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:
- Assets deemed to likely deliver superior returns (ie. small cap value)
- Assets with a low correlation with the stock market
- 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!