How Behavioural Biases Kept Me From Becoming An Indexer

I’ve spent the last five years convincing myself – and many of you – that I’m a sophisticated do-it-yourself investor with a sound strategy that will outperform the market over the long run.

My dividend growth investment approach has indeed performed well, returning over 16% per year since 2009. But the stock market in general has also been red hot over that time.  It’ll take another bear market cycle to determine whether my investment returns were skill, luck, or something in between.

In the meantime, since launching our fee-only planning business earlier this year, I’ve been recommending a couch potato investment approach to anyone who’ll listen.  I truly believe that 99% of investors would be better off indexing their portfolio with three or four low cost, broadly diversified ETFs.

Related: Why investors should embrace simple solutions

So lately I’ve started to wonder, what makes my situation so special?  Why stick with a strategy that I don’t even recommend to my clients?

The answer lies in a whole bunch of hidden behavioural biases that cloud my judgement – framing, recency bias, home country bias, and overconfidence.


It’s difficult to part ways with a successful investing approach.  Selling a portfolio of winning stocks – my babies that I’ve nurtured through this five-year bull market – just doesn’t feel right.  But if I were sitting on $100,000 in cash instead of stocks I’d have no problem starting a couch potato portfolio today.

Recency bias

As the bull market rages on and my investments continue to perform well, it gets harder and harder to recall what a bear market feels like and what I might do if my investment returns start to lag my benchmark.

Related: How are your investments performing?

This year my portfolio has trailed its benchmark by about one percent – not huge, but enough to make me pause and reconsider my approach.

Home country bias

When I started my DIY portfolio, I bought the 10 highest yielding stocks on the TSX.  While I’ve refined my stock-picking approach since then, I’ve stuck with Canadian dividend payers even though Canadian firms make up a tiny slice of the global economy.

Making matters worse, instead of keeping my Canadian dividend stocks in a TFSA or non-registered account, they’re held inside my RRSP.  Not an optimal strategy when it comes to tax efficiency.


It’s hard not to be overconfident when you’ve beaten your benchmark by a full 3% per year over the last five years.  But even the best investors will eventually suffer periods of underperformance.

Related: 5 lessons learned about investing

Why wait for that to happen before accepting the inevitable?  Indexing gives me the best chance of achieving my investment goals over the very long term.

No shame in becoming an indexer

Norm Rothery had a great piece in the Globe and Mail this month about a DIY investor whose U.S. stock picks had under-performed the market by a good 3% per year since 2007.  The investor decided to stop picking U.S. stocks and move to index funds instead – opting for Vanguard’s FTSE All-World ex Canada ETF (VXC) to get his U.S. exposure.

Rothery goes on to write:

“Scott’s decision to stop picking U.S. stocks is an uncommon one. Most self-directed investors remain far too confident in their abilities for far too long. Instead, disappointing long-term results are often attributed to misfortune or peculiar circumstances rather than the lack of a competitive edge.

There is no shame in admitting that you’re not the next Warren Buffett. The vast majority of investors aren’t. Those who figure it out are likely to improve their returns dramatically by following simple low-cost mechanical methods such as investing in low-fee index funds.”

Speaking of Buffett, the ‘Oracle of Omaha’ has famously touted the benefits of a low cost, broadly diversified investment approach, saying that most investors would be better off in an index fund rather than trying to beat the market by picking stocks or actively managed mutual funds.

Final thoughts

The more I read about, write about, and teach others about investing, the more I’m convinced that passive investing is the right approach.

It’s not that I stopped believing in a dividend growth strategy – it’s a fine approach that many investors will have success with – but it’s not ideal for my RRSP, and frankly the time and effort needed to manage it properly may not be worth it in the long run.

I suspect that it’s only a matter of time before I pull the trigger and become a full-fledged indexer.

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  1. Barry @ Moneywehave on September 28, 2014 at 10:07 pm

    I’m an index investors since it’s easy and literally requires no thinking which of course gives me time to do whatever else I want. That being said if you have a strategy that works for you then by all means go for it.

    • Echo on September 29, 2014 at 10:52 am

      Hi Barry, that’s the problem right now – I’m thinking too much about which stocks to buy. I like my TD e-Series portfolio (RESP) where I just add new money to one of three funds every month. Nice and easy.

  2. Big Cajun Man on September 29, 2014 at 6:45 am

    As a parent, I have no difficulty with the statement, “Do as I say! NOT as I do!”. I have the same issues with Debt, where I rail against debtors, yet I am one still too!

    Relax, have a coffee, there is no hypocrisy in your stance (IMHO).

    • Echo on September 29, 2014 at 11:28 am

      Hi Alan, I’ll admit I was having trouble with the “do as I say, not as I do” advice – but your point is well taken 🙂

  3. Dan @ Our Big Fat Wallet on September 29, 2014 at 6:53 am

    I think a balance of both might be the best way to go. In other words keep your dividend stocks and use the new money to start index investing. I definitely see the value in index investing and will look to that for my own portfolio, there is nothing wrong with blue chip dividend stocks (ie. bank stocks) as I think they are solid investments that will perform well for decades to come

    • Echo on September 29, 2014 at 11:32 am

      Hi Dan, I don’t mind the blended approach but my problem is that I’d prefer to index my RRSP and have Canadian dividend payers inside my TFSA (and then non-registered). Right now I have it backwards, so I’ll need to overcome these behavioural biases and get my RRSP figured out first.

  4. Alan on September 29, 2014 at 9:28 am

    Excellent post. Daniel Kahneman in “Thinking, Fast and Slow” explains very cogently why it’s impossible for an investor to beat the market over time. After reading the book I (somewhat reluctantly) sold all my stocks except one and became a couch potato.

    • Bernie on September 29, 2014 at 10:37 am


      My view is that it is easier to beat the market on average over a long time frame than to beat it every year. The market is comprised of all investors with an index representing an average price of stocks held within it. The law of averages suggest 50% of investors are above the index & 50% are below it. If most are below it the index would be in a constant decline. The tendency for a lot of investors is to buy high & sell low. If they can shake this mentality & stay in it through “thick or thin” they will do fine. The longer they stay in it the closer they will be to the index they invest in.

    • Echo on September 29, 2014 at 11:32 am

      Hi Alan, okay I’m curious – which one did you keep (and why)?

  5. My Own Advisor on September 29, 2014 at 9:53 am

    Nice post Robb. I’ve come to a similar conclusion but I think it helps I have some CDN stocks non-registered since my RRSP is almost full. I’ve tried to become as tax efficient as possible – only CDN stocks non-registered and RRSP has most U.S. stocks and ETFs.

    I’ve learned to appreciate the lazy approach to investing. I think Preet said it well when we last met here in town “I don’t care what the markets did today, I’m an indexer”.

    I can’t see myself ever selling some of my CDN stocks but I can see myself investing in more indexed products in the future. I can still get some nice passive income from ETF distributions 🙂


    • Bernie on September 29, 2014 at 10:42 am


      “I don’t care what the markets did today, I’m an indexer”.

      Actually, the way most dividend growth investors look at it is: I don’t care which way the markets go so long as my dividends continue to grow.

    • Echo on September 29, 2014 at 11:35 am

      Hi Mark, as my portfolio grows larger and there are more stocks to keep tabs on (not to mention researching which ones to add), I’m starting to appreciate the lazy approach as well. Now, I started a synthetic DRIP this year, and that has helped a lot. Still really torn on what to do.

      • My Own Advisor on September 29, 2014 at 4:48 pm

        “…as my portfolio grows larger…” a good problem to have Robb, 🙂 but I can appreciate there are more things to keep tabs on.

        I like your call about synthetic DRIPping, I do this so I’m biased I guess; I can basically set my holdings on autopilot. I rebalance my portfolio with new funds/money added to respective accounts and just keep the DRIPs taps open in markets that are good or bad.

        You’re very knowledgeable about all this stuff, but I think as you add new money, buy products like VTI or VUN for U.S. stocks and VXUS or VXC for international exposure, that will probably give you the indexing angle you’re looking for.

        As you open your TFSA (already done?) you can slowly get away from your CDN stocks in the RRSP and put your CDN dividend-stocks in there (TFSA).

        Then, once all registered accounts are maxed, simply load-up the dividend payers or put a ZDV-like product non-registered for all the reasons you already know.

        Anyhow, you know this stuff inside and out but there is some beauty that comes with simplicity. If only I could convince some folks at work about keeping things simple in my day-job. I swear every industry works hard to make the simple complex sometimes 🙂


        • Bernie on September 29, 2014 at 7:17 pm

          FYI for all regarding withholding taxes…
          UK based stocks & fully franked Australian stocks are not subject to withholding taxes in any account. So if you wanted to you could have stocks like RDS.B, BP, UL, BBL & WBK in your TFSA. We all know this is not the case with U.S. stocks but for at least these two countries you get the whole dividend without a tax grab!

          • My Own Advisor on October 1, 2014 at 3:20 pm


            You read my mind…I have been thinking about adding some ADRs in my RRSP, UL is one of them.

            No withholding taxes in any account is a good thing.

            Don’t get me wrong, I’ll continue to own dividend paying stocks (and maybe some new ones as well), I’ll also be indexing more as well.

            Cheers Bernie,

  6. Bernie on September 29, 2014 at 10:27 am

    There is no right way or wrong way to invest. You should go with what you’re most comfortable with. Personally, I love crafting & monitoring my own dividend growth stock portfolios…I have them in my RRSP, Non-registered & TFSA accounts. I don’t buy the argument that dividend stocks in an RRSP are not tax efficient. I know when the time comes to start using my RRSP (or future RRIF) that all withdrawals will be taxed the same. That isn’t important to me. What is important is I feel my investing style is the best one to keep up with inflation. If all investing strategies result in the same tax rates on withdrawal why not go with one that focuses on what you feel is the most important feature!

    Even though I really enjoy DGI I often wonder if my returns will continue to outperform the market. I realize the bull market made all strategies look good. I know my primary focus is in maintaining a safe, reliable, increasing income stream that exceeds inflation but I do also want my portfolios to beat the indexes I measure against. So far I’m way ahead. My plan is to continue “my way” until I lose interest in it for whatever reason, ie; underperformance to my goals, inability to monitor due to mental deterioration or death. I thought long & hard about what my second choice of investment approach would be. I’ve studied many options and feel the best combination of performance and ease would be to sink everything into globally diversified “Mawer Balanced Fund and have systematic monthly withdrawals for income. The fund is rock solid, has low fees & has provided an average 8% annual total return since inception with very few down years. Easy peasy! In the meantime I’ll continue on with my current preferred choice.

    • Echo on September 29, 2014 at 11:42 am

      Hi Bernie, thanks for your thoughtful comments. I know you’re a passionate dividend growth investor.

      When you said your plan is to continue “your way” until you lose interest – that’s where I’m at right now. The fact that I could get global coverage with just two funds (Vanguard Canadian Index and Vanguard’s All World Ex-Canada) is very appealing. And if something were to happen to me then it’s comforting to know that my wife could easily manage a two-fund portfolio.

      • Bernie on September 29, 2014 at 12:27 pm

        The right way to invest is the way you’re most comfortable with. In your case the two index funds give you market returns with no fuss or worry about stock selection. Your new investment strategy will free up more quality time to enjoy other pursuits and sleep well. You have many years to accumulate…all is good!

  7. Steve on September 29, 2014 at 2:42 pm

    Since the Canadian market is small and highly concentrated into financials/energy, I don’t see a problem being 80% indexer to cover the globe and then being a diversified 20% dividend investor for the stocks here at home in a non-registered account to maximize tax efficiency.

    It’s great that you can recognize your own biases and act accordingly – many cannot.

  8. Tawcan on September 29, 2014 at 3:20 pm

    Interesting post. I’m mostly using dividend growth approach but have been looking more and more into passive investing as well.

  9. Potato on September 29, 2014 at 7:56 pm

    Even if you want to focus on/tilt towards dividend/dividend growth stocks, you can do it passively with ETFs. Of course, you do compare yourself to CDZ so you’re already aware of those options.

    I started off indexing a bit to kind of hedge my bets on my ability to pick stocks, but I’ve been leaning more and more that way myself. No time left in the day to read balance sheets.

    • Bernie on September 29, 2014 at 8:33 pm


      Being a passionate DGI, as Robb calls me & I won’t disagree, I’ve studied ETFs as well. I have yet to come across a true dividend growth ETF anywhere. There are no true dividend growth ETFs only ETFs that carry dividend growth stocks. Distributions are erratic, lumpy and are just as likely to lower the distribution as they are to raise it. The payouts of the ETF rarely mirror the consistent rising dividends of the stocks it holds. I could not find one ETF older than 5 years that did not cut it’s annual distributions at least once. The performance numbers also seem to be poorer than most stock DG investors I know. But as you say most folks don’t have the time needed to research & pick individual stocks so DGI is not for everyone.

  10. chantl01 on September 30, 2014 at 9:32 am

    I have the opposite setup to you Robb – I’m a pure couch potato index investor in the RRSP, ever since I moved it in cash into a discount brokerage account. On the other hand, since the TFSA started off so small I felt more comfortable trying to buy individual dividend stocks in that account, and have continued to do so as the balance has grown. But I’m now questioning my commitment to managing individual stock holdings in my TFSA and contemplating selling all and converting that account to an index portfolio also. Although I’ve done well enough in the TFSA, there is no refuting the evidence that the indexing in my RRSP has out-performed it.

  11. Dennis on September 30, 2014 at 1:49 pm

    Better than mutual funds but you are still averaging down and paying fees. My strategy is similar to yours, double digit gains, passive for the most part and low risk. I just invest in a dozen CDN oligopolies (see Wikipedia for CDN contingent). Essential, solid fundamentals, regulated, translates into consistent returns over the long term.

  12. Robert on October 1, 2014 at 1:56 pm

    Let me come out of the closet on this too. I have yet to buy an index fund. Most of my security holdings are in stocks with a small amount in low cost mutual funds. I really like the idea of being able to go to a stockholder meeting and vote. I like to get enthusiastic about a company rather than a pool with a formula. I am not super active in modifying my portfolio and for the most part it is blue chippy.

    I also believe that index funds may work better at some times than others. If an index is changed radically at some point the funds may automatically enter a period of worse results. In other words I do not believe that past success of an index fund is an accurate measure for the future.

    If I want to be on autopilot in the future I may hop on board with index funds.

    I think age is a factor. Holding a bunch of blue chip companies is less ominous with 3 decades to go vs 6 decades. after all not many will go belly up in that period.

    • Bernie on October 1, 2014 at 4:40 pm


      There’s really no “better” or “worse” performance wise with index funds. They will always be the market average. There’s nothing wrong with being average if you want to ride along in autopilot.

      • Echo on October 1, 2014 at 5:06 pm

        One of the misconceptions about indexing is that you’re settling for “average” returns. That couldn’t be further from the truth. You’re getting market returns, minus a very small fee. The fact is, that beats 80-90% of actively managed strategies, so by being “average” you’re actually sitting at the top of the class.

        • Robert on October 1, 2014 at 6:04 pm

          Are you sure past results will be reflected in the future?

        • Bernie on October 1, 2014 at 10:51 pm


          The market is comprised of everyone invested in it. The index price is roughly an average measurement of all the stocks within in it which are owned by all those in that market. The “so called” experts say that 80-90% of active managers underperform and the majority of investors underperform. Assuming indexers also slightly underperform due to fees, however small they are, I ask “WHO EXACTLY” is outperforming the index. If this many investors are south of the index why isn’t the index price, which is buoyed on both sides by outperformers and underperformers, not in a steady state of decline?

          When “they” say the majority of investors don’t beat the market I think they are factoring in those that tried & failed and are no longer in the market. I fully believe 50% of investors in the market are beating the index and 50% are not. I also believe indexers are slightly under average but close enough to be considered average.

          • Potato on October 2, 2014 at 6:17 pm

            Bear in mind that active funds underperform net of fees — and that’s where the central argument to index comes from*.

            If Investor group A owns stocks that get 4% return, and group B owns stocks that get 6% return, and let’s say the overall market of stocks averages 5% return. But if group A and B paid 2% in fees for their stocks to get that return, and the index investor who rode their coattails paid 0.5%, then the index investor net of fees even beat out the higher performing group B.

            So lots of portfolios out perform, but few investors do, even before you get into bad behaviour.

            * – some studies suggest they under-perform on average even before fees, whereas others show active management with a slight beat on average; still more than 10-20% of funds beat the index before fees.

          • Grant on October 5, 2014 at 9:20 am

            Bernie, I think you are misunderstanding the difference between market returns and average returns. The whole market consists of passive investors and active investors. Passive investors, by definition, get market returns ( not average returns), minus a small fee for the ETFs. As a group, active investors, must also, of course, get market returns, minus fees. Professional money managers charge high fees, and individual investors tend to make behavioural mistakes such that 80-90% of all of them underperform the market. This is the evidence from the peer reviewed financial literature. It is not “the ‘so called’ experts saying so.” As Rob points out, market returns far exceed average returns.

  13. Bernie on October 2, 2014 at 7:30 pm


    While I’m not a proponent of mutual funds I do own one & no ETFs. Regarding your post I’d like to point out two things.

    Firstly, hen you look at performances in sites like Morningstar, Globefund, etc the performances shown are ALWAYS net of fees. I don’t know of any site that shows returns before fees are applied.

    Secondly, there are several actively managed mutual funds that have superior returns than index ETFs, even after fees. These mutual funds may not beat every year but they do longer term (>3 year periods).

  14. Grant on October 5, 2014 at 8:59 am

    Great post, Rob! It’s not easy to look closely at one’s behavioural biases. A couple of points if you do decide to make the change.

    1. Dividend stocks have done very well the last 5 years and are quite expensive now as a group. With reversion to the mean being a powerful force, now may be a good time to switch to a total return index strategy.

    2. At least with your stocks in your RRSP, there are no tax consequences to making the change, and you can fix the asset location issue.

    Good luck with whatever you decide!

    • Bernie on October 5, 2014 at 10:36 am

      Grant & Robb,

      As you say dividend stocks have done quite well. The S&P 500 Dividend Aristocrats Index has outperformed the S&P 500 since launch date in May 2005. Dividend growth stocks may or may not continue to outperform even though their primary purpose is safe, reliable income growth rather than total return.

      Because of the popularity of these type of stocks they are expensive as a whole so I wouldn’t recommend a dividend ETF at this time. That said, if you do some digging, you can always find a fair priced stock as opposed to a basket of them. Energy stocks, for example, are showing good value of late.

      There is nothing wrong with low fuss index funds but they offer no chance of market outperformance and don’t provide enough income in the distribution phase for most investors.

  15. Bernie on October 5, 2014 at 9:40 am

    Grant, I understand what you’re saying. Where we differ is in definition of “market”. My definition of market is the entire market of investors, your’s, I think, is the index. I consider the index to be roughly the overall average.

    Either way, my point is if most professional money managers & active investors are said to be underperforming the index & index investors are just under the index because of small fees what is holding the index up. It’s impossible to have this high a population below the index without it in a freefall. I say it has to be roughly 50-50 on either side.

  16. Grant on October 5, 2014 at 9:58 am

    Bernie, you are redefining “market” as “average”. This is not what “market” means. By definition “market” returns, are index returns. The market is the index. You can’t just redefine terms!

    Now if you are talking average returns (actually mean returns), then, of course there must be 50-50 on either side, by definition. But this has nothing to do with market returns, and, as discussed, returns of the average investor are way below market returns/the index.

  17. Bernie on October 5, 2014 at 11:04 am


    Index returns are average returns.

    The market is generally considered to be the universe of investors within the segment of the market invested in. When some say you can’t beat the market they are right. Technically only the one at the very top is beating all the others below him/her.

    In your definition where exactly do you place the index in relation to the entire marketplace?

    • Grant on October 6, 2014 at 5:02 am

      Bernie, I think I understand where the confusion lies. Average market returns (the index) are not the same as average investor returns ( the returns that the average investor actually gets). By following an index strategy, you are guaranteed to get market returns, which is far above what the average investor gets. If you actively manage your portfolio, the data shows you will underperform passive indexers 80% of the time. Therefore, that tells me where I want to put my money.

  18. Bernie on October 5, 2014 at 12:55 pm

    Robb et al,

    I would never say that any particular investing strategy should be the preferred choice for everyone. You should go with the one that you’re most comfortable with. If the strategy you’re using isn’t giving you the success you wanted, then, by all means switch your strategy. If it does works, why switch?

    Since I decided to go with a dividend growth strategy in July 2008 my total return has been 115.1% with average income growth of >11% per year. During the same July 2008 to Aug 2014 time frame the total return for SPY was 78.3% & for XIU.TO was 23.7%. My portfolio is roughly 50% Cdn – 50% U.S. A blended SPY/XIU would have returned 51.0%. I’m not switching any time soon!

  19. Grant on October 6, 2014 at 5:16 am

    Bernie, I agree that you should go with the plan that you are most comfortable with as sticking with the plan is more important than the plan itself, as long as it’s a reasonable plan, which DGI certainly is.

    When comparing your results you need to use appropriate risk adjusted indexes. Comparing a dividend strategy to broad market indexes is an apples to oranges comparison, particularly over a short period of only 6 years when dividend stocks have done well. As dividend investing is a form of value investing you need to compare your results to a large value index, or as Rob does, to an appropriate dividend ETF.

  20. Bernie on October 6, 2014 at 9:57 am


    My time period is 6 years since I left active management and went DIY. I’ve done much better on my own and know I now have a very good plan, as your’s is to you!

    My primary goal is sufficient growing income but I also like to monitor & compare to equity index funds pertinent to the space I invest in. I’m confident in my plan as I know dividend stocks have outperformed historically.

  21. Dennis on October 9, 2014 at 3:50 pm

    I too believe in Canada. We are a resource rich, water rich, educated and democratic country. Canada will continue to do well for the twenty to thirty year period that I am looking at unless we really do something stupid politically and we will see that coming.

    I look for stocks that have good dividends as well as earnings growth so that there is also stock appreciation. Canada by size and geography lends itself to oligopolies and I like these companies with limited competition, barriers to entry and almost guaranteed profitability.

    Start with the five big banks. They dominate the industry. We will cease to be a strong independent country without a strong independent domestic banking industry. The government will take whatever measures it needs to take to protect the industry. We have witnessed prevention of foreign takeovers, prevention of mergers, not allowing banks to become income trusts and most recently, as part of the EU discussions, resisting pressure from the EU to open up the industry.

    I did some research. Since 2000, the five big banks have averaged 15.3 % annual return with a DRIP program. The Globe had an article a short while ago that pointed out that TD and RY have averaged over 13% since 1975!

    How about the pipelines. Still the least expensive and safest way to ship energy. Environmental and first nations groups will make sure that not too many more miles are built. The railways are very similar. Once you have the infrastructure in place, the most effective way to ship on ground.

    Telecom is a growing business with three large domestic players; Bell, Rogers and Telus. Even if the government is successful in helping Quebecor become the fourth national player, it is still a oligopolistic situation.

    I also like Suncor. I like the retail distribution chain, the large reserves, no exploration risk as well as the maturity of the company.

    So, I have a seven figure portfolio but just hold eleven stocks (RY, BMO, TD, BNS, CIBC, TRP, ENB, CN, BCE, RCI and SU). I will add a couple more over time but don’t see a need to sell any of the companies we now hold.

    I don’t pay any management fees. I don’t hold any fixed income at these interest rates, I get 12 to 16% annual return and I don’t waste any of my time following or worrying about my portfolio. Facts and history are on my side.

    I am troubled by how segments of the industry are exploiting boomers and other retirees by promoting fear, uncertainty and complexity. In particular, pseudo financial planners that are really fund sales salesman.

    I wish you and other “fee for advice” planners every success. Objectivity and demystifying the management of money are sorely needed.

    Good luck.

    • Bernie on October 9, 2014 at 5:28 pm


      Nicely done! You’re also getting attractive dividend growth with your selections. The five major banks have been paying continuous dividends for over 150 years. TD, BNS & CM have never reduced theirs while RY & BMO have only had one small cut each during WW2. TRP, ENB, CNR, BCE, RCI & SU have 13, 18, 18, 5, 9 & 11 year streaks of continuous dividend increases. There is more stability & far less risk in investing for income than investing for capital growth.

  22. Grant on October 9, 2014 at 5:25 pm

    I think it’s a mistake to put all your eggs in one basket, because the future is unknowable. In 1989 Japan was on the top of the world and Canada and the US weren’t doing well. Japanese investors had 98% of their equity exposure in Japan. People were saying that the yen would soon be the new reserve currency. Well, we all know how that turned out. The Japanese stock market, 25 years later, is still down over 60%.

    Of course it seems highly unlikely that that could happen in Canada, but it is a big mistake to assume that the highly unlikely is impossible. That’s why we need to diversify outside of Canada.

  23. Bernie on October 9, 2014 at 7:38 pm


    I’m sure Dennis has heard all about home country bias before. His plan is obviously working for him to get to a 7 figure portfolio that’s yielding 3.5% with income growing at a 10%/year clip. I don’t think Dennis needs any advice from us, we should be asking him for some.

  24. Grant on October 9, 2014 at 7:49 pm


    Well, on the subject of “it works for me”, you might find this recent post by Michael James interesting.

  25. Bernie on October 9, 2014 at 8:04 pm


    Somehow I knew there would be something in there about indexing 🙂 I agree with the author on the most part but I maintain it is quite different to invest in stocks for income than for capital gains even though my capital gains have been spectacular. I’m not changing. However, if you ever want to switch to investing for dividend growth Grant I’d be more than happy to share what I’ve learned.

  26. Dennis on October 10, 2014 at 5:48 am

    Nothing is forever but at this point in time, I have confidence in the Canadian economy. For a large portion of my career, I lived and worked out of Canada and at times, didn’t hold any CDN stock.

    In November 09, I left full time employment. My last stop was with a CDN company that had a DC pension plan. When I left, I moved the money (165K)to a LIRA with my bank and put it into a Balanced Fund. I left it there until November 11. During that period, I netted an annualized return of 3.62%. I then got serious about investing and put it into an OLB LIRA account. I bought RY, BNS, TD, TRP and ENB. Since then I haven’t made any changes and I haven’t paid a penny in fees. My return in 2012 was 15.64%, in 2013 it was 17.28% and as of today, it sits at $305K which makes it 24.88% YTD in spite of the recent dip. (Since nothing moves in or out, this is the easiest of our accounts to measure annual return.)
    When I hit 71, I will transfer it to a LIF and will then incur an annual cost of $9.95 when I sell enough stock to cover the minimum withdrawal required. I doubt if I will ever sell any of these companies as the balancing I do is across all of our accounts.
    The composite index is based on good companies and dogs. I can understand why financial companies with products to sell use this as a frame of reference as they have a vested interest in keeping the bar low. However, I can’t understand why a thoughtful investor would take any satisfaction out of beating this measure.

    • Grant on October 10, 2014 at 10:26 am

      Dennis, comparing a high fee balanced fund run by a bank over a period when the market was essentially flat to a 100% concentrated dividend stock portfolio over a 3 year period when dividend stocks outperformed the broad market, is not exactly an apples to apples comparison! Also comparing a dividend strategy (which is a large value strategy) to a broad market index like XIC is also an apples to apples comparison. A more appropriate risk adjusted comparison would be to a dividend ETF such as XDV or CDZ. You have done well over the last short 3 year period, although I note that the 2013 return for XDV (which also is highly concentrated in the financial sector) was 18.98%.

      Dividend stocks have outperformed the broad market over the last few years, but that has not always been the case. I think it’s helpful to think about the behavioural biases discussed in this article.

  27. Alan on October 10, 2014 at 7:26 am

    There is a big difference between actual risk and perceived risk. For example, a heavy smoker worried about the risk of being killed by a terrorist. Applied to investing, those who invest in GICs in a low interest environment think that they are assuming no risk, when in fact they are almost guaranteed to lose money due to taxes and inflation. Because of the behavioural biases referred to by Robb, almost all stock pickers are assuming the significant risk of underperforming the market. If you think about it, what are the odds of you as an individual beating the majority of all of the millions of other investors out there? I understand the appeal of following stocks, analyzing financial results of companies, studying stock-picking advice, etc., but these are all pitfalls to good investing because they bring emotions into investment decisions.

    • Bernie on October 10, 2014 at 8:46 am


      I maintain that there is a huge difference in stock picking for income than in stock picking for capital gain. Picking quality stocks for consistent reliable growing dividends with the goal of living solely off the income is very low risk. This is called dividend growth investing. I choose this route rather than ETFs or mutual funds because their income is irregular and doesn’t increase with inflation. Also they contain many dogs I don’t care to own. I realize my strategy is very much hands on, especially in initial research, but I enjoy navigating my own boat. The regular dividend increases I receive from my stocks give me joy similar to when I received pay increases in my working life.

      • Grant on October 10, 2014 at 10:49 am

        Bernie, there is no difference (except for the way it is taxed) when you receive money from a stock, whether it is in the form of dividends or capital gains. The amount of $$ you have left is the same. It is just mental accounting. With regard to Canadian dividends, there is favourable tax treatment for dividends up to an income of about $82k, after which you are better off taking the income at capital gains. Dividend stocks have equity risk, as do non dividend payers, so I wouldn’t categorize dividend stocks as very low risk.

  28. Bernie on October 10, 2014 at 12:33 pm


    The low risk I’m referring to is the possibility of a dividend cut. When you are living solely off of the dividends the price volatility is of no concern. Price volatility is only of concern to those who need to buy or sell stock. I wouldn’t want to be stuck with having to sell stock in a down market to fund my retirement. That would be most stressfull!

  29. Grant on October 11, 2014 at 9:19 am

    Bernie, I prefer a total return approach rather than an income approach to the retirement phase as discussed in this paper from Vanguard.

    If you are living only off income you need to save a lot more capital. Another way of looking at it is when you are 90 years old, do you want to only spend the income? It makes sense to spend the capital over time. There is no point in being the richest guy in the graveyard.

    • Bernie on October 11, 2014 at 10:42 am


      I’m a bit confused with your approach. By “total return approach” do you mean you are after maximum returns? You mentioned before you seek global diversity. If you follow MPT you are globally diversified in equities & bonds. This is “safe returns” rather than “total returns”. Question…If you are indeed globally diversified in equities & bonds and prefer the easy approach have you ever considered the one stop “Mawer Balanced Fund” instead of your multiple index fund strategy? This mutual fund beats the global balanced index it benchmarks to in all time frames. The fund even beats equity indexes in most time frames despite being 30% bond content. I suggest you compare your performances to the Mawer fund if just out of curiosity.

      I had a brief glimpse at the Vanguard paper you linked. Sorry but I don’t give much credibility to papers or articles penned by those who are trying to sell funds, Larry Swedroe included.

      My income streams in retirement will include not only dividends but also CPP, OAS & my company pension. My wife is still working full time so the income stream doesn’t require the dividend income yet. She is also quite a bit younger than me. I want to ensure she’s well taken care of with whatever is left at that time.

  30. Grant on October 11, 2014 at 1:25 pm

    Bernie, total return means the total of capital gain and dividends. In the drawdown phase the focus is not just on income but also on capital gains such that 4% (indexed to inflation ) – this figure comes from retirement research – is cashed out each year taking dividends first, then the rest sold from the outperforming asset class of that year. I’d encourage you to read the paper. Vanguard and Larry Swedroe publish and review a lot of research on evidence based investing and are well regarded in the financial industry. I wouldn’t be too quick to dismiss them just because Vanguard sells funds. Besides withdrawal strategies have nothing to do with selling funds.

    I agree the Mawer funds have a good track record, although I see that they only publish 10 years of performance despite being in existence for 16 years. Also, statistically, to be 90% sure an active managers’s outperformance is due to skill and not just luck, he/she needs to outperform for 22 years. My concern with Mawer is that being actively managed, their outperformance may not persist. In addition the current managers may leave or retire and the next managers may not be as good. . If you are looking for the best simplest solution, I’d go with the 3 ETF solution, Vanguard Canada All Cap ETF (VCN), Vanguard All World ex Canada ETF (VXC), and Vanguard Canadian Aggregate Bond ETF (VAB) in proportions consistent with your risk tolerance, and rebalance one a year.

  31. Bernie on October 11, 2014 at 2:14 pm


    I know very well what total return means. I was wanting to know if you did & if you have any bond content. It appears you do.

    The Mawer Balanced Fund has been in existence since February 1988 which is 28 1/2 years. You can get their CAGRs from 1 month to 20 years & to inception here: Investment Management Ltd.

    Year by year TRs from 1998 to 2012 are available here:

    Other info is readily available directly from Mawer… is good too. I have their complete monthly price & distribution history, inception to April 2014, in an excel spreadsheet but haven’t done any computations with it yet. I understand they had only two down years…2% in 1994 & -16% in 2008. They have several outstanding funds but this one is their flagship. Their management is outstanding. My wife has no real interest in investing so I’m going to suggest she go with this fund and take out systematic withdrawals when I pass on or am no longer able to function properly. That said, I plan to live forever, or die trying!

    Happy Thanksgiving sir!

  32. Bernie on October 11, 2014 at 2:38 pm

    FYI…for all those who may be interested:

    I wanted to compare the 20 year CAGR performance of the S&P 500 Equity Index to the individual U.S. Dividend Champions (stocks which have increased their dividends for at least 25 years) so I ran some numbers this morning.

    82.7% of the 104 Dividend Champions had better 20 year TRs than the Index. The overall average CAGR of the Champions was 11.95% vs 9.24% for the Index.

  33. Grant on October 12, 2014 at 5:18 pm

    Bernie, yes, you are right the Mawer Funds have been in existence for 26 years (not 16, my bad), and their CAGR for 20 years does beat the broad market index (although the risk adjusted index is not given). However the 5 year CAGR does not beat even the broad market index, so it looks like the outperformance is falling off. As the Mawer Funds are really large value funds, an appropriate risk adjusted index would be the large value indexes – eg, for the Canadian equity component, the Dow Jones Canada Select Value Index.

    I prefer the certainty of indexed funds rather than the uncertainty of actively managed funds.

    With regard to the U.S. Dividend Champions, being a large value fund it would have a higher expected return than the broad market, so the S&P is not an appropriate bench mark to compare it to. It should be compared to a large value index. Justin Bender discusses this in this article.

    Happy Thanksgiving to you, too, Bernie!

    • Bernie on October 12, 2014 at 10:08 pm


      Mawer Balanced Fund is a neutral balanced global fund of funds that roughly contains 30% bonds, 20% Cdn stocks, 20% US stocks, 20% Int’l stocks & 10% cash or short term equivalents. These are the funds it holds:
      Mawer Canadian Bond Fund Series
      Mawer U.S. Equity Fund Series
      Mawer International Equity Fund
      Mawer Canadian Equity Fund
      Mawer Global Small Cap Fund
      Mawer New Canada Fund
      Cash Equivalents
      It is well diversified with large, mid & small caps. When you are comparing performance you should compare this to your whole balanced portfolio rather than equity indexes.

      The “U.S. Dividend Champions” are not a fund. They are the complete list of U.S. stocks (of no particular cap size) that have at least 25 consecutive years of dividend increases. I don’t know of any ETFs or mutual funds that hold these stocks exclusively. What I was attempting to show is one could likely outperform the SPY quite easily by choosing stocks from this group.

  34. Grant on October 13, 2014 at 10:17 am

    Bernie, yes, I understand that, my point was that when comparing performance one should use appropriate risk adjusted indexes. Eg. if you, or a manager are buying small cap or value stocks, which have a higher expected return over the broad market, performance should be compared to a small cap or value index. Managers like to use broad market indexes when they are buying small cap and value stocks (partly because they are well known) as it usually makes them look good.

    Similarly, the Mawer Funds ought to be compared to the appropriate weightings of the appropriate value or small cap indexes. And the collection of US Dividend Champions, whether they be a fund or not, should be compared with a large value index, as dividend stocks tend to be large cap value stocks.

  35. Bernie on October 13, 2014 at 9:12 pm


    I did compare the Mawer Balanced Fund to the appropriate weightings of the indexes it benchmarks to. I mentioned this earlier. It outperforms through all time frames. I’m out of town for several more days. When I get back & have some time I plan to compare Mawer’s year by year performance to those weighted indexes all the way back to inception. I fully expect this fund has beaten the appropriate benchmark index well over 90% of the time.

    As for the Dividend Champions or any other dividend stocks I don’t only compare to the SPY I compare to several indexes. I know dividend stocks aren’t for you or most of the readers here. All I’m saying is if anyone has the interest they can do very well with holding these types of stocks. I speak personally from experience.

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