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.

Related: How my behavioural biases kept me from becoming an indexer

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.

Simplify, simplify

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.

Related: 5 lessons learned about investing

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.

Related: Why investors should embrace simple solutions

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.

Final thoughts

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.

Related: How to get started with an index portfolio

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.

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13 Comments

  1. CJL on September 25, 2015 at 5:12 am

    I believe VCN has a .06% MER and VXC charges .27%

  2. CJL on September 25, 2015 at 5:16 am

    Nope, I was wrong on VCN. It is .11%.

  3. tom on September 25, 2015 at 9:23 am

    ‘That’s because countless academic studies have shown that it’s nearly impossible to beat the market over the very long term.’
    I see this quote all the time, but have difficulty with it exactly as it is, if many people are underperforming the market, it stands that there are some whom outperform.
    I have seen funds that outperform for years, but they achieve this by increasing the risk. shouldn’t we append, ‘without increasing the risk’ ?? After that is as we get older we usually reduce risk, thus reduce potential gains, because our outlook is shorter term.

    • Echo on September 26, 2015 at 8:59 am

      Hi tom, you’re right that if many people are underperforming the market that it stands to reason that there are some who outperform the market. The problem is when fees enter the equation. Once fees are deducted then you’ll find the vast majority of investors underperform the market average. And the ones that do outperform, net of fees, are impossible to identify in advance.

      As far as risk goes, here is a good explanation of risk-adjusted returns and whether that matters when choosing an investment – http://awealthofcommonsense.com/risk-adjusted-returns-matter/

  4. Rob C on September 25, 2015 at 11:45 am

    With such a significant investment in VXC All World do you worry about withholding taxes or is that ETF holding totally invested in your RRSP?

    • Echo on September 26, 2015 at 8:40 am

      Hi Rob, this is all held in my RRSP.

  5. George on September 25, 2015 at 5:05 pm

    I am confused. Why should one buy VCN for Canadian exposure and not the Mawer canadian Equity mutual fund? The Mawer fund has outperformed the index over 20 years.

    • Grant on September 26, 2015 at 7:31 am

      George, the Mawer fund is an actively managed fund, so although it is one of the very few funds that has outperformed the index over the last 20 years, there is no guarantee it will continue to outperform. The current managers may retire etc. Reversion to the mean is a very powerful force. I would rather take the certainty of market performance than the possibility of outperformance.

    • Echo on September 26, 2015 at 8:47 am

      Hi George, nothing wrong with the Mawer funds, or Steadyhand, Leith Wheeler, and other lower cost, actively management funds that have a proven track record.

      As Grant pointed out, there’s no guarantee that these funds will continue to outperform in the future, for a variety of reasons. The Mawer fund charges 1.21% per year, so it will have to continue beating the market by 1.1% per year to make it a better investment than VCN. Is it possible? Of course. But I’d prefer to take the sure thing.

  6. Brian on September 26, 2015 at 6:58 pm

    Not arguing your logic behind your decision regarding the equity/stock component of your portfolio. But, two stock ETFs is not a diversified portfolio! You owe it to your readers to at least mention other asset classes and why they are not a part of your choices.

  7. amber tree on September 28, 2015 at 2:54 pm

    Simpe porfolios… that is also my goal. I like the idea behind it, but it scares me to invest with only one strategy…
    Next to that, I want to feel the rush of investing, thus I allow myself someplace money as well

    I also would be interested to know why you are stock only. quid bonds, REIT, alternatives?

  8. Echo on September 28, 2015 at 5:58 pm

    Hi Brian and Amber, stocks have the highest expected returns, which is what I’m after over the long term – http://www.getsmarteraboutmoney.ca/tools-and-calculators/interactive-investing-chart/interactive-investing-chart.html

    Certainly an all-equity portfolio is not suitable for everyone. One of the model portfolios listed on the Canadian Couch Potato website uses the same two ETFs that are in my portfolio, but adds a Vanguard Canadian Bond ETF for further diversification.

  9. Marko Koskenoja on October 9, 2015 at 7:48 am

    Good write-up Echo! I am on board with your thinking. I went from paying 1.48% MER/Management fee for TD’s Strategically Managed Portfolio to Vanguard and BMO ETF’s though TD DI. Being 56 and mostly retired I have 55% of my money in bond ETF’s.

    I save over $1000 per month in fees with the DIY ETF’s.

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