Posted By By Dale Roberts
Special to the Financial Independence Hub
Everybody relax. Chill out, or you can Chillax. Is that a word that is still in use?
For all of the noise and hysteria, 2018 was not all that bad a year for Canadian and U.S. investors. But if you listened to the financial press and were unfortunate enough to watch too much BNN or perhaps the more frenetic and desperate U.S’ investment shows that look more like a Football halftime show, you might think the world had ended for Investorkind.
Seriously, turn this stuff OFF. Unless you’re able to watch and laugh, then carry on. As I like to write, all of this financial and investment fluffery is for entertainment purposes only.
2018 was not that bad: all normal and expected market behaviour
When I looked at my accounts at the end of 2018, I saw that my personal RSP account was down just slightly at about 3%. My wife’s personal RSP and spousal RSP accounts were both positive to the tune of about 2-3%.
Hardly Armageddon.
Here’s one of my wife’s accounts. It’s a one-year chart so it shows the slow start to 2019. The purple line is my wife’s account (that I manage), the dotted blue line is the Canadian stock market – the TSX composite.
That does not look like panic time. More like snooze time with not much going on.
The account uses the basic building blocks also largely followed by the Canadian Robo Advisors,and mostly by those who create a well-balanced ETF portfolio. You can find some basic models on my ETF Model Portfolio page.
For my wife’s accounts, and for all of our accounts, I use Canadian stocks, U.S. stocks and Canadian bonds. I mostly do not use International stocks. Core indexers might say that is a ‘mistake’, you might be best served to stick to the script. I will certainly be back with articles on International Diversification for Canadian investors.
Not including international stocks added a slight boost to our portfolios in 2018.
International Developed Markets (iShares XEF) was down 6.6%.
US Total Markets (iShares XUU) delivered a positive 2.9%in 2018 thanks to the strong US Dollar. Canadian investors see that currency boost.
The Canadian Market (iShares XIU) was down 7.7%.
The Canadian Bond Market (iShares XBB) was up 1.3%.
Put it all together in a Balanced Portfolio
We can see that two of the assets were in positive territory, two of the assets were in negative territory. Typically your asset mix will largely determine your returns. A good benchmark is the new Vanguard all-in, one-ticket portfolio solutions. For more on those wonderful funds please have a read of Jonathan Chevreau’s article on Moneysense.
While the funds are not allowed to report returns as they are not yet ‘one-year old’ Vanguard does list the benchmark returns. These are the returns that one would net without any fees or performance tracking error. Keep in mind the fees on the Vanguard Portfolios are very low at .22%.
Conservative in 2018 down -0.65%
Balanced in 2018 down -1.64%
Growth in 2018 down -2.68%
These can be very useful benchmarks for investors. If you’re not measuring up you might look under the hood to discover where and why you’re coming up short. It may be with respect to your asset allocation, your asset selection, your behaviour or your fees (or other).
But all told, we can see that 2018 was a year of ‘not much going on’ for a typical intelligent investor who holds a well-balanced portfolio. A key in 2018 would have been to not currency hedge. Of course Canadian Couch Potato has been advising mostly against currency hedging your assets for many years. From 2014, Why Currency Hedging Doesn’t Work in Canada.
Currency hedged returns for US and International assets were very poor in 2018. You should have listened to Dan. One exception, you will often see the portfolio designers currency hedge the international bond assets.
Here’s an example of the individual holdings of the VGRO Growth Fund.
One area that did work a little better in 2018 was Dividend Growth investing in the US and Canada. That’s why you’ll see my wife’s accounts in positive territory. We use the Vanguard Canadian High Dividend Yield VDY. We hold a few US Dividend Achievers. My wife also invests alongside Warren Buffett (BRK.B) as well.
A Wonderfully Simple Two-Fund Solution
If we check in with one of our favourite Canadian personal finance writers, Robb Engen of Boomer and Echo, we’ll see that his simple portfolio also would have had a ho hum year. Robb uses a two-fund solution.
Robb holds Vanguard’s VCE for the Canadian stock component. It has a dirt cheat MER of .05%. For US and International stocks Robb uses Vanguard’s VXC. That will combine the US and International asset in one fund. From the article link …
VXC was down just 2.38% in 2018 while Canadian markets were down by that 7.7%. What I really like about Robb’s personal asset allocation is that he only holds between 15 – 25% for his Canadian companies. That’s smart. Canada is such a small percentage of the world economy and our market is concentrated in financials and energy. Given that, most of Robb’s assets are in the US and International fund that held up reasonably well in 2018.
I also like that Robb holds no bonds. He understands that he has the risk tolerance level and the time horizon to take on a growth-oriented portfolio that is likely (over the longer term) to outperform a more conservative Balanced Portfolio.
And of course we always need to take a longer term perspective. While not all that ‘long term’ here’s the performance of VXC from inception. While we never know what markets will do short-term, the trend is positive.
These lower prices are good – make that Great!
And of course if you’re in the accumulation stage, you should be rooting for lower prices. That allows you to accumulate more shares or units and lower your average cost per unit or share. While we can’t time the markets, these ups and downs are normal, those periods when we are accumulating more shares offer a wonderful long-term benefit.
What about those Dividend Growth gals and guys?
These folks will tell you that they don’t look at those scary price charts, they look at a chart like this …
The chart is from Mark at myownadvisor and his 2018 Dividend Income Update.
Different strokes for different folks, right? Many investors use annual dividends as a goal that allows them to focus on the longer term picture. There’s nothing more important than investor behaviour and staying true to our plan. You’ll see from the chart above that there are no wild stock market gyrations: just a nice clean line going up, up and away, marching confidently toward Mark’s end game and financial freedom.
For a list of interesting reads and links to many dividend updates have a read of financialuproar’s Linkfest #35.
Stay the course
Keep in mind that stock market swings are normal.
Stock markets are like a box of chocolates – you never know what you’re going to get.
Simply ensure that you understand your goals and risk tolerance level and invest within your risk tolerance level. Keep adding monies on a regular schedule without care or worry. Set it, and forget it. Keep your fees low.
Investing, it ain’t rocket surgery.
Happy New Year!
Dale @ cutthecrapinvesting@gmail.com
Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on January 6, 2019 and is reproduced here with his permission.
