# Geographical Diversification



## Belguy (May 24, 2010)

I would be interested in how some of the rest of you have diversified your portfolios geographically.

In reviewing my own portfolio, I find that I am generally diversified as follows:

25% Canadian equities
12% U.S. equities
5% Intl. developed countries (Vanguard VEA)
14% Emerging Markets
4% REITS
40% Bonds

How would you judge this against the following suggested allocation that I came across:

20% Canadian equities
16% U.S. equities
16% Intl. developed countries 
4% Emerging Markets
4% REITS
40% Bonds

Thank you for your thoughts.


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## HaroldCrump (Jun 10, 2009)

These days, diversification is not a black or white scenario.
I assume you are using the "home" country of a company for calculating your geographical allocations?
There are a lot of companies where the "home" country does not mean much.
The majority of their business could be abroad.
Many of our Canadian companies fall into this bucket as well.

You could consider indirect diversification as well, such as buying stock in companies like Coca Cola, Microsoft, General Mills, Pfizer, etc. that are already well diversified.

If you wish to avoid a certain part of the world (say, Europe for example), you cannot do so simply by not buying the stock of an European companies.
Your Canadian, US or other holdings may already have significant exposure to Europe.

Global diversification has a lot of hype, too, IMO.
There are fad ETFs.
If you are mostly into large cap Canadian or US stocks, you are already well diverified globally.


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## andrewf (Mar 1, 2010)

Seems like a fine allocation to me. Note that you are seriously overweighting Canada, but that's fine, given much of your future liabilities are sensitive to Canadian inflation.


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## rinoscar (Jan 26, 2010)

If you don't mind me asking, how are you invested in the 40%bond? Is it one etf, or several?

Thank you


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## Belguy (May 24, 2010)

My 40% bond allocation is currently divided between the following ETF's:

iShares DEX All Corporate Bond Index Fund
iShares DEX Real Return Bond Index Fund
iShares iBoxx $ High Yield Corporate Bond Fund
iShares US IG Corporate Bond Index
Morgan Stanley Emerging Markets Domestic Debt Fund
SPDR Series Trust Barclay's High Yield Bond Fund
Phillips Hager & North Bond Fund Series D

I have been told that I am nuts to have this many bond funds in my portfolio.

For simplicity sake, I may move to just put everything in the PH&N Bond Fund Series D or the iShares Short Bond ETF while perhaps holding on to my Real Return Bond Fund for long term protection against inflation.

I do not invest in individual securities but hold a portfolio that is predominately composed of ETF's.

I am attracted by something called 'The Uber-Tuber Portfolio' which I found on the Canadian Couch Potato website.


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## rinoscar (Jan 26, 2010)

Belguy said:


> My 40% bond allocation is currently divided between the following ETF's:
> 
> iShares DEX All Corporate Bond Index Fund
> iShares DEX Real Return Bond Index Fund
> ...


Wow! you caught off guard with all those funds. I too am in the 60/40 allocation and thinking of just having XSB(iShares short bond) and planning to get a high yield fund either the iBoxx or the one the Claymore offers.

Arent' the MER higher if holding Phillips hager over ETF?

Also, I would like to mention, and I may totally be wrong on this, but shouldn't your bond allocation be the "safe" part of your portfolio? Maybe your taking on added risk for minimal returns.


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## Belguy (May 24, 2010)

You make many good points, rinoscar. Against my own better judgment, I let my portfolio drift some by trying to chase after hot returns.

I think that a better approach is to invest in just one or two broad-based bond funds.

At this moment in time, my own thoughts would be to put everything in a short term bond ETF such as the iShares XSB.

In some earlier analysis, I determined that the PH&N Bond Fund Series D had slightly outperformed the iShares CDN Bond ETF XBB and that is why I chose the former. Also, in this difficult bond environment, I feel a little better paying a little more for professional bond management and the PH&N folks are among the leaders in this field.

And so, either the XSB or PH&N Bond Fund D would be among my top pics in the current bond environment. 

And yes, I have taken on added risk for little potential added return.


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## kcowan (Jul 1, 2010)

Belguy said:


> And yes, I have taken on added risk for little potential added return.


Did you know that then or just discover it after the fact?

Did you know that Philips is Art Philips, the former mayor of Vancouver?


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## rinoscar (Jan 26, 2010)

Personally I would go with ETF's. It is true that PH&N are among the best out there, but surely in the long run they will underperform the index. 

I am also in the middle of changing my whole portfolio and I am trying to cover everything with the least amount of ETF as possible,


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## Belguy (May 24, 2010)

The 5 year return of the iShares CDN Bond Index ETF (XBB), as of May 31, is 4.50%.
The 5 year return of the PH&N Bond Fund Series D, as of May 31, is 4.85%.

By the way, the PH&N High Yield Bond Fund Series D has had the following returns as of May 31:

1 year: 15.30%
3 years: 7.71%
5 years: 7.27%

Just as an aside, I note that the TSX reached a new milestone today--it's lowest point so far this year.

How low will it go???


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## HaroldCrump (Jun 10, 2009)

Belguy said:


> How low will it go???


Some more please, thank you very much 
For the first time in a year, some of the stocks I'm watching are hinting of coming close to my buy price.


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## Belguy (May 24, 2010)

Maybe they'll reach your buy price and continue to go much lower from there.

Must be nice to be sitting on a cash position!!


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## Belguy (May 24, 2010)

From the Canadian Couch Potato website, here is the Uber-Tuber Couch Potato Portfolio which recognizes that "value stocks and small cap stocks have historically delivered higher returns than the overall market:

Canadian core equity: 12%--Claymore Canadian Fundamental (CRQ)
Canadian small-cap equity: 8%--iShares Small Cap Index (XSC)
US core equity: 8%--Claymore US Fundamental (CLU)
US value equity: 4%--Vanguard Value (VTV)
US small-cap equity: 4%--Vanguard Small-Cap (VB)
International core equity: 8%--Vanguard Europe-Pacific (VEA)
International value equity: 4%--iShares MSCI EAFE Value (EFV)
International small-cap equity: 4%--Vanguard All World ex-US Small-Cap(VSS)
Emerging markets equity: 4%--Vanguard Emerging Markets (VWO)
Real estate: 4%--Claymore Global Real Estate (CGR)
Short-term bonds: 40%--iShares DEX Short-Term Bond (XSB)

Note that because this portfolio has so many funds, it would be expensive and unwieldy for an account of less than $100,000,

This portfolio's overall cost is 0.38%

Does anyone have any comments, suggestions, or critiques concerning this portfolio?


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## mogul777 (Jun 2, 2009)

Too many funds, nice for the brokerages raking in the trading fees however. WTH is there a 40% short-term bond position? Is that a temporary thing or permanent, if it's permanent it's stupid as hell.


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## Belguy (May 24, 2010)

S&P 500 Index is currently down 16% from it's peak and down 8% YTD.

We're in the money---NOT!!!


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## MoneyGal (Apr 24, 2009)

If you can't stand the heat...

Back to geographical diversity. In my office, we are doing some research on TSX60 companies. One company which is TSX listed has 8 Canadian employees, no operations in Canada, and 7,000 employees...in Finland and Africa.


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## kcowan (Jul 1, 2010)

MoneyGal said:


> One company which is TSX listed has 8 Canadian employees, no operations in Canada, and 7,000 employees...in Finland and Africa.


But is it many of the ETFs?


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## HaroldCrump (Jun 10, 2009)

MoneyGal said:


> Back to geographical diversity. In my office, we are doing some research on TSX60 companies. One company which is TSX listed has 8 Canadian employees, no operations in Canada, and 7,000 employees...in Finland and Africa.


Now you got my attention....care to share the name?


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## MoneyGal (Apr 24, 2009)

Sure. It's First Quantum. 

(Don't quote me on the specific number of employees - I'm sure the 7,000 is rounded and the Canadian employee base might be 9 people. The research associate in my office is putting together this project - I was just chatting with her over coffee; and she isn't in today.)


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## humble_pie (Jun 7, 2009)

can't stress enough the important points re geographical diversity brought out by harold & moneygal. A TSX listing is meaningless. Company can be carrying out operations anywhere on the planet.

occasionally i've been mildly interested in one or two of these profiles, enough to buy some shares. I find the companies difficult to follow, in that there's no local news and the culture of the company including its language is often opaque & hard to grasp. Therefore i tend to avoid them.

in addition, some big canadians that are near household words are, essentially, dependent upon foreign countries. Potash, so sensitive to asian economies, is a good example. CN rail is largely a US railroad now, so as US shipments go, so goes its story. Uranium one was engineered by a canadian and a former american president, but its operations are in kazakhstan & africa. Migao and hangfeng are 100% chinese fertilizer stories.

these stories add up to another reason why i'm skeptical about the advertising & claims put out by funds & etfs. I'm convinced that every single fund & every single etf would list the above 5 companies among its "canadian equity" allocation, although in reality the market performance of each of the 5 has nothing to do with canada.


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## CanadianCapitalist (Mar 31, 2009)

It is true that countries and economies are a lot more integrated these days and Canadian companies do a lot of business overseas as do foreign companies in Canada. Kraft Foods does a lot of business in Europe just as Nestle and Unilever do in the US. 

But that doesn't mean that benefits of geographic diversification are oversold. Though correlation has increased, foreign stocks do not move in perfect lock-step with Canadian stocks. So adding foreign equities increases returns / decreases portfolio volatility. This has been true for Canadian investors over the past 20 years.

Of course, diversification benefits show up only over long time periods. Over the short term, esp. in periods of economic crisis, stocks in all geographies can move in the same direction.


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## slacker (Mar 8, 2010)

I use the Vanguard VT mutual fund allocation as a basis, and then overweight the Canadian portion by about 5x. Breaks down like this:

9% Emerging
24% Europe/Pacific
27% US
15% Canada
25% other stuff (bonds, reit, stock pick's)

Any comments?

https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT#hist=tab:2


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## rinoscar (Jan 26, 2010)

Belguy said:


> The 5 year return of the iShares CDN Bond Index ETF (XBB), as of May 31, is 4.50%.
> The 5 year return of the PH&N Bond Fund Series D, as of May 31, is 4.85%.


I was thinking more like 10, 15years or more!


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## rinoscar (Jan 26, 2010)

slacker said:


> I use the Vanguard VT mutual fund allocation as a basis, and then overweight the Canadian portion by about 5x. Breaks down like this:
> 
> 9% Emerging
> 24% Europe/Pacific
> ...



I am also thinking of selling my VTI and VEU to only be invested in VT. However something is holding me back, I guess the more I read articles the more they tend to advice to hold one etf for Us, another for international and one for Canada.


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## rinoscar (Jan 26, 2010)

@Canadian Capitalist,

Are you the same guy that came up with a portfolio with fees of ~.20%?

I think it was Belguy who had a link to it. If it is you, would replacing all foreign and canadian etf's to only the vanguard world stock?


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## CanadianCapitalist (Mar 31, 2009)

rinoscar said:


> @Canadian Capitalist,
> 
> Are you the same guy that came up with a portfolio with fees of ~.20%?
> 
> I think it was Belguy who had a link to it. If it is you, would replacing all foreign and canadian etf's to only the vanguard world stock?


I do track a low-cost portfolio that I call the Sleepy Portfolio on my blog.

http://www.canadiancapitalist.com/category/investing/sleepy-portfolio/

I still like to hold VTI, VEA and VWO separately because, as you point out, VT also holds Canadian stocks and I'd like a much higher exposure that the 3 or 4 percent that Canada has in the World markets. A passive portfolio requires just a few transactions every year and holding VTI+VEA+VWO instead of VT doesn't add all that much to the costs.


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## rinoscar (Jan 26, 2010)

Dumb question Where does the REIT fall into, bond(income) or equity?


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## Four Pillars (Apr 5, 2009)

rinoscar said:


> Dumb question Where does the REIT fall into, bond(income) or equity?


That's a great question.

I don't really know the answer, but I think real estate should have it's own category since it's not fixed income or equity.

In reality, I've always lumped it in with equity however, because it shares some of the same characteristics of the price being related to the earnings.


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## rinoscar (Jan 26, 2010)

First off, I want to say sorry to belguy for kinda highjacking his thread

I was thinking of allocating the REIT into the income part of my investment. I hope someone can answer this question.


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## MoneyGal (Apr 24, 2009)

REITs are often understood as a hybrid between equity and fixed income. 

I personally set a target allocation for REITs and then back out actual holdings from my S/B allocation (i.e., I have a target REIT allocation of, let's say, 5% - I keep holdings to the target and back out holdings when calculating my overall stock/bond allocation). But that's just me.


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## rinoscar (Jan 26, 2010)

@Canadian Capitalist

Ok, wht if I keep VEU;international excluding US ETF and add XIC to bump up the canadian exposure?


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## kcowan (Jul 1, 2010)

*Why you should diversify by sector, not region*

Why you should diversify by sector, not region

Correlations have gotten tighter by geography in the last 5 years so that diversification by sector is a better risk reduction strategy.









> Specifically, energy, health care, utilities and consumer staples have 20-year correlations of less than 0.75. Several sectors, however, move closely with the broader BMI. The industrials, consumer discretionary and financials sectors all show 20-year correlations above 0.90


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## andrewf (Mar 1, 2010)

Again, correlations vary over time. Past correlations are no guarantee of future correlations. People who have forgotten this have gotten burned in the past.


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## slacker (Mar 8, 2010)

I have 20% in financials and 20% in energy, how should I diversify?


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## Jungle (Feb 17, 2010)

Should all your investment accounts (RRSP, TFSA, pension, non-reg, etc) add up to your correct asset allocation profile? 

For example, if you want 75% equity and 25% fixed income, should you make sure that all your accounts add up to this? (assuming 20+ years to retire and high risk tolerance)

Should you include your emergency fund in the fixed income portion of your allocation?


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## HaroldCrump (Jun 10, 2009)

Jungle said:


> Should all your investment accounts (RRSP, TFSA, pension, non-reg, etc) add up to your correct asset allocation profile?
> 
> For example, if you want 75% equity and 25% fixed income, should you make sure that all your accounts add up to this?


I do it that way.
Some accounts are too small to balance individually, like the TFSA and the RESP (in my case).
I find it inefficient to try to asset allocate each account separately.
I'll have to do something different for the RESP, though, once it starts to get close to its winding up date.


> Should you include your emergency fund in the fixed income portion of your allocation?


I include it in the Cash portion.
I consider Fixed Income to include bonds & GIC.
Cash includes savings account & money market account.


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## Jungle (Feb 17, 2010)

HaroldCrump said:


> I do it that way.
> Some accounts are too small to balance individually, like the TFSA and the RESP (in my case).
> I find it inefficient to try to asset allocate each account separately.
> I'll have to do something different for the RESP, though, once it starts to get close to its winding up date.
> ...


I see. Do you find it difficult to manage so many accounts to ensure your allocation stays on target? I guest that depends on how many times you rebalance. 

Our emergency funds are invested in mainly bonds and cash. Wasn't sure if that should be included in our allocation. This account does consume 6.1% of our net worth. I like the idea of using it in our allocation, so we can use other areas for growth.

I went over all my accounts. Added up all the equity, fixed income, cash etc. Found out my "overall" big picture was heavily weighted on too much bonds, GICs.

After I keep reading all these books, I fear inflation (long term) and need growth to defeat this. I have read and seen graphs about this efficient frontier, deviation, sector correlation and how it's important to rebalance regularly.


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## HaroldCrump (Jun 10, 2009)

Jungle said:


> I see. Do you find it difficult to manage so many accounts to ensure your allocation stays on target? I guest that depends on how many times you rebalance.


I have a spreadsheet set up where I list all my holdings and classify them as either equity, fixed income or cash.
Definitions get subjective, though.
Bonds, while generating "fixed" income, also fluctuate in value and therefore are not as "fixed" as cash in a savings account for example.
Anyhow, once you have done the classification, your asset allocation is easy to calculate using formulas.
As you update your holdings and values, the asset allocation re-calculates and is always up-to-date.


> Our emergency funds are invested in mainly bonds and cash. Wasn't sure if that should be included in our allocation. This account does consume 6.1% of our net worth. I like the idea of using it in our allocation, so we can use other areas for growth.


Sure, I believe you should include everything.
I personally do not count on my bonds as emergency cash due to the reason mentioned above.
Also, they are fairly illiquid and the spreads are unfavorable.
I do not include net-worth type items in asset allocation calculation, like home value, car value, etc.



> I went over all my accounts. Added up all the equity, fixed income, cash etc. Found out my "overall" big picture was heavily weighted on too much bonds, GICs.


Not unusual.
My cash + GIC exceeds my equity allocation.
Most of that is due to emergency funds and yet undeployed funds (like 2010 RRSP contribution).
Hopefully, once I have built up my emergency savings fully, all further cash will get allocated to equity or bonds only.


> After I keep reading all these books, I fear inflation (long term) and need growth to defeat this. I have read and seen graphs about this efficient frontier, deviation, sector correlation and how it's important to rebalance regularly.


I use the sleep test


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## mrbizi (Dec 19, 2009)

Jungle said:


> I see. Do you find it difficult to manage so many accounts to ensure your allocation stays on target? I guest that depends on how many times you rebalance.
> 
> Our emergency funds are invested in mainly bonds and cash. Wasn't sure if that should be included in our allocation. This account does consume 6.1% of our net worth. I like the idea of using it in our allocation, so we can use other areas for growth.
> 
> ...


A personal finance software like Quicken can help you in this regard. I use Quicken and it comes with a pre-built report/graph where you can get a big picture/overview of how your assets are allocated regardless of what accounts are actually holding those assets.


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## Jungle (Feb 17, 2010)

mrbizi said:


> A personal finance software like Quicken can help you in this regard. I use Quicken and it comes with a pre-built report/graph where you can get a big picture/overview of how your assets are allocated regardless of what accounts are actually holding those assets.


Does quicken come in any software packages like MS office ?


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## mrbizi (Dec 19, 2009)

Jungle said:


> Does quicken come in any software packages like MS office ?


Nope, you have to buy it separately. IMHO, it's well worth the price.

http://quicken.intuit.ca/personal-finance-software/index.jsp


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## slacker (Mar 8, 2010)

I used to use Quicken and MS Money, but have switched to using a spreadsheet for complete customizability.


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## davext (Apr 11, 2010)

Belguy said:


> You make many good points, rinoscar. Against my own better judgment, I let my portfolio drift some by trying to chase after hot returns.
> 
> I think that a better approach is to invest in just one or two broad-based bond funds.
> 
> ...


I have a large sum of money in the XSB fund as well but I'm looking for something that is just as safe, but with a slightly higher yield. This ETF has been very stable for me, I'm happy with it.


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