If you’ve followed my blog, you should know by now that I’m a big fan of passive index investing. That means I don’t really like to pick individual stocks. I also don’t like to day trade and manage my money on a daily basis. Some may think this is a stupid way to make money, but I’m not a gambling man. Never have been , never will be. I’m an investor, and as an investor I take a long term approach (greater than 10 years) to building my wealth. I’m not looking for the home run, rather I like to hit singles and over a period of time this becomes successful (sorry Blue Jays).
One only has to look at the what happened over the last couple weeks to see why choosing individual stocks is a bad idea. You might have been an investor in Home Capital Group, thinking the steady dividend and housing mortgages to be a great investment, but in less than two days more than 80% of the value was wiped out. That just doesn’t happen when you’re investing in the index.
Secondly, who was to know that Home Capital would be the company that would go belly up and not another mortgage lender like Genworth? Can you predict it? I can’t.
Perhaps it’s all the bad news and turmoil about the stock markets that freaks people out from investing. Or perhaps people have no extra money because they’ve poured all their money into their expensive mortgages. Either way, those that sit on the sidelines have been missing out.
If you truly fear missing out, then let me rub it in some more.
The Balanced Portfolio
I’ve always been a big fan of the Canadian Couch Potato portfolios. They are low cost investment portfolios that only have a combined management fee of 0.2% or lower. Try telling your real estate agent to take that commission. It probably won’t happen.
Granted the portfolios have always been changing on the site (which I hate) but using an old formula of a balanced approach of bonds, US equities, Canadian equities and ex North American equities has done really well in the first quarter of this year. Just how well?
Bonds are boring. As they should be. They’re a stabilizer for bad times and an income generator at others. This chart shows VAB (Vanguard Bond Index ETF) that has been up 1.65% already this year and dishing out a 2.67% annual interest yield. I’ll take that over EQ Bank’s 2.5% high interest savings account. At least I know the Canadian government is going bankrupt anytime soon. On top of that, this acts as our hedge against falling stock markets since bonds have a negative correlation to stocks.
I think everyone knows that Canada isn’t doing too well right now. Our economy seems to be spinning its wheels as overly indebted citizens and President Trump’s temperament seem to be keeping a lid on any growth. That said the Canadian index ZCN (BMO TSX Index ETF) is still up over the course of the year. After 4 months, the Canadian stock market is up 2.04%. Slap on a very generous 2.7% annual dividend and you can see why getting 5% from stocks is easier than cooking Minute Rice.
Keep telling yourself Trump is destroying America. Those negative views are only endorsed by the pessimists out there that probably want the world to end tomorrow.
The US stock market has been on a tear and already VUN (Vanguard Total US ETF) is up 8.76% in 4 months! It’s not because the US is printing loads of money. Quite the contrary, monetary policy is tightening with an increase in interest rates, yet corporate profits, according to Thomson Reuters, is rising an average of 13.6% for the first quarter of 2017.
So who’s doing well? Maybe not you and I, but corporate America certainly is and there’s no reason to think it won’t continue. So rather than bitching and complaining, maybe you should jump on the bandwagon.
There’s tons of turmoil on the Korean Peninsula. There are reports of terrorist attacks in London and Paris. France might elect Trump version 2.0. So how are the world markets responding? With a big F&*# You!.
Stocks outside of North America have risen like bandits. In fact, it might be hotter than the house market in Toronto right now because it’s on pace for a 45% gain year over year for 2017. See how ridiculous I just sounded right there?
VIU (Vanguard Ex North America ETF) has actually gained 15.61% in just 4 months this year! That’s crazy! I’m leaving Canada right now because even I can see where the growth is right now. I’m not even going to mention the annual 1.5% dividend because people will think I’m adding candy syrup to an already sweet chocolate cake.
One would think this train has outrun itself, but hey don’t you remember what happened in the US when stocks recovered at record rates after 2008? Anything can happen.
So how much would someone investing $50K from the beginning of the year in a very well rounded portfolio look like?
A fairly conservative portfolio like the one above that is similar to the Couch Potato models would have gained 6% over the first 4 months of the year. This means it’d be sitting at $53,000. This is not including any dividends and interest from holding the ETFs
So even if the markets didn’t do anything for the remainder of the year, we’re already looking at the standard 6-7% annual long term growth we’re looking for. Things are certainly looking good for 2017. Let’s just hope so.
Many people keep pointing out to me how real estate gains have destroyed anything that the stock market can return. That is certainly true. Real estate is the only asset class where banks will let you leverage 20 to 1, thus turning a $50K investment on a $1,000,0000 home into a 400% gain in a year. Yet there are risks with a 20 to 1 leveraged investment.
A single home is a single asset. These ETFs hold over 3000 companies as a whole. I don’t see all 3000 companies going bankrupt any time soon. Holding a home that is highly leveraged incurs maximum risk since all your eggs are in one basket. What happens when the price reduces by 5%? That’s a full 100% of your equity gone. Even if Canadian stocks fall, bonds would rise to offset some of it. If the US should falter, Europe might lessen the blow.
One could counter that if you could leverage 20 to 1 on stocks, you’d end up being a billionaire, not even a millionaire, quicker than investing in real estate. That’s probably true, but can you see how absurd an argument that is. Who the hell leverages 20 to 1 on anything? That just sounds risky and crazy. Oh wait, real estate investors do…