# Passive Portfolio: I'm in...sort of.



## prollywrong (Dec 17, 2010)

New investor, 35 yrs old. Opened up a Questrade RRSP account last week and purchased a whack of ETF's. Aiming for long-term couch potato with the ETFs, then I may add some individual securities as I gain experience. Or not. 

Any thoughts/suggestions/criticisms on this portfolio would be appreciated. I've lurked around here a while and learned a tonne, so I feel I owe the regulars a thank you already.

Equities Portfolio:

CANADA:

10% iShares S&P/TSX Capped Comp (XIC)
10% iShares S&P/TSX SmallCap (XIS)

US: SMALL CAP

10%Vangrd AllWr exUS SmCap E.T.F. (VSS)
13% Vangrd Small Cap E.T.F. (VB)

US: ALL

13% Vngrd Total Stock Market (VTI)

US VALUE:

13% Vangrd Value E.T.F. (VTV)

INTERNAT:

10% iShares MSCI EAFE Value E.T.F. (EFV)
10% Vanguard MSCI EAFE E.T.F. (VEA)

EMERGING:

13% Vanguard MSCI Emerging Markets (VWO)



The %'s are a little off but it's close. Don't have the exact Expense Ratio but it's low...sub .4% 

Wondering if I should have chosen a single ETF to represent MSCI EAFE? Didn't notice too much redundancy in their holdings, but I'm curious what others think? 

It's weighted toward the US based on little more than my own flimsy opinion and conjecture. I'm a bit concerned about currency fluctuation but I've read if I hold long enough it shouldn't matter? Don't completely buy it but didn't like the cost/performance of hedged products. 

If I were to add anything, it would likely be specific to sectors that Canada is weak in...technology? Any suggestions here? 

No fixed income but I do have a cash position that is 5x the total equity value. 

So, did I blow it?


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## leoc2 (Dec 28, 2010)

Prolly here is information about slice and dice portfolios
http://www.bogleheads.org/wiki/Slice_and_Dice

I am a fan of a 3 fund portfolio
http://www.bogleheads.org/wiki/3_fund_portfolio

Here is a forum entry that discusses the topic
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=93190&newpost=1342136


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## sisco (Oct 18, 2011)

I agree with leoc2, there is beauty in simplicity when it comes to passive investment portfolios.

Personally, I favor fundamental indexing due to its inherent value bias, and the fact that you get "built-in" re-balancing in cases where a particular stock/sector are run up.

For me, Vanguard Total World Stock ETF (VT) is very attractive. You get the whole world in one ETF. All fundamentally weighted. That said, you need to accept the fact that you won't have a home bias in your portfolio if you go this route. Or you could top-up your Canadian holdings through a separate ETF, I guess.

Pair VT with a bond fund, and/or whatever other asset class(es) you may feel is important (RE, or commodities, or what have you) and run with it.

To each their own!


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## eulogy (Oct 29, 2011)

You bought way too many ETFs I think. Especially the US ones where you have overlap. I'd personally have all my US holdings in VTI. I'd just find one US equity ETF, one Canadian equity ETF, one International equity ETF and one Canadian bond ETF. I'd definitely be looking to simplify it.


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## mrPPincer (Nov 21, 2011)

For your Canada component, VCE would be cheaper, with an annual fee of .09% vs XIC's fee of .25% and XCS's .55%

On the downside I've just noticed that although VCE claims to represent 85% of the canadian market, it only holds 102 stocks,
versus XIC with 256, and XCS with 260 holdings

I won't hazzard a guess as to which would win out in the long run, the greater diversification of your two choices, or the lower MER that VCE will have, but just so you're aware, the lower cost option is there.


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## Sampson (Apr 3, 2009)

There is some overlap since you have selected some very broad index tracking funds. If you are a firm believer of value- or size- effects on returns, then dump the broad indicies and select alternatives tracking only small/med-cap and only value stocks.

You don't mention much else about your portfolio, except the cash. I would also include some real estate and commodity exposure (since CC's argument of heavy Canadian weighting doesn't hold in your case).


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## Belguy (May 24, 2010)

My opinion is that you have too many holdings which is something that I am prone to do as well. You only really need four or five low fee, broad based ETF's at most to have a well diversified portfolio that is cheap to own and easy to manage and rebalance over the long term. Otherwise, you may be reaching out for better returns which experience may teach you does not always work out as well as just keeping it simple and cheap. Also, I'm not certain of the wisdom of getting into higher fee sector specific ETF's. Keep it simple!!!


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## Sampson (Apr 3, 2009)

Perhaps I am alone here, but I don't think 9 ETFs is too many - I only think that the ones the OP has selected are not adequately giving coverage to the capitalization and size advantages the OP is expecting (from Fama-French studies).

One could argue that access to American and EAFE markets is all the equity exposure you need, but even then you need easily more than 4 holdings to reap the potential benefits.

e.g.
US Lrg/Sm Cap
US Small Cap
EAFE Lrg/Sm Cap
EAFE Small Cap
Short bond
Real estate
Commodity

this is a pretty basic portfolio makeup - since there is no exposure to emerging markets, local (Canadian markets), government or real return bonds, long bonds, cash etc. So it is quite easy to see how one almost MUST have 6-10 holdings if ONE believes in value- or cap-weight tilts to their portfolio.

Of course, not everyone does, but if you see no benefit in value or cap-weight in equity returns, you might as well just get VTI, short government bonds, and cash - since that gives you plenty of diversification within and among asset classes.


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## Soils4Peace (Mar 14, 2010)

My picks are as follows. It's a lot so you may want to skip some of them for now. I like fundamental but I like low fees too.

VCE Canada Large 
CRQ Canada Large 'value'
XCS Canada Small
VTI US Large
PRF US Large 'value'
PRFZ US Small 'value'
VEA Developed Large
CIE Developed Large 'value'
VWO Emerging Large
VSS Developed, Emerging and Canada Small

That's good diversification but they are all stocks. You would benefit from adding some other asset classes: REITs, bonds, commodities...

I don't really like XCS. I prefer to hold individual small value-y Canadian stocks.


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## prollywrong (Dec 17, 2010)

Sampson said:


> Perhaps I am alone here, but I don't think 9 ETFs is too many - I only think that the ones the OP has selected are not adequately giving coverage to the capitalization and size advantages the OP is expecting (from Fama-French studies).
> 
> One could argue that access to American and EAFE markets is all the equity exposure you need, but even then you need easily more than 4 holdings to reap the potential benefits.
> 
> ...


Thanks Sampson, this was the kind of allocation I was aiming for. My mistake, then, was choosing the broad indexes like VTI and VEA? These would be candidates to cut? 

The goals were to keep fees low while gaining exposure to value and weight caps in the US and elsewhere. No bond allocation yet...not sure why. Guess I'm hesitating to add more cash to the mix right now. 

It is difficult to keep things spare with so many options available. I'm two weeks in and already fighting the voice that says "Oooh, you should add some..." after I read the latest Globe article. 

"Commodity exposure" would be a commodity-specific ETF, correct? 

No one mentioned the currency exposure so I gather it's a common situation to be in? 

I think I'll trim the broadest markets out then sit on this for a while while I do some more reading.


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## Zeeshan Hamid (Feb 28, 2012)

For the stock portion why wont you just pick up XWD? 

ISHARES S&P 500 FUND 53.03% 
ISHARES MSCI EAFE INDEX FUND 41.97% 
ISHARES MSCI CANADA INDEX FUND 4.98% 


EAFE gives you Europe, Far East and Australia. Add XEM to get emerging market exposure. That's two funds that give you the world. IF you wanted to get sector specific then you could add small and / or midcap. Beyond that there's no reason to be overly granular.


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## fatcat (Nov 11, 2009)

i think you have way too many funds

at age 35 where you will just keep adding and adding to you positions (and incurring trading costs and doing all the maintenance and taxes) for 30 years

i think keeping fees as low as possible is really important

i would have VTI,VEA,VWO, and XIU or XIC

trying to target the way you have will be smoothed and equalized over 30 years

like for all intents and purpose VB,VTI,VSS and VTV will do about the same over 30 years as just holding VTI and yet you have to manage 4 funds instead of 1 (and pay higher costs)


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## prollywrong (Dec 17, 2010)

Y'know, I think you guys are probably right. 

Simple and cheap is the way I should have gone. As a beginner I'm willing to tinker a bit now to arrive at something I can sit on for a while. And if I want to do 'core and explore' later, that option is available. 

Two weeks in and I'm already second guessing my strategy...


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## Belguy (May 24, 2010)

Keep it simple by just holding four or five of the lowest fee, broadest based ETF's according to your target allocation and then just forget about it aside from rebalancing once a year.

"Wearing yoga pants doesn't make you fit, and swinging a titanium driver doesn't make you a great golfer. In the same way, holding a bunch of ETF's in your portfolio doesn't make you a Couch Potato investor if you end up falling into the same old bad habits, like thinking you can outsmart the broad indexes."

--Dan Bortolotti, MoneySense, March 2012

Keep it simple, easy, and cheap and don't try to get fancy in an attempt to achieve superior returns. That's where many investors end up going wrong!


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## prollywrong (Dec 17, 2010)

I guess that, psychologically, I have a difficult time believing passive investing works. 

I'd like to believe, but it's tough to ignore/discount the endless chatter about this or that investment trend, what's hot what's not, the constant focus by media on sexy active strategies, the tireless braying and gossip, etc, etc. There's a part of me that asks, "If something as relatively straightforward as passive investing can work, why isn't everyone doing it?" 

And I do think - despite how popular the conversation of active/passive is among people who have done some reading and on sites such as this - that for the most part truly passive investing remains a deeply contrarian strategy. Saying to a newbie investor: "Buy three or four ETF's, rebalance, and otherwise forget about it" runs counter to decades of input claiming that successful investing is immensely complicated, risky, time-consuming, hard work, and so on. 

The flip side of the question is: "Is passive investing yet another easy-money fad?"

I know (ballpark) what I'd like to have in twenty-five years. I can almost get there by saving alone. I have zero interest in spending a large portion of my day managing my portfolio. So it's passive for me.


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## leoc2 (Dec 28, 2010)

prollywrong said:


> I guess that, psychologically, I have a difficult time believing passive investing works.
> 
> I'd like to believe, but it's tough to ignore/discount the endless chatter about this or that investment trend, what's hot what's not, the constant focus by media on sexy active strategies, the tireless braying and gossip, etc, etc. There's a part of me that asks, "If something as relatively straightforward as passive investing can work, why isn't everyone doing it?"


The etfs needed to passively index invest are relatively new products. The financial advisory empire would not find it in its own best interest to advocate passive investing. It's like saying that you don't need to pay up for their advice anymore.



prollywrong said:


> And I do think - despite how popular the conversation of active/passive is among people who have done some reading and on sites such as this - that for the most part truly passive investing remains a deeply contrarian strategy. Saying to a newbie investor: "Buy three or four ETF's, rebalance, and otherwise forget about it" runs counter to decades of input claiming that successful investing is immensely complicated, risky, time-consuming, hard work, and so on.
> 
> The flip side of the question is: "Is passive investing yet another easy-money fad?"
> 
> I know (ballpark) what I'd like to have in twenty-five years. I can almost get there by saving alone. I have zero interest in spending a large portion of my day managing my portfolio. So it's passive for me.


A fad? I don't know. I do know that being an aggressive active investor with few stocks that go wrong could ruin your whole retirement. Being 100% in stocks instead of an asset allocation of stocks and fixed income could ruin your whole retirement. Always cashing out when the market tanks because you are not diversified and you miscued on your risk tolerance could ruin your whole retirement. Having friends who recommends the next investment that earns a steady 10%-12% per year every single year could ruin your whole retirement. Passive investing using index funds with a conservative asset allocation of Fixed income and Total Stock? Better, worse, who knows, but it's not going to ruin your whole retirement.


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## Belguy (May 24, 2010)

You say that you have zero interest in spending much time on your investment portfolio. That pretty much leaves you with investing in some buy-and-hold strategy or paying the fees to have someone manage your portfolio for you. I feel that one of the best buy-and-hold strategies is potentially buying four or five low-fee, broad-based ETF's in a cheap and simple to manage Couch Potato portfolio. Alternatively, you could invest in approximately 15 dividend paying stocks from solid companies who you feel will remain in business for the long term and who have a history of increasing those dividends over time. The current issue of MoneySense magazine has a list of 20 Canadian and 20 U.S. such stocks for your consideration. This second method takes a little more time and effort on your behalf but many swear by this dividend growth formula for long term investing and the jury is out on which of these two strategies will provide better returns in the long run. Good luck and get back to us in 50 years and let us all know how it worked out for you.

By the way, getting your asset allocation target set up according to your circumstances and risk tolerance is probably more important than the actual investments that you ultimately select. Also, periodically rebalance your portfolio but do not constantly trade in order to chase after hot sectors or stocks which can be a losing proposition in the long term unless you plan to spend a lot of time researching individual stocks.

Buy, HOLD, rebalance and prosper.


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## fatcat (Nov 11, 2009)

prollywrong said:


> I guess that, psychologically, I have a difficult time believing passive investing works.
> 
> I'd like to believe, but it's tough to ignore/discount the endless chatter about this or that investment trend, what's hot what's not, the constant focus by media on sexy active strategies, the tireless braying and gossip, etc, etc. There's a part of me that asks, "If something as relatively straightforward as passive investing can work, why isn't everyone doing it?"
> 
> ...


very interesting points and well said ... i think the value of passive investing is really a function of time ... you are young and heading out to work for 30+ years ... i am heading into retirement and old age ... i think the value of passive investing will absolutely reveal itself to be true in your case ... very few people can beat the index over 30 years ... since trading stocks is essentially predicting the future, eventually the weight of the job becomes too much, it is too difficult to do ... i use etf's because i do target specific areas for diversification and i like the generally low fees and the safety of owning 6 banks instead of one in ZEB for example ... but over 30 years i would absolutely buy the broadest cheapest indexes and then just forget them ... i think now you could make a case for putting all of your money in 2 funds VT, the vanguard all world stock fund and then pimco's bond fund ...


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## prollywrong (Dec 17, 2010)

Another question for those recommending simple three (or less fund) portfolios: how does one work in exposure to, say, precious metals or REITS? Or is this a form of slice n' dice, being 'sector-specific' again? Any links posted will be read and are appreciated.


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## leoc2 (Dec 28, 2010)

prollywrong said:


> Another question for those recommending simple three (or less fund) portfolios: how does one work in exposure to, say, precious metals or REITS? Or is this a form of slice n' dice, being 'sector-specific' again? Any links posted will be read and are appreciated.


VCE/XIU/XIC have precious metals stocks in the form of gold miners. Adding REITS is up to you, as long as you treat them as equity. Adding these sectors complicates your portfolio and the re-balancing process. Consider the Vanguard USA target retirement funds. They recommend a 3 fund portfolio for someone your age:
https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList#targetAnchor

If it's good enough for vanguard then it would be good enough for me. 

In case you missed this reference:
http://canadiancouchpotato.com/model-portfolios/


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## jagger (Jan 12, 2011)

I'm curious which brokerage do you use, and did you pay any currency exchange fees for the US etfs?


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## Argonaut (Dec 7, 2010)

leoc2 said:


> VCE/XIU/XIC have precious metals stocks in the form of gold miners.


Precious metals stocks != Precious metals.


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## fatcat (Nov 11, 2009)

i finally got around to looking at VCE which looks very, very good
it holds 85% of the total equity of the canadian market
and includes real estate (rio can, brookfield, h&r) and gold miners and potash
the mer is .09 !!!
i think that holding this and reinvesting dividends and adding to it is the way to go
very hard to beat


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## Belguy (May 24, 2010)

"Investing in stocks over a long period of time pays off, even if you do something as simple as putting your money in an index fund. While that could prove risky from year to year, over the long term, it's a great decision. Consider this: if you invested everything in the market on the Friday before Black Monday, the big crash of October 19, 1987, you got in when the Dow Jones Industrial Average was at 2,500. You'd have felt like a complete fool a year later because you bought at the absolute worst time to buy. But, let's take the long-term perspective, the right one. By the summer of 1997, the Dow had leapt more than 5,000 points. That's a lot of performance to miss. And, by the summer of 2007, the Dow hit 14,000. In less than twenty years the market went up 460 per cent, and that's if you got in at the worst possible moment."

--Jim Cramer

Moral: Invest in four or five simple, lowest-fee, broadest-based index products and just hold them forever trading only periodically for rebalancing purposes and don't try to get fancy or chase after hot sectors. Over the long run, you'll achieve superior results to those of most active investors and you will spend one heck of a lot less time doing so.

The longer your investment time horizon, the less risk you will be taking. Oh, to be young again and know then what I know now!!!


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## prollywrong (Dec 17, 2010)

jagger said:


> I'm curious which brokerage do you use, and did you pay any currency exchange fees for the US etfs?


I'm with Questrade. No problems so far, but the account is only a month or so old. Found the chat service helpful during my first buys. No exchange fees b/c I bought in US cash, otherwise there are.


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