Portfolio Update

I got married in September 2013 and so far avoided combining my portfolio with my wife’s – in order to track and check how my 2013 progress went without any skewing of the numbers. With 2013 ending in a couple of days, I have decided to include her holdings and starting 2014 – this blog, Roadmap2Retire will track our combined portfolios.
My wife’s portfolio consists of two mutual funds:
  • Scotia Canadian Balanced Fund – which is a index fund tracking the Canadian S&P/TSX Composite Index and the DEX Universe Bond Index and has a MER of 2.03%.
  • Scotia Diversified Monthly Income Fund – also tracking the same indices as mentioned above, with a MER of 1.45% (How does Scotiabank justify the difference in MER fees when tracking the same two indices?)
After including her holdings into a combined portfolio, our current portfolio diversification is as shown below. For the sake of comparison, I have included both the Before and After merger diversification charts. I think the portfolio is fairly well balanced, although I would like to see more exposure in Industrials, Technology and Telecom Services (In the old chart of sector allocation, I had merged Tech and Telecom into one group, but I have split that up now to follow the traditional 10 sectors of the economy).
Our asset allocation is still fairly well balanced after the merger.


Due to the addition of the new funds which are concentrated in the Canadian market, our combined geographical distribution is skewed more towards Canada with a 57% weighting. This is one area of balancing that we need to work on.

 

I have updated my Holdings page here.

What are your thoughts on this portfolio composition? I would love to hear thoughts, comments and feedback from the readers.

Bond Allocation

Investing in bonds provides an investor with a diversified investment portfolio. Every investor’s portfolio should consist of some bond component. Bonds provide stability in the portfolio and a predictable income stream.

Asset Allocation

It has become a common advise from most advisors that the percentage of bonds in your portfolio should be ‘100 – your age’. This gives you a rough idea of the importance of bonds, but should not be followed as a hard written rule. Benjamin Graham, the father of value investing, gives a simple (and in my opinion, better) rule of thumb to follow. Relative allocation between stocks and bonds should be between 25% and 75%, one way or the other. He goes on to say “any such variations should be clearly based on value considerations, which would lead [the investor] to own more common stocks when the market seems low in relation to value and less…when the market seems high in relation to value”.

My Bond Allocation

Bond allocation in my portfolio in Aug 2013 is about 11% – a relatively low value. This is because of the historically low interest rates that we currently have. The chart below shows the US 10-year treasury yield. The yields are at their lows and are already starting to creep up. When bond yields rise, bond fund prices lose value, so I have decided to keep my bond allocation to what I consider minimal.
historical bond yields

I only hold high grade near term maturity bonds as of this writing. I hold bonds using the iShares 1-5 Yr Laddered Government Bond Fund (TSE: CLF) ETF, which is composed of Canadian federal and provincial bonds maturing between 1 and 5 years.

 
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.
 

Getting Started – Asset Allocation

Diversification of assets is one of the major pillars of investing. If and when disaster strikes, you should be in a position to protect your assets. Diversification of assets has been proven to protect people’s portfolios time and again and something that should not be ignored.What do you diversify with?

  • Cash – Emergency funds, savings, GICs etc
  • Equity – an asset allocation of 25%-75% is recommended
    • Canadian equity
    • US equity
    • International (rest of the world) equity
  • Bonds – an asset allocation of 25%-75% is recommended
    • High grade bonds
    • Inflation protected bonds such as TIPS or real return bonds
    • Corporate bonds
  • Commodities – such as gold, oil etc can be a good way to hedge to protect against inflation
  • Real Estate – can be either your own home or via a REIT. Also acts as a great hedge to protect against inflation.

My Asset Allocation

I realize that my current portfolio goes against the recommended value of holding atleast 25% bonds. This is because of the extraordinary times that we are going through, with the bond yields being extremely low. In addition to that, once the interest rates start rising again, the bond funds lose value – so I am expecting some negative returns there. Nevertheless, I hold approximately 11% of my portfolio in bonds. I have increased my holdings in the next best thing to bonds with income producing equity sectors such as utilities and consumer staples.

Another way to looking at the diversification is to look at the geographical diversification – so that I am protected against disasters in one country. For e.g., if I was completely invested in the US market back in 2007-2008, I would have lost a lot more money than I did. With part of my portfolio in Canadian equity and international equity, I was able to protect my assets. My current geographical diversification looks as shown above.

What does your diversification look like? Are you diversified enough?

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.