Where did my money go?

Most of my friends think that I’ve lost my mind.

 Two days ago, I sold $700,000 worth of individual stocks that I stockpiled lovingly, mostly over the past dozen years.

I greedily rubbed my hands with delight every time the markets crashed:  September 2001; The Iraq War in 2002/2003; The Recent Economic Crisis in 2008/2009.  I sold large portions of my bond index (XSB-To) during those times to ensure that my portfolio aligned itself with my original allocation.  I wanted a bond percentage that was equivalent to my age.  And recent stock market madness kept ensuring that I was selling bonds to buy into the stock markets when they fell, and buying bonds only (while avoiding stocks) when the stock markets rose.  Simply rebalancing dispassionately added rocket fuel to my investments over the past dozen years.

But other than buying cheap shares of my first world international index, the rest of my bond money went into individual stocks during those declines, not indexed holdings.

Since 2005, I’ve battled the idea of going “100% indexed”.  But every year since then, individual stocks made up a greater and greater component of my portfolio.

I’ve always told people, “Most of my money is in low cost indexes,” and that has always been true.  But this week was a catalyst for me.  I realized that the money I had in individual stocks was nearly as much as the money I had in indexes.  Couple that with perpetual feelings of self-doubt, peppered with statistical realities, pushed me to sell all of my individual stocks and plunge the proceeds into the indexes I owned.

My current allocation is very simple.  My index funds are broad-based, and not specialized in certain sectors.  What’s more…they’re cheap.

  • 40% in XSB-To (the short term Canadian bond index)
  • 30% in VTI (the total U.S. stock market index, with an expense ratio of 0.07%)
  • 30% in VEA (the low dividend paying first world international index, with an expense ratio of 0.15%)

My wife has an indexed account with Vanguard, with similar allocations, but an emphasis on U.S. bonds rather than Canadian bonds.

As “nomads of the world” we don’t have a specific leaning towards a single currency, as you can see by the holdings.  We don’t know where we’ll retire, and in all likelihood, we’ll wander around a bit: a winter here, a winter there.  Not tying ourselves to a specific currency seems logical, in our case.

I realize that many investors like to “Slice and Dice” their ETF holdings, breaking into small cap value, mid cap, large cap, etc., as they try garnering excess returns introducing three things:

  1. Assets deemed to likely deliver superior returns (ie. small cap value)
  2. Assets with a low correlation with the stock market
  3. Annual rebalancing between the asset classes

From 1931 to 2010, according to John Bogle, as published in his most recent book, Don’t Count On It! he reveals that such an approach would have made 12.9% annually versus 10.3% annually for the S&P 500 index.

But Bogle wisely suggests that the data is “period dependent”.  From 1944 to 1964, the results of the two methods were virtually identical.  After taxes, the simple S&P 500 index would have had the edge, thanks to the “capital gains triggering” of the alternative.

Then from 1983 to 1990 (17 years) the simple S&P 500 portfolio beat the “Slice and Dice” portfolio, 16.3% annually, versus 13.9% annually.

From 1931 to 2010, the “Slice and Dice” portfolio won, but much of the advantage was earned during some short periods of time.

Either way, as Bogle so aptly suggests, nobody really knows what methods will work best in the future.

For that reason, I’m keeping things simple with my own portfolio.  And of course, my costs will be low.  I’ll likely “Value Average” by bolstering up the laggards with new purchases, and if the stock markets take another bath (and I hope they do) I’ll be ready to sell bonds and buy greedily into those stock markets, bolstering my stock ETF positions.

And rest assured…when the stock market does drop (that’s what markets do from time to time) loads of smart people will be suggesting that “this time it’s different.”

It won’t be different.  It never is.  The markets will eventually recover—even if it takes years.

Be greedy when others are fearful my friends!

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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24 Responses

  1. Thanks for sharing Andrew. I understand the reasons, what I am curious is if your decisions would be different depending on your portfolio value? I find that the variables are constantly changing around us which influences our decision making process and I am curious if there are other variables other than the feeling that lady luck may go see someone else 🙂

  2. @The Passive Income Earner

    Hey Passive,

    The research I did for my book, The Millionaire Teacher, surely did its part. The more I read and researched, the more I started to see the futility of active investing, versus passive investing. There are gifted and lucky people who can beat the markets, but over my lifetime, I don't think I'll be one of them.

  3. John Papers says:

    This is amazing list like the previous one..

    Thank you for this post..

  4. DIY Investor says:

    I agree with your move although I'm taking bets on how long you'll stay out of individual stocks. With your love of research and uncovering winners it will be hard to resist. Maybe your investment club satisfies that urge, I don't know.

    There is something to be said for putting a small percentage of your assets in individual stocks. It keeps you in tune with the market and , as you demonstrated, it gets you to uncover some big winners.

    Even Charles Ellis and Burton Malkiel admitted to holding individual stocks for "…the fun of it". I have to say though that accepting the evidence is difficult for most people and kudos to you for that. Most people are like lawyers with a prior belief to prove and search for the evidence to prove their belief.

  5. What, no lottery tickets? 🙂 I think it will be hard for you to stay out of at least a limited exposure to individual stocks after your investing successes.

  6. Andrew: I really admire your humility here. Many people in your position would be convinced that they are stock picking geniuses and would write books how you, too, can follow their path to riches. Congratulations on your success, and look forward to reading your book.

  7. @John Papers

    Cheers John. Love the name of your blog, by the way

  8. @DIY Investor

    Thanks Robert,

    I recently read the short book that Malkiel and Ellis did together: The Elements of Investing. What I thought was interesting was that David Swensen, when writing the forward, actually criticized them for admitting that they bought individual stocks. I know that Swensen promotes indexes and of course, actively manages the Yale Endowment Fund, so it surprised me that he said that in the foreword.

    I think the investment club will satisfy my urge to buy individual stocks. The markets don't really get my blood rushing, although you're right, I have enjoyed researching businesses in the past. When I first sold those stocks, I felt absolutely gutted. Of course, I added the money to my indexed positions right away, but I still felt sick to my stomach. And now I feel peaceful. I haven't even looked at the stock markets since doing it. I'll have a look from time to time (I'll hear from others when/if the markets tank) and I'll see what has done poorly when it's time to invest my monthly savings, so I can buy the laggard.

  9. @The Biz of Life

    Hey Biz,

    That's what Robert said. But I'm not so sure. I don't have much of a gambling bone. I suppose that if Coke's price dropped tomorrow to $10 while the rest of the markets stood still, then yeah, I'd be tempted. But it sure would have to be a really really fat pitch for me to start swinging.

  10. @Canadian Couch Potato

    Thanks Dan,

    I do enjoy seeing mutual fund managers touted as geniuses who have had investment track records that fall well short of my own over the last 10 years. But I laugh. I'm no genius. And that probably means that they aren't either. That 90th percentile is going to be more than enough for me. The top fund managers of the day are likely to fall under that 90th percentile benchmark going forward anyway. We all know that, in investing, the past is no future indicator. It's a strange racket, isn't it? It has very little to do with how hard you try. I like the idea of running marathons with people who train everyday, beating 90% of them, but never running a single day a year. That's what indexing is like. Nothing else really compares to that. Sloth wins.

  11. DIY Investor says:

    @Andrew Hallam I find the comment "I don’t have much of a gambling bone" interesting. I feel the same way. I played a lot of poker in doing my 2 year stint of military service and enjoyed it and wondered but have never been to a casino. My friends tell me I've got to go but I've never seen the enjoyment in pulling a slot machine handle. I played the lottery for a year and quit after never coming close.

    Behavioral finance people emphasize the importance of anticipation in life compared to the actual event. I guess there could be some "gambling gene" that comes into play that affects people's investment behavior. I would say to anyone that has a gambling tendency to definitely stay away from the stock market.

  12. Hey Robert,

    Statistically, we might both be odd ducks. But at least we're swimming in the same pond. Other than gifts for friends on birthdays, I've never bought a lottery ticket….for myself. Nor have I ever used a slot machine or gambled in a casino. If the odds of losing are high, it's not fun for me. I've always equated money to work. You lose money—you work to get it back. I'd rather not lose the money! Our pond is a nice, tranquil one, wouldn't you say?

  13. Congratulations on your successful investing career. An indexed portfolio of stocks and bonds is an extremely viable method for getting good returns.

    I had a post planned about asset allocation, where I use the 60/40 stock/bond model as an example, but also promoted the picking of individual stocks as well. So I found it interesting to see you going 100% indexed, and 60/40 no doubt. It would have felt weird for me to post that right after you've posted your news about this big move of yours, so I plan on posting it some time in February. And after that, I've got follow-up articles on the merits of owning individual stocks. 🙂

    As a bit of a preview, I guess I'll bounce my ideas off of you and see what you think, since we seem to have fairly similar views of investing in all cases except that of owning individual stocks.

    Basically, my two main arguments about going with individual stocks are:

    1) The public is financially illiterate enough as it is. By never researching and owning individual companies, they're helping to keep themselves that way. They may have solid financial skills in other areas, but no real understanding of how businesses work. This is void if someone has a successful investing career and then switches to pure indexing, but many people don't do it that way.

    2) By indexing, and owning hundreds if not thousands of companies, the public gives up their voting rights. I see people complaining left and right about corporate greed, excessive compensation, unethical corporate actions, the power divide between the rich and poor, and then they readily hand over all of their voting rights. My opinion is that the public should take a larger role in owning and voting for individual companies. When companies are 60, 70, 80+% institution owned, the board has little accountability.


  14. @Dividend Monk

    Hey Matt,

    Benjamin Graham would definitely nod his head if he saw what you wrote under point number 2. In his view, people need to view themselves as owners, and they need to vote and pressure businesses that don't act in accordance with shareholders.

    I do think that few interested folk would follow me into indexes though. The desire to think they can find "that great man/woman" or "be that great man or woman" will be too great for most people.

    As for stock pickers, you are 100% correct. People need to see them as businesses, purchase them as businesses, and pressure them as business owners when they need to.

  15. Very interesting couple of posts, Andrew.

    I commend you for getting out while ahead. By being 100% indexed in your personal portfolio, you've removed several risk factors.

    I am surprised about the timing of it all, though. You said you've been mulling this for some time, but what brought about the catalyst to actually hit sell?

    Had you not posted that you bought RBC about a month ago, I wouldn't ask. But considering you DID recently make a stock purchase, it makes the decision seem rash (regardless of how long you've thought about doing it.)

    Just wondering.

    I understand the sick feeling (though not on the scale that you probably did!)

    I put a few hundred bucks a month into cheap index mutual funds… when the market value of any fund reaches a certain threshold, I sell the fund and by a comparable ETF. I find the process both nauseating and cathartic.

    As for stocks… I haven't been able to hit sell. I probably should, but I plan to enjoy them for another couple years yet 😉

    Have a good day, Andrew.

  16. @Myke @In Search of Salt

    Hey Myke,

    I was buying individual stocks practically every month until I decided to index my account fully. Honestly, the more research and writing that I was doing on my book, the more I was convinced that it would be practically impossible to beat the indexes going forward. It has been a constant mental war for me, and oddly, I feel very much at peace about the decision…even though I struggled with it for the days that followed the sales.

  17. Hi Andrew,

    Thanks for the clarification. If you were constantly buying, I can understand that the timing had nothing to do with rashness or an outside variable, and was something more akin to "hey, let's finally take the leap."

    Only seeing snapshots of your investing story, I had assumed that the RBC purchase was the first in a while.

    I'm glad to hear that you have found peace in the transaction. That probably means that it was the correct decision 🙂

  18. @Myke@In Search of Salt

    Cheers Myke,

    It's actually a lot easier to figure out what to buy at the beginning of each month now. I just buy the laggard, while trying to keep the same allocation. It's so nice and easy!

  19. Only having 3 holdings certainly does make it easy!!

    I just went through a bit of an internal battle dealing with some US cash I had sitting in my account: bolster one of my US holdings, spread it across my US holdings, or add a new US holding, either stock or a Vanguard index.

    In the end, I added something I think will be decent over time, but it would be much easier, for sure, to just have the target allocation to deal with.

    Off topic, but are you in need of a schedule/day planner by chance? I have loads of them from various contacts and am trying to give some away. I just put the offer on my blog as a giveaway. If you are interested, take a look (I have a list of what I have in the post… I have one from Singapore Airlines, as a matter of fact) and let me know.

  20. With your success in individual stocks I'm surprised, but there are benefits to going the full-indexed route. I'll be rooting for you.

  21. rj says:

    If I look solely at your equity holdings I note that you are holding VEA and VTI at 50% each.

    Is there any reason you choose VEA over VXUS which offer a broader index including small and mid and be the equivalent of VTI (of course it also includeds emerging markets as well) ?

    Also I am embarking on a fully indexed approach and wondered if you had any comments about the advantages and disadvantages of over weighting your home country?

    I am leaning towards the following four ETFs for my equity holdings:

    35% VTI (Total US Stock)

    45% VXUS (Total World Stock ex-US)

    15% XIC (iShares CDN Capped Composite Index Fund)

    5% XRE (iShares S&P TSX Capped REIT Index Fund (TSE)

    In addition to the equity holdings I also hold 30% in XSB (Canadian Short Term bonds).

    In terms of my equity holdings this gives me an overall 18.5% effective weight in Cnd equity (because VXUS contains Cnd equity). Which is still 6 times the global cap weight of Canada.

    All of my fixed income, salary and pensions are in Canadian dollars some I am not worried about taking on the unhedged currency risk (especially since this portfolio will be used in retirement to purchases many goods and services that are not canadian dollar denominated).

    The thing I struggle with is that many of the authors your recommend. Bernstien for example recommend a 70-30 split between their home country (the US) and foreign equities. I understand their rational, but worry that Canadians may not benefit from the same advice given our small global market cap which in turn is highly concentrated in the materials and financial sectors.

  22. @rj

    Hey RJ,

    I think the portfolio you chose for yourself is fabulous.

    To answer your question about VEA, I chose it because I didn't want exposure to China or India. Nobody is going to be able to see the future, but long term, fast growing markets haven't proven to outgrow slower growing markets when accounting for dividends reinvested, so I just choose to skip the ride on the emerging markets.

    As for your concern about Canadians having a highly concentrated index and perhaps not benefiting from more of a global market cap, I can just give you my view, based on history. For the most part, the Canadian index has always been resource based, as has the Australian index. But with reinvested dividends over lengthy periods of time, both stock market indexes have more or less matched the U.S. and the UK, and Kenneth Fisher argues that it doesn't really matter which market index you choose, over a lengthy period of time, they'll perform very similarly. So I don't think there's going to be a "missing out" component–as many people seem to think, if they skip China or some other global market component. Short term (over 10-15 years or so) it can certainly end up looking like that sometimes, but over the long term, I don't feel it's a big issue.

    I think that sometimes we get wrapped up in these minor details, when in the long haul they won't make a lot of difference. I think what will make a huge difference is our emotional ability to stick to something solid and rebalance or value average into the indexes we do happen to own. Most people won't be able to do that. When the markets plunge, and really smart people are saying, "This time it's different" many people who painstakingly build great, diversified, low cost indexed accounts will screw it all up, big time. That's the biggest risk I think, rather than choosing one index over another. Plus, with all the new ETF offerings that will constantly become available, it can encourage investors to jump around a bit, always seeing a slightly "better" option–which I think might ultimately lead to defeating the idea of just kicking back with a solid strategy, rebalancing, and enjoying the long term profits.

    Thanks, RJ, for writing such a detailed post. Neither of us can see the future. But we both have great portfolios for the long term. You're going to do amazingly well with your portfolio if you can stick to it.

  23. Eric Burnett says:

    Don't know if you already have something like this on your blog, but…Here's a useful site for ETFs for those who want to buy Index Funds, but either want to avoid the minimum initial investment required or are unable to get into one of the five account families you introduced.


  24. anthony says:

    First of all , if you indeed did sell $700,000.00 worth of stocks 2 days ago, ( which you held for 12 years), would you have not triggered rather large capital gains and therefore taxes??

    Secondly, as a teacher, you have a defined pension to look forward to, which most of us out here do not, which is unfair to say the least.

    As an afterthought , what sort of individual stocks did you own??

    Were you an income/dividend investor?

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