Perfect Asset Allocation Doesn’t Exist

You can classify most personal finance bloggers into two categories.  There are index investors and there are dividend investors.  Sometimes they cross over, but for the most part you choose one or the other.  I happen to fall in the category of dividend investor, and here are some reasons why:

The Search For The Perfect Portfolio

Investors who follow an index investing strategy, or a couch potato strategy do so because they want to achieve the same results as the overall stock or bond market while maintaining lower fees.  They also like the passive approach of simply following the index rather than selecting individual stocks, mutual funds or ETFs.  They call this a lazy investing approach where you can just “set it and forget it”.

The problem I see with this approach is not so much the theory behind it, but the practice.  Most index investors have a portfolio consisting of more mutual funds and ETF’s than my portfolio of individual dividend stocks.

From Canadian small and large cap stocks, US equity, international growth, emerging markets, preferred shares, corporate bonds, government bonds, short term bonds, real return bonds, precious metals, and real estate, it seems that investors get caught up in trying to achieve the perfect asset allocation mix.

And then there is the re-balancing act that follows.  Sometimes this takes place every quarter, twice a year, or at the very least annually.  Index investors are constantly fine-tuning their asset mix to once again achieve the perfect balance.

In reality, does all of this diversification and re-balancing protect you in a bear market?  Did the latest global crisis spare any one particular region, sector, or class enough limit your losses?  Can you ever beat the market with index investing?  Are you really investing passively when you have a dozen or more funds and are constantly re-balancing?  What happens if the market crashes when you are reach your retirement age?

Why I Choose Canadian Dividend Growth Investing

Dividends are more reliable than capital appreciation.  FTS raised their dividend for the 38th consecutive year.  ENB increased their dividend for the 14th year in a row.  Dividend reductions are rare events.  Meanwhile, the last ten years have been described as a lost decade where the market has not reached it’s pre-2000 highs.  Where will your returns be if you don’t have dividends?

There are only two dozen or so Canadian dividend growth stocks to follow.  They represent a selection of financial, retail, utility, pipeline, communications, and transportation companies (some others).  Pick one when it’s value priced and purchase a worthwhile amount.  It’s not rocket science like some would have you believe.  Use yield, P/E ratio, the Graham number to determine value.  Here’s a website that does it for you –

The income provided by growing dividends will fund my retirement.  My yield on cost this year was 6%.  When I want to retire in 20 years the yield on cost will be double digits.  That means beating the market with yield alone, not to mention any capital gains.

Speaking of capital gains, I don’t want to eat into my capital during retirement.  My dividend income will have grown enough that when I’m ready to retire I won’t have to sell any stocks, I can just live off of the dividends.  Dividends which are still growing each year, giving me an inflation adjusted annual income.

I want to live and retire in Canada.  Foreign dividends are fully taxed, whereas Canadian dividends are taxed favourably outside of a registered account.  Foreign investing also comes with currency risk.

Under-Diversification or Concentrated Holdings?

During the latest economic crisis many Canadian dividend paying stocks continued to pay their dividends, and some even increased their dividends (one notable exception was MFC).  For the patient dividend growth investor this crisis was an opportunity of a lifetime to pick up new positions in these over-sold companies at incredible valuations.

Related: Using A Stock Screener To Find The Best Stocks

You can say that I am not diversified enough, but I would argue that investing in Canadian dividend growth stocks has outperformed every asset class over the last 15 years.  Why would I want to put my money anywhere else?

I would like to point out that while I am extremely passionate about dividend growth investing, my advice to others is to find an investment approach that works for them and to stick with it for the long term.  Chasing the latest fad every few years is guaranteed to be hazardous to your wealth.

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  1. Money Smarts Blog on December 16, 2010 at 11:00 am

    Ok, that’s it – you are officially off my Xmas card list!! 😉

    Serious, good post – you raise some valid issues with index investing. For the record, I have very few securities and I haven’t done a single trade for almost 2 years. I really need to get in there and update my accounts – I’ve gone from “passive investing” to “negligent investing”. 🙂

    • Echo on December 16, 2010 at 11:54 am

      Yes, I guess you’re not supposed to literally “set it and forget it” 🙂

      That’s ok about the Christmas card, you can just send me a copy of your book instead 😉

  2. Balance Junkie on January 11, 2011 at 6:40 pm

    I’m sorry for being about a month late with this comment. I must have missed this post in the run-up to the holidays. I just wanted to say I think you made some great points. Index investing isn’t the panacea that many think it is, but then no single strategy is.

    I agree that we all need to do what works for us, but you did make some really convincing arguments for incorporating at least some dividend-paying stocks into your strategy. Well done! 🙂

    • Echo on January 11, 2011 at 8:40 pm

      @Balance Junkie
      No worries, I bet you saw this post in The Wealth Builder Carnival today 😉

      Thanks so much for your comments. You’re right, no strategy is perfect but we owe it too ourselves to find out what makes the most sense for our own situations.

      • Balance Junkie on January 12, 2011 at 8:57 am

        You are correct about The Wealth Builder Carnival. I usually find great articles by blogs that are new to me in carnivals. It’s not too often I find a good article from a blog I read regularly! 😉

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