By Robb Engen, Boomer & Echo
Special to the Financial Independence Hub
For a while now I’ve dithered over when to sell my portfolio of dividend stocks and implement my two-fund ETF solution. The tanking stock market didn’t help – particularly with oil and gas stocks plummeting and a few of my holdings underwater. Behaviourally, I badly wanted to wait until oil prices recovered so I didn’t have to sell those stocks at a loss.
But last Thursday I finally took the plunge and sold 24 dividend stocks, worth roughly $100,000, and immediately replaced them with two ETFs from Vanguard. I’m not going to lie; it was hard to sell my babies:
Finally did it. Sold all of my dividend stocks. Feels like a part of me died today.
— Boomer and Echo (@BoomerandEcho) January 7, 2015
To get over my behavioural biases, I had to forget about each individual piece and simply treat it as one big portfolio. Then I confirmed what I already knew: my $100,000 was better off invested in two broadly diversified and low-cost ETFs (which includes over 3,000 stocks from around the world) than it was invested in just 24 Canadian companies. My DIY investing journey began after the global financial crisis in 2008-09. It wasn’t until markets crashed by as much as 50 per cent that I started to take notice of my investment statements and performance.
Aside from the significant decline in my portfolio, the most alarming number was the 2.7% MER being paid on a global equity mutual fund. Enough was enough, so in mid-2009 I opened a discount brokerage account at TD, transferred my portfolio there, and bought individual stocks with a focus on dividend growth. The timing couldn’t have been better: dividend stocks were out of favour and trading at extremely discounted valuations. In just five-and-a-half months my new strategy paid off handsomely – returning over 35 per cent over the remainder of 2009. I suspect most DIY investors have similar stories – underperformance and high fees caused many to dump their advisors, sell their mutual funds, and strike out on their own.
Genius or a rising tide for all?
If the initial results were anything like mine, what followed was a lot of self-congratulating and back patting. DIYers like me were brimming with overconfidence. But what was lost on me at the time was the old John F. Kennedy aphorism, “a rising tide lifts all boats.” Indeed, anyone who stayed invested after the great crash of 2008 was amply rewarded by the five-year bull market run that followed. DIY investors like me falsely took credit – attributing the success to their ability to pick winning stocks – instead of recognizing that we were all benefiting from a rising stock market and that our fortunate timing could be explained as simple luck.
Tide is about to turn
Dividend stocks have outperformed the broader market for a few years, but the tide is starting to turn. Value stocks are harder to come by today and I don’t have the patience to wait on the sidelines until they become more attractive, nor do I have the ability to unearth the hidden gems that are often overlooked by analysts and institutional investors. I diligently track the rate of return on my investments and compare the results against two appropriate benchmarks.
All active investors should do the same; otherwise it’s impossible to tell if your strategy is working. Outside of that glorious run in 2009 my portfolio has barely topped its benchmarks of CDZ (the iShares dividend aristocrats ETF) and XIU (the iShares S&P/TSX 60 index fund). This year my portfolio badly under-performed those funds – by 4.38% and 3.50% respectively.
My Portfolio rate of return versus benchmarks
|1 year (2014)||8.53%||12.91%||12.03%|
|Since Aug 2009||14.79%||13.41%||7.88%|
Okay, aside from this year it hasn’t been all that bad. But lately I haven’t felt that the time and effort spent managing my portfolio has been worthwhile. My last few stock picks were flat-out terrible (Rogers Sugar, Canadian Oil Sands) and I drifted away from the core ideas behind dividend growth investing, which is to buy blue-chip stocks when they are value-priced and hold them for the rising dividends.
That’s not to say I lost faith in the dividend growth strategy – but you need extreme discipline and dedication to stick with this approach for the long term. That means keeping new cash and dividends on the sidelines – often for years – until better stock prices come along. I no longer wanted to worry about market timing, analyst reports, and researching ideas for new companies in which to invest. I wanted a simple strategy that required minimal maintenance while still giving me the opportunity to reach my investing goals. That strategy, as you now know, is an easy two-fund solution built with Vanguard’s All World ex-Canada ETF (VXC) and its Canada All Cap Index ETF (VCN). That’s it.
So far the best thing about switching from 24 dividend stocks to 2 ETFs has been unsubscribing from 24 company email alerts. — Boomer and Echo (@BoomerandEcho) January 9, 2015
You can track your rate of return using these handy calculators developed by PWL Capital’s Justin Bender. Thanks to Justin for helping put together the past returns for my portfolio and its benchmarks again this year.
How did your investments perform last year?