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On Wednesday of this week I did some buying within my portfolio in order to better meet my asset allocation targets (Enhancing My Asset Allocation). Four transactions were completed, each one with a very specific purpose and objective in mind.
Transaction #1: Sell Employer Stock Purchase Plan Shares
The purpose behind this trade was to reduce my Canadian equity allocation. After this trade the Canadian component is still high by about 8%, however I am more comfortable now than I was. Remember, as one of my principles states I want to achieve full diversification to reduce the overall risk in my portfolio.
The timing of this trade worked out well as my employer shares have seen a nice rise recently. I would have done the transaction regardless as I continually buy shares monthly and these shares can quickly make up too a lerge percentage of my portfolio. The money from this sale was quickly reallocated into other assets.
Transaction #2: Buy Emerging Markets Index Fund
My current global asset holdings include 2 index funds. The first is a segregated fund that I buy as part of my pension plan. The nice thing is it is an index fund and has done well in tracking the EAFE index. I also hold an iShares MSCI International Index Fund. Both these funds are primarily focused on large companies in well-established countries. What these funds don’t cover as well is the emerging market sector of the market. I have set a target of 5% for this asset and this trade takes me closer to that target.
I chose to purchase an index fund for this asset class as I am not going to attempt to select individual securities in these emerging markets. The fund I chose was the Vanguard Emerging Markets ETF. The suggestion to use this fund originally came from SoundInvesting.com and after further research I decided this was a good fund for me. More details on this fund will come later.
Transaction #3: Buy US REIT Index Fund
The second buy I completed was to expand my REIT holdings to further than just Canadian REITs. I currently hold a Canadian REIT index through iShares. This trade will expand this asset class within my portfolio and further reduce the overall risk and will provide additional yield to my portfolio which wll up the income my portfolio throws off.
The fund I chose was theVanguard REIT ETF – again, I will explain this fund more in a future post. It has a good track record and low fees.
Transaction #4: Buy Russell Microcap Index Fund
The last transaction I completed was to further diversify my small-cap holdings by adding a small amount (1%) of a microcap ETF to the mix. The fund I chose was iShares Russell Microcap Index Fund. It tracks an the Russell Microcap Index which tracks the performance of companies in the $50 million to $550 million range. My objective for this fund is to further diversify my small-cap holdings outside of the S&P 600 index that I currently hold. More details on this microcap fund will be coming soon.
That was a busy week from a transaction perspective. In a future post I am going to describe these funds in more detail. Please ensure you subscribe to my feed to get these updates when I make them.
Hi There,
I have noticed that you have recently made several posts on asset allocation, and you make it clear that it’s one of your personal favorite topics. I however question some of the choices you have made with your portfolio in that regard, and I thought that you might be interested by my ‘criticism’, so here is my personal take on asset allocation.
1) I consider that, when choosing investment vehicles that will be part of your portfolio (stocks, bonds, cash, etc.), then asset allocation should not be a factor. Investment horizon and tolerance to risk are in my opinion the only real factors that should be considered. If you are investing for the next 15-20 years, buying bonds is a very bad idea unless the ups and downs of the stock market stop you from sleeping at night. Bonds have never out-performed the stock market in the long run and I do not see why that would change. Purchasing bonds (or fixed-income funds) for the sole purpose of diversifying your portfolio is in my opinion a mistake.
2) The geographical factor may be relevant if you are looking to invest in companies that are doing business mostly in the local economy. If most of your stocks are of companies involved in the global market (GE, JNJ, KO, PG, etc.), then it is pointless to track geographical allocation. Even for businesses that conduct most of their activities in a single country, like financial institutions, I also strongly doubt that there is a value added in diversifying geographically. It is preferable in my opinion to invest in institutions that you actually know and can follow, rather than purchasing shares of one of the biggest bank of a foreign country. By buying an ETF of foreign companies, you are actually doing that but at a larger scale. Finding the better managed company in my opinion is far more critical than holding stocks in a global environment.
3) By now, you probably won’t be surprised if I say that business size allocation is also unimportant. If you are going with indexes, having large/medium/small/micro-cap business indexes, then the end result will probably be that you will be increasing your transactions fees rather than your returns. I agree that, by indexing, you average your returns and lessen the risks. Following too many indexes however will not make your portfolio less risky, but only more costly.
4) Where diversification is important in my opinion is only when you consider the sectors you are investing in. The previous 6 months show that it may not be a good idea to have all your money invested into financials. On the other hand, it is probably pointless to have holdings in more that 4 or 5 sectors of the economy. If the world economy is facing troubled times, all sectors will be affected and having invested in 12 different sectors will not help you to dodge the bullet. Investing in 4 or 5 sectors mostly prevent your portfolio from being too affected when the economical problems are of a smaller scope and/or mostly focus on a specific sector of the economy.
So, in a few words, over-diversifying your portfolio does not provide any real advantage and in the end you will probably only average down your returns and increase your fees. I of course may be wrong; that’s just an opinion.
Hi Akkei,
Thanks for the comment and the thought you put into it. However, I do have to disagree with you on a number of points.
1) I have heard this many times before and in fact I once believed that as well. However, I have done a great deal of reading (check out William Bernstein’s books) and am now convinced that asset allocation is the primary factor in determining portfolio returns. In fact, Ken Fisher has stated that 70% of portfolio returns come from asset allocation, and not security selection. The issue comes down to managing risk.
2) I am not sure I follow you here – are you suggesting that it is better to just invest in your home country and in companies you are familair with? Again, I would rather have more diversification than less. Index ETFs provide that with me. In Canada, our market is only 3% of the global market. I want to make sure I have opportunities to earn money from growth in other countries.
3) Assets return differently at differnt times. By going small/large growth/value etc, an investor is looking for non-correlated assets that will return different amounts at different times. When one is performing well, chances are the other is not. It balances the risk and in my opinion actually increases returns over time.
4) I have not seen any research on the what the right number of sectors are in a portfolio. However, I would prefer to have more diversification than less.
So, I think you and I differ quite a bit (which is ok!) in our definition of risk and how to manage that risk. I have seen many arguments for concentration in a portfolio. However, I would rather see my returns evened out over time with similar long-term results than see wild and dramatic swings. That is just me.
Thanks for your comment.
TDG