A counterfactual is when we create possible alternatives to events that have already occurred – something contrary to what actually happened. We do this all the time. “If only I had set my alarm, I wouldn’t have been late.” “If only I hadn’t been speeding, I wouldn’t have wrecked my car.”
We also use counterfactual thinking with our investing decisions. “If only I had put $10,000 in the Amazon IPO.” “If only I would have cashed out before the market downturn.”
Counterfactuals can be both negative and positive. “If I didn’t invest that lump sum in April 2020 I wouldn’t have as much money today.”
I made a big investing decision in January 2015 when I sold all my dividend stocks and switched to total market indexing. Sometimes I think about the counterfactuals – what would have happened if I made a different choice?
Related: Exactly How I Invest My Own Money
I could have stayed the course and stuck with my dividend paying stocks. I could have sold the stocks and bought a dividend ETF. I could have gone all-in on the Canadian, US, or international markets. I could have turned into a gold-bug and invested in gold ETFs (or buried it in my backyard!). I could have followed the five-factor investing model.
I thought it would be interesting to run a simulation, an investing multiverse of madness, that showed what my returns would have been if I made different investing choices with my $100,000 back in 2015.
I sought out help from Markus Muhs, a Senior Portfolio Manager at Canaccord Genuity Wealth Management, to pull together the return data and fancy charts to make this multiverse come to life. Markus also shared his thoughts on the various investing approaches and outcomes.
Robb’s Investing Multiverse of Madness
To set the scene, we started with a $100,000 portfolio on January 1st, 2015. That is approximately when, in real life, I sold 24 Canadian dividend stocks and put the proceeds into 25% VCN (Canadian equities) and 75% VXC (international equities). Then, on March 4, 2019, I sold VCN and VXC and bought Vanguard’s All Equity ETF, VEQT (which I still hold today).
In the multiverse, infinite variants of Robb could have made an infinite number of investing decisions from January 1st, 2015, to July 31st, 2022 (the date of our sample).
Markus and I looked at the following examples:
- Real life Robb’s returns using VCN/VXC to March 2019 and then VEQT to present
- Robb’s returns had he stuck with his portfolio of Canadian dividend paying stocks
- Robb’s returns had he sold the dividend stocks and bought iShares’ CDZ (his benchmark index)
- Robb’s returns had he sold the dividend stocks and bought the global dividend ETF trio of ZDV, ZDY, and ZDI
- Robb’s returns had he sold his stocks and invested in global equities, ex Canada (VXC)
- Robb’s returns had he sold his stocks and sunk everything into the S&P 500 (VFV)
- Robb’s returns had he sold his stocks and invested in French-Fama factor-based global equity portfolio (from DFA)
- Robb’s returns if he sold his stocks and bought iShares’ Gold Bullion ETF (GLD)
“I ran back tests on Robb’s previous strategy of owning a basket of Canadian dividend stocks, the ETF strategy he shifted to in 2015, and then various other assets he could have potentially pivoted towards instead. These back tests were done using Y-Charts’ portfolio modeller, which allowed me to periodically rebalance his hypothetical dividend portfolio and make the change in March 2019 to his ETF portfolio. Various other asset classes were also charted, measuring total returns from Dec 31, 2014 to July 31, 2022.” – Markus Muhs.
*Note that all return data is gross and excludes any trading commissions or fees.
Which variant of Robb had the best returns over the past 7.5 years? Read on to find out.
Robb’s Investing Decision #1: Total Market Indexing
For the first scenario – my real-life scenario, Markus ran an ETF back test to recreate almost exactly what I did: moving all of my money into 25% VCN (Vanguard FTSE Canada All Cap), and 75% into VXC (Vanguard FTSE Global All Cap ex Canada), with annual rebalancing, until March 4, 2019, when I swapped into the more convenient all-in-one ETF portfolio, VEQT (Vanguard All Equity Portfolio), when it became available.
In this scenario $100,000 grew to $186,930; a compound annual growth rate of around 8.5%.
Robb’s Investing Decision #2: Canadian Dividend Stocks
This is my most common counterfactual – what if I had stayed in Canadian dividend stocks? How would my portfolio have performed?
Unfortunately, a few of my stocks became defunct in the years after 2015, so it was not easy for Markus to back test this perfectly. That included the merger of Agrium and Potash – both of which I held in 2015. We added CDZ as a place holder for the defunct stocks, and to round out the total number to an even 20 (with 5% allocated to each).
We also assumed that this variant of Robb didn’t continue to own Canadian Oil Sands past Jan 1st, 2015 (combining that money with its acquirer, Suncor).
“It’s not perfectly scientific, but let’s say theoretically this is what Robb did. One would assume he may have been more active in selling some companies and adding new ones from time to time, but in this back test I have him equal-balancing the stocks at the beginning of each year and reinvesting all dividends,” said Markus.
In this, “stay the course with Canadian dividend stocks” scenario, the initial $100,000 would have grown to $176,880; a compound annual growth rate of just under 8%.
Indexing versus Dividend Stocks: The Comparison
The overall performance ended up being similar between the two strategies. Since we couldn’t perfectly simulate the dividend stock scenario, we agreed that it wouldn’t be fair to declare the ETF strategy an absolute winner.
“What’s remarkable, though, is how little effort the ETF strategy likely took on Robb’s part, versus researching, following, and rebalancing the dividend strategy,” said Markus, adding “the global vs Canada outperformance is quite obvious for the first six years, while the out-performance of Canadian value companies more recently closed the gap.”
Markus said that while the dividend strategy consistently churned out a high yield, an important metric to a lot of investors, this would have been of no value to Robb in his accumulation years and might just have added to the time he put into the portfolio.
The other variants of Robb in the multiverse did as well as we could have expected, in hindsight.
Robb’s Investing Decision #3: iShares’ CDZ
This variant of Robb still really liked Canadian dividend stocks, but also didn’t want to deal with managing a portfolio of 25+ stocks.
He chose the iShares’ S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) which returned 6.02% annually.
This was obviously a smarter and easier solution to manage than the stock portfolio, however in both cases it can’t be guaranteed that Canadian dividend stocks will consistently perform as well as they did over this short time period.
Robb’s initial $100,000 investment grew to $155,730.
Robb’s Investing Decision #4: Global Dividend ETFs
Another variant of Robb similarly like dividends but recognized the value of being globally diversified.
He divided the money equally between three BMO dividend ETFs (Canadian, International, and U.S.).
This strategy underperformed, at a compound annual growth rate of 6.9%, due to weak international equity returns (close to 0% over the time period) and missing out on the biggest drivers of returns during that time: large cap U.S. growth stocks.
Robb’s initial $100,000 investment grew to $166,570.
Robb’s Investing Decision #5: Vanguard’s VXC
This variant of Robb went with the simplest solution available in 2015 and stuck with it.
With VEQT not yet available, and not wanting to bother rebalancing two individual ETFs, Robb put everything into Vanguard’s All World ex Canada ETF (VXC) and didn’t look back.
Canadian stocks underperformed during this time period, so this approach would have returned an impressive 9.0% compound annual growth rate between Jan 2015 and July 31, 2022.
Robb’s initial $100,000 investment grew to $191,750.
Robb’s Investing Decision #6: The S&P 500
The variant of Robb who put all his money into the S&P500 via Vanguard’s VFV, eschewing all Canadian and international equity investments, would have seen the best performance of all strategies in the investing multiverse of madness.
Robb’s initial $100,000 would have grown to more than $247,700; a whopping 12.7% compound annual growth rate.
“Obviously, we know in hindsight that the U.S. markets outperformed Canadian, international, and emerging market stocks by a wide margin over the time period, but it would have been impossible to predict this ahead of time,” said Markus.
Robb’s Investing Decision #7: Five-Factor Global Equities
In another universe of the multiverse Robb employed a diversified French-Fama factor-based approach.
Markus said that although the fund wouldn’t have been available to him as an individual investor (nor were similar multi-factor ETFs at the time), he used the Dimensional Fund Advisors (DFA) Global Equity Portfolio in the comparison.
This approach would have also underperformed, slightly, at 7.61% annually, as market returns over the past seven years were largely driven by the large cap growth stocks that are underweighted in such an approach (which tilts to small cap and value stocks).
Robb’s initial $100,000 grew to $174,400.
Robb’s Investing Decision #8: Gold
In the final universe, Robb is a gold bug and simply dumped all his money into the iShares Gold Bullion ETF (CGL). Gold bug Robb ended up with the worst outcome, at an annual growth rate of 4.18%.
This grew his original $100,000 portfolio from $100,000 to $136,400.
Comparing the Investing Multiverse Outcomes
It was clear that the variant of Robb who invested his entire $100,000 portfolio into the S&P 500 enjoyed the best outcome in the multiverse.
And the variant of Robb who fell down conspiracy theory rabbit holes and invested his $100,000 in gold had the worst outcome.
We also know, with the power of hindsight, that it was US stocks – large cap US growth stocks in particular, led by Apple, Amazon, Alphabet, etc. – that drove the majority of returns since 2015.
It’s important to understand why a particular strategy might have underperformed, or outperformed. If US stocks led the way, that means on balance an approach that was overweight to US stocks would have likely had a more positive outcome than an approach that was underweight US stocks.
It’s interesting to think about counterfactuals – how a scenario might have played out if you had made different choices. But you can easily make yourself sick with regret over missed opportunities.
We should strive to make the best decisions we can with the information we have available. But life is surprising, and so we shouldn’t be surprised when we get a different outcome than we were expecting.
In my case, the overwhelming evidence convinced me to abandon my individual stock picking and switch to index funds. My second, but equally important goal was to simplify my life and reduce the time spent on my investment portfolio. A one-fund solution that automatically rebalances requires exactly zero effort to manage.
The investing multiverse was a fun thought experiment on how my big investing decision could have led to a wide range of different outcomes.
My portfolio performed third-best out of these particular options.
Do I wish I had invested all my money into the S&P 500? Not really. I know that certain sectors, countries, and regions will have their ups and downs over time. US stocks may have a long period of underperformance, in which case I would regret not diversifying.
Markus Muhs, CFP, CIM is based in Edmonton and works with families in Alberta, B.C. and Ontario, providing comprehensive financial planning and managing their wealth through a low-cost evidence-based approach.