For five years I attempted to beat the market with a portfolio of Canadian dividend stocks. As my investments grew, I began measuring my returns and comparing the results to a benchmark – an exchange traded fund from iShares called CDZ, which tracks Canadian dividend stocks.
I wanted to know if my judgement as a portfolio manager was adding any value, or if I’d just be better off buying an index mutual fund or ETF.
It turned out that I was beating the market. My stock picks returned an average of 14.79% from August 2009 until December 2014. CDZ, on the other hand, averaged 13.41% per year over the same period. The broader Canadian market, as measured by iShares XIU, returned just 7.88% per year.
My easy two-ETF solution
Despite this outperformance, I chalked up my stock-picking success to luck rather than skill. That’s because countless academic studies have shown that it’s nearly impossible to beat the market over the very long term.
I decided to sell my portfolio of dividend stocks in favour of an easy two-ETF solution built with Vanguard’s All World ex-Canada ETF (VXC) and Canada All Cap Index ETF (VCN). That’s it.
Talk about diversity: VXC holds an impressive 3,052 stocks in 38 countries from around the world; while VCN is made up of 235 small, mid-size, and large stocks in Canada.
My portfolio went from 24 Canadian stocks to nearly 3,300 stocks from across the globe.
I shudder to think about the amount of time I used to spend researching stocks, obsessing over my portfolio, and reading media reports (that often made me second guess my decisions).
This year I’ve barely even glanced at my portfolio. I might as well have gone to sleep during the two-week period of stock market turmoil this August. I just didn’t care.
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Compare that to when the price of oil went in the tank last fall and I watched my oil & gas stocks tumble right along with it. Would Canadian Oil Sands cut its dividend? (It did). Should I sell now, or buy more while prices are low?
When I had just 24 stocks in my portfolio, one or two duds had a significant impact on the bottom line. But with 3,300 stocks in my arsenal, the fortunes of one company, or even one sector, is not that concerning.
When I made the move to this two-ETF solution, I split my $100,000 investment like this:
- Canadian equities (VCN) – $25,000
- Global equities (VXC) – $75,000
The costs are a relative bargain. VCN charges a miniscule 0.11%, while VXC costs 0.25%. That puts the overall MER of my portfolio at 0.215%, or just $215 per year.
Finally, I can’t say enough about having a diversified portfolio. Canadian stocks had been on an incredible run since 2009, which is evident by the results of my stock picks over the past five years.
But 2015 has been a different story. iShares XIU, which tracks the TSX 60, is down 8.3% on the year, while CDZ, the Canadian dividend aristocrats index, has fallen 11.6% year-to-date.
Meanwhile, international markets, led by the U.S., have been on a roll in 2015 and VXC is up 6.5% this year. I’m smiling.
I’ve accepted the fact that I can’t beat the market over the long term based on stock picking skills. What I’ve also come to realize is that accepting market returns, minus a very small fee, still means that I’ll beat 80-90% of investors who choose to remain in actively managed mutual funds or invest in individual stocks. Hardly average.
I’ll also save time – no more pouring over stock research or getting email alerts every time an analyst changes his or her mind about a company’s prospects.
I’ve set my portfolio on cruise control for the next three decades, and the only thing I’ll have to worry about is finding five minutes once a year to rebalance the funds back to their original allocation.