having only ~10 holdings.

My 2 cents


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## dcaron (Jul 23, 2009)

My horizon is ~15 years. These are the allocation scenarios Im contemplating, and #3 or #4 are more likely, if I decide to stick with National Bank Direct Brokerage. If I negotiate a decent preferred currency conversion rate, I will pick #1 or #2. I may reduce the Fixed Income ratio downwards. I may increase Canadian (love resources and financials) and Asia (oppurtunistic) exposure as in #4.


*Scenario #1 (mininal fees)*
Fixed Income 40% CLF (.15%MER)
Can Equity 20% XIU (.17% MER)
US Equity 20% VTI (.07%MER)
Eur/Pac Equity 20% VEA(.15%MER)

*Scenario #2 (greater diversity)*
Fixed Income 20% CBO (.25%MER)
Fixed Income 20% CLF (.15%MER)
Emerging Markets  5% VWO (.22%MER)
Eur/Pac Equities 15% VGK (.14%MER)
US Equities 15% VTI (.07%MER)
Can Equities 25% XIU (.17%)

*Scenario #3 (Canadian ETFs only)*
Fixed Income 20% CBO (.25%MER)
Fixed Income 20% CLF (.15%MER)
Emerging Markets  10% CBQ (.60%MER)
Eur/Pac Equities  10% XIN (.49%MER)
US Equities  20% XSP (.24%MER)
Can Equities 20% XIU (.17%)

*Scenario #4 (Canadian ETFs only, more Canadian bias)*
Fixed Income 20% CBO (.25%MER)
Fixed Income 20% CLF (.15%MER)
Emerging Markets  10% CBQ (.60%MER)
Eur/Pac Equities  20% XIN (.49%MER)
US Equities  10% XSP (.24%MER)
Can Equities 20% XIU (.17%)


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## Four Pillars (Apr 5, 2009)

larry81 said:


> i dont understand why everyone is so concerned about XRE poor diversification and 0.55% MER. Its not like REIT should be a big part of your asset allocation anyway.
> 
> For anyone with a portfolio of >50k, the simplicity of holding XRE should be the main reason you accept the MER and dont care about the fund having only ~10 holdings.
> 
> My 2 cents


It might be just a matter of principle, but I don't like throwing money away when I don't have to. If your REIT allocation is $25000, you are spending and extra $130/year compared to owning one or two individual REITs.


I did an analysis a while back where I looked at how many REITs in XRE someone could buy directly and get good coverage.

http://www.moneysmartsblog.com/reit-etf-or-reit-investment-trusts/


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## HaroldCrump (Jun 10, 2009)

FP, the trouble with that plan is re-balacing.
I see that you address the issue of re-balacing _within_ the REIT portfolio in your blog, however, a different issue is your overall asset allocation re-balancing.
For now you invested $20,000 into the top 8 REITs as per the XRE.
That $20,000 represents 8% of your overall portfolio as you state.
Say after a year, the REITs have done well and are now 25% of your portfolio.
Or they have done poorly and are now only 15% of your portfolio.
Each time you rebalance (I assume you'd re-balance at least once or twice a year), you'd pay trading commissions on 8 stocks rather than 1 stock.
You also need to make a decision on which ones to buy and sell.
Presumably, you'd need to review the financial statements and public reports of the 8 REITs before you can decide which ones to buy/sell.

If these were boring old bank or pipeline stocks such as TRP, RY, etc. one could take a buy-and-forget approach.
However, REITs are too volatile to buy-and-forget.

It's a lot of work to save a couple of hundred $$ a year.


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## andrewf (Mar 1, 2010)

Also, if you're holding in a taxable account, that's 7 more ACBs to keep track of with those return of capital distributions.


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## Four Pillars (Apr 5, 2009)

HaroldCrump said:


> FP, the trouble with that plan is re-balacing.
> I see that you address the issue of re-balacing _within_ the REIT portfolio in your blog, however, a different issue is your overall asset allocation re-balancing.
> For now you invested $20,000 into the top 8 REITs as per the XRE.
> That $20,000 represents 8% of your overall portfolio as you state.
> ...


Didn't think of that part. 

That post ended up being just a theoretical exercise. 

I ended up just buying some RioCan for my REIT allocation.


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## Belguy (May 24, 2010)

REIT ETF investors should consider ZRE.


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## pablito (Apr 3, 2009)

*hypo*: Thanks for the encouragement and ETF suggestions. I'll have a closer look... especially VXUS as I wasn't aware of that one. And yes, I'm keeping an eye on the exchange rate. Thanks! Hmm... CDN lost some ground today.

*larry81*: Thanks for the comment! I realise that VTI includes some Small Cap, but overweighing with VBR is down to influence by Bernstein's Four Pillars. I think I am basically falling into what he calls the "Splitters" camp and the Small Value class appears the one most worth paying attention to. However, I'm also trying to keep the number of asset clases to a respectable number hence the mixed approach.

*MikeT*: Thanks for the precious metals suggestion, I'll check it out. But if I can ask, why do you suggest that one? I thought others might jump in with recommendations on precious metals. To be honest, I still have some homework to do in this area... not sure how I feel about them. On a related note, a few days ago I heard and interesting quote on the radio about the price of gold. Basically, the gentleman was pointing out that although the current price was at an all time high, the inflation adjusted price was not... so still quite some room to grow in his mind. Though, I can't say I've verified this.

Also, regarding the 22% in Developed International, am I right in thinking that you consider this to be high based on my proposed allocation to US stocks?



Belguy said:


> And, that is why you need a bond component in your portfolio and the older you are, and the shorter your time line, the bigger fixed income component you should have.


*Belguy*: I'd like to be clear on the intent of your comment here. I'm not suggesting that I won't eventually be buying bonds (more precicely bond funds/ETFs), just not now. For the short term, given the current low yields, my thought is to allocate my fixed income portion to a HISA fund like RBF2001 or similar. Interest rates can only rise from here which will result in a decrease of the value of the bond funds/ETFs. I think I'd eventually like to build a bond ladder, but it would appear that my current bond portion doesn't justify it. That said, if someone has a better option then a sad 1.2% HISA fund (RBF2001), I'm all ears.

*FP*: I think I'll use VA over DCA... probably quartely so as to not drive myself nuts... thought that was intended for new contributions... and this will have to be to the index funds that most closely match what I've specified in the original post. Likely something like:


Fixed Income (25%) - I'd normally use e-Series TDB909, but for now probably RBF2001

Canadian Stocks (15%) - e-Series TDB900

US Stocks (20%) - e-Series TDB902

Global Dev (~22% though may revise downward) - e-Series TDB911

Emerging Mrkts (8%) - CIB519

And the rest in more RBF2001

Alot of good discussion on REITs. I'd read the blog posts about simply buying a few of XRE's holdings directly, but 1) I feel more comfortable with additional diversification; and 2) Buying more individual trusts means a higher yearly commission for a relatively small proportion of my overall portfolio. I'm not sure it is justified. That said, I'll have a closer look at RioCan and have a think about replacing XRE with it.

*FP*: Would you be willing to elaborate on your comment about VNQ?

Thanks to everyone for the great feedback!! I'll rethink a few things... next step will be planning the re-entry... hopefully sooner than later.

More questions to come I'm sure.


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## MikeT (Feb 16, 2010)

With regard to cef.a (central fund of Canada):

I honestly just don't trust the synthetic/futures stuff. I want bullion backed shares held in my own country. The gold portion of my portfolio is saftey. And funny things have happened to gold in the past. It wasnt long ago that it became illegal for ciizens to own gold, the government forced people to turn in their gold for paper money. I would actually prefer to have the gold myself in my mattress actually, but it's inconvenient and lumpy. So next best is bullion stored somewhere secure in Canada. Cef.a does this for a reasonable mer, but you have to watch as it is a closed fund and trades at a premium to NAV. And you happen to get automatic diversification with silver to boot. There might be something better, I don't know as I'm not a huge goldbug.

Regarding developed international:
If you are talking about small and midcap stocks, then no prob.

But please tell me if it matters if I invest in:
Glaxo vs pfizer
Boeing vs airbus
Rim vs apple
Any foreign based multinational vs American multinational.

At a certain size, it stops mattering where a company is based. Picking your large cap allocation by country is arbitrary and useless to consider in your asset allocation strategy. A much better large cap strategy is to diversify by sector and not restrict your allocation to any country in particular. On the other hand, japan has shown us that it doesn't make sense to concentrate too many holdings in a single country either.


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## Four Pillars (Apr 5, 2009)

pablito said:


> *FP*: I think I'll use VA over DCA... probably quartely so as to not drive myself nuts... thought that was intended for new contributions... and this will have to be to the index funds that most closely match what I've specified in the original post. Likely something like:
> 
> ...
> 
> ...


What is "VA"?

I think VNQ might be a better choice than XRE because it is more diversified and has a lower expense ration. 

That said, not sure if it make much of a difference, especially if you only have a small % in REITs.


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## MikeT (Feb 16, 2010)

I think riocan is big enough that it is going to act like an index anyways. I used to hold riocan, and a second smaller REIT which I kept changing based on what was doing better. Over the years it's been a waste of time. I've since sold and just hold riocan alone. I just don't think any mer is worth paying if you live in Canada and want REIT exposure.


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## andrewf (Mar 1, 2010)

VA - Value Averaging


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## fatcat (Nov 11, 2009)

> REIT ETF investors should consider ZRE.


 why instead of XRE ?


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## Belguy (May 24, 2010)

I haven't really looked into it but, from what I hear, ZRE is more diversified.


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## larry81 (Nov 22, 2010)

Belguy said:


> I haven't really looked into it but, from what I hear, ZRE is more diversified.


18 holdings vs 11 for XRE


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## Pinery (Nov 19, 2010)

Also ZRE is equal weight while XRE is cap. weighted.


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## Financial Cents (Jul 22, 2010)

Agreed, owning REI.UN is almost like the index of the REITs in Canada.

I have REI.UN and HR.UN. Would like own to own REF.UN at some point or another REIT but then that's it. These guys make up about 5% of our overall portfolio, good enough for us.

I wouldn't bother with XRE long-term, why pay fees when you don't have to?


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## andrewf (Mar 1, 2010)

HR.UN almost blew their brains out in the credit crisis. Concentrating your investment in one or two names increases you risk of significant loss/underperformance.

One thing you can do to reduce the MER drag is to buy the top few names, then hold ZRE as an approximation of the completion. It still let's you rebalance easily, retains diversification, and reduces your blended MER to something more like 0.3%-0.4%.


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