Lazy Investing is Great – But Don’t Be Too Lazy!

Unlike most people’s brokerage accounts, mine doesn’t reinvest dividends or interest automatically into new shares of the indexes I own. 

I wish it did.  It just lumps cash into the account and I have to manually direct it, at some stage.

If you have an account like mine, at DBS Vickers, you’ll want to wait until you have a few thousand dollars worth of dividends/interest income before making a purchase.  Doing so ensures that you won’t pay as much, relatively, in commissions.

For example, it costs me $25 U.S. to make a purchase, so why would I place an order to buy $50 of my exchange traded index fund when 50% of it would be gobbled by commissions?  Instead, I can wait for my cash to grow to $5000, make the purchase I want, and only give up 0.5% in commissions when paying $25 to the brokerage.

But here’s where I admit to being exceptionally lazy

When I purchase something for my brokerage account, the proceeds are automatically wired from my savings account.  So if I have a few thousand dollars in my brokerage account, in cash, it will just sit there until I manually make it available for a purchase.

You might think I’m exceptionally odd, and there’s really no excuse for this:

I have been using cash from my savings account, while completely ignoring the cash building up in my brokerage account.  A few days ago, I looked at the accumulated dividends:  $24,000.  Hmmmm.

It wasn’t making any money just sitting there (and nor would it) so I decided to allocate it to one of my three index funds.

Here are the funds I own:

  1. A short term Canadian bond index (40% of my portfolio)—XSB
  2. Vanguard’s total U.S. stock market exchange traded index (30% of my portfolio)—VEA
  3. Vanguard’s first world international stock market index (30% of my portfolio)–VTI

Choosing which one to allocate this $24,000 to was easy.

Have a look at the chart below.  It’s a three month chart comparing the short term Canadian bond ETF that I own, to the first world international exchange traded index fund that I also own.  You might not be able to see the percentages, so let me tell how each of them fared:

The international stock index rose 6% over the past three months, and the short term Canadian bond index dropped very slightly over the same time period.

Now let’s have a look at my U.S. stock market index, and compare it to the bond index. 

The bond index, as mentioned, has dropped in value over the past 3 months, and the U.S. stock market index has gained 8% in the same time period.

My target allocation is as follows:

  • 40% Canadian short term bond index—XSB
  • 30% First world international stock index—VEA
  • 30% U.S. stock market index–VTI

When looking at my account, I noticed that my bond allocation was worth roughly 39% of my total.  So I took my $24,000, and I bought more of my bond index.  This is what I will do every month—month after month after month.   I’ll buy the lagging index….the one with the poorest recent performance.  That’s going to ensure that I remain as close as possible to my target allocation. 

This kind of investing isn’t sexy, but this is why it will beat more than 90% of investment professionals:

1.  Each of my exchange traded index funds will beat the vast majority of their actively managed counterparts.  For example, my U.S. index will beat the vast majority of U.S. actively managed funds.  And my international index will beat the vast majority of international funds.  My bond index will pound most of its counterparts as well.  That’s irrefutable, based on the albatross of costs associated with active management.

2.  I have the courage to buy the lagging index, rebalancing over time.  When the stock markets crashed in 2008/2009, I did what I was supposed to do:  I bought stocks and stock indexes because my bonds were making up a disproportionate amount of my investment account when my stock indexes fell.   I did the same thing in 2002/2003, when the markets were on sale:  I poured money into the stock market.

 Although we all know that we’re supposed to do this when markets fall, most of us don’t, including most investment professionals.  This gave my performance a huge gap over the pros.  And it will again, at some point.  I highly recommend rebalancing dispassionately when markets go haywire, or at the very least, continuing to buy the laggard, as long as it’s not some falling stock you’re betting the farm on, or a single foreign country index.  Go broad, with your indexes, and you’ll be fine for the long term.

Having said all this, I’m definitely not perfect.  What other chump would leave $24,000 in cash, from dividends, just sitting in his/her investment account?  If it’s cash you want to keep aside, a smarter investor would have put it in a high yield savings account, rather than let it fester in a brokerage account.

But like I said before:   I can be pretty lazy sometimes.

 





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 (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). 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. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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21 Responses

  1. Ts says:

    Hi Andrew,

    Great post, I have a question. Why did you pick a Canadian bond fund and a US index fund? Any reason to not buy TSX index funds?

    Thanks,

    TS

  2. That's a great question TS.

    I live in Singapore. My wife is American and I'm not sure where we're going to spend most of our time when we retire. For that reason, I only wanted 40% of my money in Canadian dollars. With the rest of the money split between U.S. and International equities, I have a slight overall bias to the Canadian dollar(representing 40% of my total) but my account is quite international. That said, as I get older, I'll be increasing my bond component. By the time I retire, I'll likely have 50% exposure to the Canadian dollar as I increase my bond allocation. With the small percentage of global capitalization that the Canadian equity markets are comprised of, I didn't bother to add a Canadian equity component.

  3. TS says:

    Thanks Andrew.

    So in all of your research which as you write indicates that index funds are better investments then most other forms or picking stocks or at least mutual funds, would you advise that Canadian index funds are also a wise investment or has all of your research been pointed at US index funds. I can do some work into this as well and investigate how the TSX has done VS the US exchange, but just wondering if you could advise if I as a Canadian living in Canada and planning on retiring here should be invested in CAD Index or US Index.

    Thanks again for all your insight.

    TS

  4. Hey TS,

    Canadian exchange traded funds are great. You could end up with XIC.To for your Canadian exchange traded index fund, if you want.

    You can see how a simple rebalancing of the U.S. index, Canadian index and the Canadian bond index would have fared since 1976. This is updated to the end of 2009. But when I extend the data based on the performance of 2010, we end up with a further 10%.

    Rebalancing such a combination of indexes would have turned $100 in 1976, into $3,400 ish today—if taken to March, 2011. Check it out here: http://www.moneysense.ca/2006/04/05/classic-couch

  5. Great post!

    I guess there's definitely a point where you can be too lazy! I like your allocation and your strategy to buy the lagging index. I'm trying to do that with my ETFs in my RRSP. For example, I just bought some more XBB with the recent market runup in equities over here. That move felt good, like I actually understood what I was doing.

    I am surprised you waited so long (up to $24 K) to buy more units! I usually push the buy button after a few thousand accumulates in my RRSP. Then again, I pay less than $10 per transaction and probably don't have as much patience as I should have 🙂

    Cheers,

    Mark

  6. Hey Mark,

    You're right. It's silly how long I waited. I really am pretty lazy in many ways! I didn't have any kind of strategy, I just didn't bother. In fact, I didn't even know that I had that much. I don't really look at my account cash balance very often (obviously!).

  7. gibor says:

    You said "I noticed that my bond allocation was worth roughly 39% of my total". I was wondering if you take in consideration exchange rate? Last 3 months CAD $ rose more than 3% comparing to US$, so your XSB was more than 39%

  8. gibor says:

    Andrew, I want to buy some international ETF. In your opinion what is better VTI or VXUS?

    • Hey Gibor,

      I just checked VXUS. It has an emerging market component, which isn't my cup of tea. I only invest in countries that would allow me to drink the water out of the tap. Long term, despite what many people think, emerging market returns don't beat developed market returns.

  9. Hey Gibor,

    First of all, I haven't looked into VXUS. But I do know that with so many options popping up for ETF investing, it's going to be tough for the average ETF investor to avoid jumping around as new products become available. That might defeat the purpose of the whole thing as people jump around.

    Your question about exchange rates is awesome. This is what I do. I look at my account and see the overall value in Singapore dollars. In Sing dollars, I look to see which index performed the others, and then base new purchases on my attraction towards keeping the account as close to my desired allocation as possible, in Singapore dollars (the currency I get paid in). That allows me to "value invest" based on performance, as it relates the the currency that I earn my income from. I didn't want to go into that part in the post, because it doesn't apply to everyone. Your point is really good. If one currency strengthens, then the ETF in that currency could outperform another ETF in another currency that may not have increased. This is the reason I use the Sing dollar as my benchmark to make decisions.

  10. gibor says:

    Andrew, thank you for replies! I asked you this question because I live in Canada and not so comfortable with US$ stocks and ETF. I have some US stocks and ETF ans some of them like PM or PALL gave me excelent appreciation, BUT in US$, in Canadian $ gains are much more modest. Except this exchange rates in discount brokerage are killers! (they add huge margin on the rate).

    Or another example, if 8 years ago , I would invest into some US security and I would gain total 60 -65% (not bad ! about 8% average) in US$, BUT 0 (zero) in Canadan $ taking in consideration exchange rate….,

    • Hey Gibor,

      It's always a pleasure to start a dialogue online, so thanks for your questions and comments.

      There's another way to look at the lowering U.S. dollar values too. Currencies and stocks always go too far in a given direction. At some point (maybe we're there already) the U.S. dollar is going to be valued lower than it should be. When something becomes popular, it usually rises further than it should, and eventually settles back. The same thing occurs for unpopular entities—whether they're stocks or currencies.

      Here's something to love about that U.S. dollar plunge. If you buy a stock like Johnson & Johnson, you'll be buying a stock that hasn't appreciated for quite a while. But profits continue to rise. And the company gets most of its revenue from overseas. As a person who can purchase JNJ in Canadian dollars, you're getting a steal of a deal, if you think long term.

      I think we can say the same for your U.S. ETFs. At some point, the Canadian dollar will be overvalued, compared to the U.S. dollar. As I mentioned, that might be the case now. Continuing to buy U.S. ETFs will likely present a wonderful long term opportunity. You'll be buying at a discount today. And eventually, the U.S. dollar will recover.

      There was a similar circumstance during the Korean War. High U.S. debts led to the Canadian dollar being valued higher than the U.S. Then it reversed back to normal.

      During the Vietnam war, we saw the same thing happen. The loonie was stronger than the greenback again.

      And history repeats itself with the Iraq war.

      Load up on those American equities/indexes my friend. Twenty years from now, you'll have a nice fortune on your hands—in Canadian dollars!

  11. gibor says:

    Andrew, I also like dialogue online… too bad we don't have forum and have to jump from blog to blog.

    You're telling a good reason ehy to invest into US$ in US securities. I also think that CAD$ is overvaluated , this is why I bought this year JNJ, ABT, PM (many will hate me for tha last one :)).

    I just want to get exposure to world market and I'm in big doubt what to choose: VEA, VXUS or XWD (last one in CAD$). Would be very please to hear your opinion on XWD or other canadian international ETFs.

    As per Bond portion, just was wondering why you invest into XSB? I hold CBO and thinking to buy some real return bond ETF (like XRB or ZRR) – IMHO inflation should go up, interest rates too …. and we need some protection.

    P.S. I know that if interest rate go up, long term bonds going down. What about Real return bonds?

    • Hey Gibor,

      Real return bonds would probably be a great idea. I own XSB because it's a short term bond with a decent expense ratio, and because it's short term, it should stay ahead of inflation.

      The problem with all these ETFs coming up, is that people might be tempted to jump from ETF to ETF, as new ones come available. That's an example of us playing into Wall Street's hands. I think that if we pick a basket of low cost ETFs, and if we are disciplined, it won't matter a heck of a lot which ones we choose at the end of the day, as long as we're diversified, and as long as the expense ratios are reasonably low.

      What do you think?

  12. gibor says:

    Andrew, I see advantage on Real return bonds ETFs, as they were design to beat inflation and this is actually what fixed-income investments should do. I'm also thinking about high-yield ETF (like CHB). Yes, they're more volatile, but IMHO still less volatile than even any particular blue-chip stock. Except it high yield ETFs pay on average much high yield than dividend stocks.

    With all those new ETFs and investors jumping from 1 to another – we get some strange picture. For example new ETF holds 80% stocks that old ETF holds. If a lot of investors sell old ETF and buy new one, old ETF and 20% of stocks (that new one doesn't hold) will drop in price without any economical reason. Maybe I'm wrong …. what do you think?

  13. Loved the post, Andrew. Maybe you can't brag about picking the next hot stock, but on the other hand you can take the wild swing of emotions out of the equation, except for the feeling of going with a solid strategy for the long term.

  14. Hey Gibor,

    I think the industry keeps giving us fresh products to tempt us. At the end of the day, as long as we're diversified, and have our money in low cost indexes, we'll beat most of the professionals. That's guaranteed, of course.

    But going for specific sectors could go either way for us in the long term. I like to keep things simple. Doing so will ensure that I beat the vast majority of hyper-active indexers who jump around from sector to sector, after all fees (and errors of judgement).

    I think it's best to keep out of high yield indexes. Keep things diversified and simple. Then go outside and enjoy the fresh air while others have their faces vainly in the financial pornography of the internet, TV, or the Wall Street Journal.

  15. Paula @ AffordAnythi says:

    One benefit to not reinvesting dividends is that you don't end up buying more of a stock when it is high. Dividends are larger when the stock is doing well, smaller when the stock is doing poorly. So reinvesting dividends means you'll necessarily buy more when the stock is high. Then again, you have to pay taxes for dividends you cash out.

  16. RebeccaD says:

    I must admit: I have never said "Andrew" and "lazy" in the same sentence….

    Assetbuilder only allows an opening investment of minimum USD $50K as you've pointed out. What is your suggestion for where to invest my savings until I reach that point of eligibility? (Approx 1.5 years – hopefully less depending on how disciplined I can be – and how many EASA classes Vanessa lets me teach in one year. Hah!)

    Thanks for continuing to steer us in the right direction, Andrew.

    Rebecca

    • Hey Rebecca!

      Thanks for posting the question on my blog. I'm sure there are other people who can learn from it.

      If you contact Assetbuilder by phone, and let them know how much you have, while giving them an indication of what you plan to save each month, they will probably make an exception. This kind of thing is pretty common.

      If someone opens an Assetbuilder account with $50,000, but doesn't add to the account, then that person won't be (from a business perspective) as good as a client who has $25,000 to invest, but is able to invest $1,500 a month for many years to come. If you can convince Assetbuilder that you will soon have much much more than this amount (because you're a great saver) then they'll likely acquiesce, and you'll be able to open an Assetbuilder account with less than $50,000.

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