Wednesday, March 9, 2016

The temptation of Index Investing

As you may have noticed on my Portfolio page, I hold an Index Fund. It's a RBC US Index Fund with fees of 0,70%. If you browse a little bit on the Web you can find US Index Fund much cheaper. For example, the Vanguard US Total Market Index ETF (VUN) has fee as low as 0,15%. 

As experienced investor, we all know that small percentage have huge effets over a long period of time. Right now, I stick with my RBC Index Fund simply because it enables me to purchase shares on a regular basis at no cost. That's where lies the advantage. For now.

You all know by now, I don't want to hold too many stocks. The reason : I don't have time nor the passion to closely follow more than 15-18 stocks. (even that number is outrageous. I have to work for a living, work out, eat, etc.) I now hold 22 stocks. I know, that's insane, Check it out here. I doubt that most of you can follow more than 20 stocks, unless you are still living in the basement of your parents. If it' the case, you might have other worries than following stocks...  (just joking).

So how did I end up with 22 stocks? Basically greed and the fact that I'm a man and therefore I think I'm the king of stocks. I most certainly aren't. I have many stock stories that went sour and could confirm this. ABX get out of my body!!!

I believe the less you do while managing your portfolio, the better it will fare over time. We are always tempted to diversify, buy this new attracting stock or add some of this and some of that to average down our cost. By the end of the month and the years these commissions pile up and eat up our performance. (yes it does)

Where am I getting at? I guess I'm getting at Index Investing.

I've been thinking about Index Investing for a while. But never got my head around it. I think I might consider this option starting this year. Will I sell my actual stocks? I might get rid of some of them (POT, COP, ABX...) but I will keep the others. I sure won't touch to my main holdings, namely JNJ, BNS, RY, POW, etc.

I 'm thinking more of developing an hybrid approach. I would  keep roughly 16-18 stocks and would add 3 or 4 index funds. It's in these funds that I would inject new money. Once a month or every quarter. Then I would rebalance the whole thing just once a year to match my initial strategy.

This initial Index strategy could resemble this :

  • 35% Vanguard Canada All Cap Index ETF (VCN) | MER = 0,11%
  • 35% Vanguard US Total Market Index ETF (VUN) | MER =0,16%
  • 20% Vanguard FTSE Developed All Cap ex North America (VIU) | MER = 0,20%
  • 10% Vanguard FTSE Emerging Market All Cap Index (VEE) | MER = 0,29%

Just that simple. Actually, back in the days I should probably have opted for this sort of strategy right away. Any Millenials listening out there?

All in all, the management fees would represent an average total of 0,19%. Not bad to hold pretty much the entire world of stocks!

This is indeed a Couch potato strategy. You won't beat the Market for sure. But you will do just as well. And that's much better than a whole lot of active managers.

So I'm thinking more and more about making this move. Will see how it goes. Stay tune.

What do you think about this move? Should I do this? And would you consider doing some Index Investing?




37 comments:

  1. It's tough to be a pure indexer, indeed! But embracing the indexing philosophy should mean no more individual stock picking :P

    My own index portfolio has only three funds in it :
    - 27% Vanguard Canada All Cap Index ETF (VCN)
    - 53% Vanguard FTSE All-World Ex Canada Index ETF (VXC)
    - 20% Vanguard Canadian Aggregate Bond Index ETF (VAB)

    Total MER: 0.21%!

    ReplyDelete
    Replies
    1. Salut Jason! I don't think it has to be black and white. I will never be a pure indexer, for sure. But I will get the best out of both worlds. I'm bi-investingwise! ;-)

      Delete
    2. You're right: it's all about finding balance and sticking to what you believe in. It's much more damaging for a portfolio when an investor changes their mind all the time.

      Delete
  2. *raises hand* Millenial here! I've been tempted to go with indexing before. But at the end of the day I decided to continue picking my own stocks. Even if the combined average cost of MER and TER is 0.33%, which is quite affordable for an index fund, then that's still $1,000 of money spent every year by the investor just for maintaining a $300,000 portfolio. It would be cheaper to pay the trading costs of buying the top 10 or 20 holdings in an index fund once, weighted the same way as the fund, and theoretically achieve similar returns as the index fund itself. :) But I know not everyone has this problem because a lot of people don't have a lot to invest, so the management fees of index funds don't matter that much. All that being said, I do own a couple of index funds myself, but for bonds. To each their own :)

    ReplyDelete
    Replies
    1. Hello Millenial! I get your point totally Liquid. Fees still eat up your performance. But how about those 2-3 stocks that will do badly in your portfolio? You know they will be one or two along the way. Other point is: It's ok to be bold when you have a 100K, 200K or 300K portfolio. But how about once you top the 500K$ mark? Wouldn't feel a little bit more secure owning a whole Index rather than having, say, 20 stocks worth around 25K$ each?

      Delete
    2. Yes, good point. I'd rather have an index fund than 20 stocks worth 25K$ each. Maybe my strategy will change when I reach $500K lol.

      Delete
    3. Yeah, we still I have time to think about it ! ;-)

      Delete
  3. No exposure to bonds? I am all for index investing -- esp if you dont have the time and interest in picking stocks.
    The core holdings like you mentioned, dont require any monitoring whatsoever. I currently own around 30 companies - but of those, 10-12 companies require almost no monitoring from my end. They keep chugging along doing their own thing...and sending me more in dividend year after year.

    The key will be to find a balance between indexing and picks. Atleast thats where we are headed. I own stocks in my portfolio - while my wife's portfolio is mostly composed of ETFs.
    R2R

    ReplyDelete
  4. This comment has been removed by the author.

    ReplyDelete
  5. No bonds, no. I donMt want to hold more than 10% bonds overall. And right now I already own bonds through Placements Québec. That's it.

    I get your point regarding your core holding. But I disagree about the fact that you don't have to spend time checking them out. I don't mean I do all the time, but it's in the back of my mind. I should check what JNJ is doing, etc.

    Indeed, the key lies with finding the good balance between the two. That will be my task in the coming months. Thanks for commenting R@R. You are a hybrid investor too!

    ReplyDelete
  6. I have more than 20 stocks, and I do not live in the basement with my parents.

    I choose to prioritize my time - instead of watching mindless TV, or wasting time on the internet/facebook, I work towards improving my financial situation.

    If you are picking your companies correctly, you should not be spending too much time on your investments. If you need to monitor those companies too much you are either speculating, or you are picking companies whose businesses you do not trust.

    My logical brain thinks that mindlessly buying an ETF where the top 30 companies account for most of the weightings is an inferior way to just picking 30 individual companies and forgetting about them. I think that jsut buying and holding without any turnover and cost is better than having to pay an annual fee in perpetuity, and have the potential for a shift in strategy or inclusion of holdings.

    Of course, if you do not want to build your own portfolios, then buy index funds. Just make sure you are not indexing because "everyone else is doing it"

    Good luck in your investing journey!

    DGI

    ReplyDelete
  7. Hey DGI.

    Glad to find out your are not living in the basement! As would Seinfeld say: Not that there is anything wrong with that. (Makes you more money to invest)

    Making the most of your time is key. I hear you. (I still watch Seinfeld's reruns though)

    I believe that no matter how well you pick your stocks you are still bound to fall on a few bad apples. Unless you hold a crystal ball.

    You logical brain probably shares the same insight as most managers who think they can beat the Market.

    I get your point. (after all I'm still currently a buy and hold investor) But I also understand Indexer's point of view : "if you can beat the market, join it".

    I don't know if everyone else is indexing. I do know I find it hard to ignore the attraction of buying stocks directly.

    So I guess it's the other around for me : indexing seems like the sensible thing to do, while buying stocks directly would appeal more to the passion side of my brain.

    So I'm still debating the idea of Indexing, which seem to be making quirks a little.

    Having said that, thanks for your straightforwardness.



    ReplyDelete
  8. DGI made me realized the fee I indicated was too high. Indeed, 0,76% was the sum and not the average MER of the Vanguard funds mentioned. My bad. And thanks to him for pointing it out.

    ReplyDelete
  9. This is a very timely post for me, since I've been thinking of converting my portfolio to various vanguard indexes as well; however, I think the hybrid route is the way to go. My plan is to convert my underperforming/disappointing stock choices into indexes once I get around 20 or 30 stocks in my portfolio. It's a lot of fun doing your own research and making your own choices, but past a certain point, I imagine it becomes a full time job just keeping an eye on things. Thanks for sharing!

    ReplyDelete
  10. Hey André! Thanks for your comment. It all depends on the person I guess. Some like to browse and keep tracks of their investments. I do and I try. But sometimes I lack the time to do so. Of course, it doesn't take as long to monitor a JNJ or a RY. But how about those other stocks you own. Hence the idea of Indexing at one point. Like I said to Liquid, past a certain amount, say 300K$, how will I feel owning that much in each and every stock I own? Asking the question... ;-)

    ReplyDelete
  11. This is Dividend Growth Investor's other comment that oddly enough doesn't seem to want to appear on my blog.


    "You logical brain probably shares the same insight as most managers who think they can beat the Market. "

    What are you talking about? Are you saying that for example I am worse off picking the 30 individual companies from Dow Jones Industrials Index, as opposed to buying a Dow Jones ETF?

    An index is a portfolio of individual stocks that someone else has chosen using a certain criterion. You buy all 30 - 500 - 3900 -5500 of them at once and hold on to them. The real advantage of index funds over other funds is the fact that they have low annual management fees and have low turnover. In your case however, a 0.70% annual fee is eating up a lot of your returns. So you need a cheaper index.

    A dividend portfolio is a group of securities I have selected, based on criteria I have selected. I buy them, and I hold them. The real advantage of long-term dividend growth investing is that you buy once, and hold for as long as possible with minimal turnover. The only cost is the commission to buy the stocks - it is a one-time fee as opposed to a recurring one that an index fund holder pays.

    There is nothing wrong with indexing. Particularly if you have no time or desire to learn about investing. Or if you like to watch Seinfeld reruns. :-)

    I just hope that you are not attracted to it because you hear everyone else talking about it. I think everyone else is talking about it because we have had a 7 year bull run in equities - so no-effort indexing seems like a no brainer in hindsight.

    I actually enjoyed this discussion, because it gives me some ideas for a post I am working on.

    Good luck in your investing journey Monsieur!

    ReplyDelete
    Replies
    1. Hey DGI, no I don't imply that at all.

      I made a mistake about the fees of the Index I was writing about. It's not 0,76% on average but rather 0,19%, which, as you know, makes a whole lot difference over time.

      No, I am not attracted to Index Investing because it's popular. Although there is nothing wrong with that. It means it's worth something (well, most of the time).

      I like the thinking (or not thinking) of it : it is mathematicaly sound. Whatever you do (or not do!), over the course of a long period, you will likely end up beating most actively managed funds out there.

      Perhaps you won't get as much results as some stock pickers. But I think you could do just fine.

      I will read your post with pleasure. Take care man.

      Delete
  12. Hi there,

    I hold the same exact portfolio: VCN, VUN, VIU, VEE.

    Nobody can beat this, more than 10,000 stocks in the entire world.

    ps: your MER % are off

    ReplyDelete
  13. Hello

    Great simple and effective portfolio. How long did you hold it and how much? Thats is the question!

    MEE = 0,29%
    VIU = 0,20%
    VUN = 0,16%
    VCN = 0,11%

    These are the MER on Vanguard's Canadian site.

    ReplyDelete
    Replies
    1. I have been holding this portfolio for a few years now, recently switched from US based ETF's to Canadian ETF's (VTI->VUN, VXUS->VIU/VEE). Portfolio size is mid-7 figures and growing larger every year with new contributions.

      I dont understand why you guys fiddle with 20+ stocks, this seem counterproductive and a waste of time. Also, do you chase yield when there absolutely no need for income when you are far away from retirement ? I could understand a retiree with a dividend income producing portfolio if i were you, i would switch to an index-based portfolio as soon as possible.

      :)

      ps: VEE is at 0.23% not 0.29%

      Delete
    2. You point is valid Anonymous. But side income is also important, whatever age. I guess it depends on your situation. Besides you can use it to drip and buy more shares. Then it grows your portfolio too.

      I just check and VEE as a MER of 0,23%. You are right.

      Thanks for the comment and update.

      Delete
    3. What you call "side income" i call early taxation.

      Suppose you invest 10,000$ to generate 500$ div income. Since the 500$ would get taxed, the investor would have been better simply investing 9,500$ in any broad market ETF and spend the 500$. Since most people invest in RRSP, there also the tax drag of de-registering your funds. In the end, you simply lose a portion of your hard earned dollars to the tax man for no reason.

      When we talk about investing performance, tax efficiency are even more important than MER. This is were dividends investing fall short of the passive strategy.

      greeting from a fellow Quebecois !

      Delete
    4. Good point. Fortunately we can also use tools such as TFSA -- which goes for ETF's as well.

      You make a good case of Index Investing.

      I think it has pretty strong virtues as well. The most important one : it's a couch potato strategy. And I strongly believe that doing less with your portfolio equals getting bigger returns.

      Thanks!

      Delete
  14. Bonjour Monsieur D! Just got around to reading this post, and I can see why it`s generating so many comments. Excellent, honest, introspective, timely post....great job :)

    My two cents:
    I can see where you`re coming from, and the temptation to index more is very real for me. I`m going to use my son`s RESP as a test for indexing (only two ETFs), and see how it goes. As much as I enjoy Dividend Growth Investor`s blog, I disagree with his comment regarding monitoring 20+ companies shouldn`t take much time if you`re buying the right companies. At a bare minimum, 20 companies equals 4 quarterly news releases, earnings call transcripts, and financial statements per company. If you did the bare minimum, you wouldn`t do any industry analysis, competitor analysis, or read company articles to see how their plan is unfolding.

    I`d propose that many dividend, growth, income, and value investors are likely index investors without realizing it. If you own 25+ mid-to-large cap stocks of companies from the same geographical area, you`re going to mirror the index return of that geographical area pretty closely. On any given day, if the DOW is up 1% and the TSX is up 3%, my portfolio is likely up around 2%. If someone only invests in Canadian dividend stocks, my bet is that their portfolio will mirror the CDZ ishare ETF within a couple percentage points.

    Encore, bravo mon ami! Je suis hate de lire si tu vas poursuivre plus des investissements dans les ETFS.

    ReplyDelete
  15. Thanks man. This post, even though it's not a through examination of dividend investing vs index investing, gives you a good idea of where my head is now investing wise.

    I hear you. If you hold 20 stocks or more you still have to read a whole bunch of reports. I say still because I don't read all of them. I know I should but I don't have time nor the appetite for it.

    I think there are a lot of investors out there who would de better simply holding one ETF (or two). When you have more than 50 stocks, for instance, I doubt that your pick selection surpasses a classic ETF. Not because you do bad choices, but because you will sell some, buy some, etc. It's in our nature. I think for example, a guy like Dividend Mantra, who has a lot of merit for what is done, would probably be better off holding ETF's than say 92 stocks. But that's my opinion. ;-)

    Take care mon ami et merci pour ton commentaire!

    ReplyDelete
  16. I hear you. I have the same thought going through my mind everyday and tempted to start investing in more index ETF, so I can spend more time on looking for the right stocks. I also like the idea of getting exposure to other countries, and I feel like having some of my money in index fund make me more focus on picking stocks. I am not good at multi-task. It also gives some sort of fail-safe.

    ReplyDelete
    Replies
    1. Hey Kat Y ! I totally agree with you. I guess both methods are good. It just depends on the amount of time you have following and picking stocks vs being passive and investing through Index ETF's. Right now I seems to be in a stock picking mood. But how about tomorrow? Will see. Thanks for coming here.

      Delete
  17. If I cannot figure out how to post a comment to your articles, without going to email, I am starting to question whether I am really qualified to pick any stocks ;-)

    ReplyDelete
    Replies
    1. This is a really good one DGI. ;-))))) Well, you managed to post this comment, no?

      Hopefully you are way better at picking out stocks! Take care! ;)

      Delete
  18. I'd go with hybrid approach if I were you, that's what we're trying to do.

    ReplyDelete
  19. Yeah, I noticed. How does it turn out for you so far?

    ReplyDelete
  20. I know this is a pretty heated debate among many long term investors... individual stocks or simply go with funds. I think there is a space for everything in one's portfolio, of course, it's all a matter of personal preference. I hold only individual stocks though some Vanguard funds do look compelling from a fees/yield perspective. Thanks for sharing.

    ReplyDelete
    Replies
    1. Hello DivHut!

      Yes, heated indeed. You tell me! I experienced it quite recently.

      It shouldn't be. I mean, after all we all share the same goal : getting richer. How we get there is up to each and everyone of us.

      I say, if it suits you, go ahead!

      Thanks for coming by.

      Delete
  21. Commentaire de Bruno, un blogueur francophone :

    Bonjour,

    Je trouve votre dernier billet très intéressant et j'aimerais me permettre d'y ajouter quelques commentaires; si je peux me le permettre.

    Premièrement, je ne me sentirais pas nécessairement coupable de posséder 22 titres. Il faut y aller de façon à être confortable, je ne verrais pas ça comme étant une honte. Walter Schoss a obtenu du succès en gérant un portefeuille qui contenait beaucoup plus que 22 titres.

    Posséder RY et BNS, c'est presque comme posséder un seul titre en terme de risques, de perspectives et du type d'opérations des deux banques (malgré le fait que la BNS est peut-être plus diversifié internationalement).

    http://basehitinvesting.com/superinvestors/walter-schloss/

    En incluant des fonds indiciels, ta stratégie ressemble un peu à l’approche Core/Satellite.

    http://www.investopedia.com/articles/financial-theory/08/core-satellite-investing.asp

    Ce n’est pas que je veux te dire quoi faire, mais moi je gère l'ensemble de mon portefeuille moi-même, mais si je souhaitais me départir d'une partie de la gestion de mon portefeuille comme toi tu le fais avec des FNB indiciels; j'obtenais peut-être pour la gestion active discrétionnaire avec un gestionnaire de portefeuilles dont j'admire. Dans mon cas, ce serait avec un gestionnaire X. Ils sont capables de réaliser des rendements supérieurs aux indices à long terme après les frais de gestion. Tu posséderais alors des titres potentiellement différents que ceux qui compose le portefeuille que tu gères toi même.

    ReplyDelete
  22. Salut Bruno,

    Je ne me sens pas si inconfortable que ça par rapport à la gestion de mon portefeuille. Car, outre quelques citrons (POT et ABX), je compte sur de titres solides. Mon léger inconfort a trait plutôt au temps que je peux mettre à surveiller l'évolution de ces titres : lecture de rapports, journaux, etc. D'où mon intérêt à entretenir un portefeuille plus petit qui, j'ose croire, me procurera un effet levier plus grand, car il sera moins dilué. BNS et RY sont de grandes banques canadiennes. Ils ont un marché similaire, même si, comme tu le notes, BNS est plus versé à l'international, notamment en Amérique latine. Pourquoi détenir les 2 semblent être ta question? Parce que dans ma stratégie j'ai établi une proportion pour chacun des secteurs de mon portefeuille (énergie, finances, etc.). Et qu'avec mes récents achats énergétiques (TRP, ENB, etc.), ma répartition en finances a diminué. J'avais le choix de racheter du RY, mais BNS était à ce moment en rabais. J'en ai alors acheté et il a continué de baisser. J'en ai alors racheté... Et voilà, maintenant il fait partie de mon « Big 6 »!

    Je gère aussi mon portefeuille moi-même. Et l'achat de ces fonds indiciels sera fait par moi. Bien entendu, Vanguard ou iShares gèreront ces fonds. Mais c'est moi qui les rééquilibrerai au besoin. Bref, je serai seul le pilote. Je comprends ton inclinaison à considérer l'offre de gestion active, mais cette avenue n'est pas dans mes cartons. Le moins d'intermédiaire, le moins de frais, le mieux les placements se portent. Merci de ta visite!

    ReplyDelete
  23. Hi Mr. Dividende,

    Montrealer here in my late 20's. I started investing 2-3 years ago with index funds (mostly SPY, which i switched to XSP to hedge against the currency but still get the return of the SP500). I do believe the US stock market will give a much better return than the canadian market in the long run. Then, i started picking stocks to take advantage of undervalued stocks in my opinion. 2015 and beginning of 2016 was a fantastic time to do that. When i don't see good opportunities, I put my cash in index funds, and once in a while i'll sell some and buy a stock I feel i can get a good return out of. We could say I use the core/satellite strategy. At the moment, I have about 25% in indexes and the rest invested in individual stocks. I can see moving my proportions of index vs individual stocks depending on the opportunities I see. I do want to be always invested in the market, because I don't believe in market timing, so the indexes provide a well diversified way to be invested all the time, and I try to take advantage of dips to buy stocks that fell more than the index and that I feel will come back to their normal level. I built a good position in canadian REITS that give/gave a fantastic yield in the last couple months, and I see myself holding on the these for a long time. There is something I just love about getting distributions dropped in my portfolio, it gives me peace of mind... Whatever the price of the stock, these stocks have given the same/growing distributions in the last 10-15-20 years. I see these drops in the market as a great opportunity to get in at a very nice YOC.
    I think a proportion of 50-50 between indexes and individual stocks is a good fit for me. I think I can see some good opportunities in the market, but I am not sure I can beat the market year after year... It is fun to try though :)

    My goal at the moment is to build a portfolio worth 200k by the time I turn 30, which is in 2 years... I think it will give me a good kick-start and I could lower my savings rate a bit (it is quite high at the moment, around 50% of my decent gross income) and count on the compounding effect and still a more than decent savings rate to get me to a nice portfolio by the time i'm 40.

    Keep up the good work, love reading your blog!

    ReplyDelete
  24. Hello Julio the Montrealer in his late 20's! I like your strategy which resembles mine. Although I'm fairly new to Index Investing. I think I read somewhere that, even tough it did less than the US market historically, the Canadian Market wasn't far behind. I guess it all comes down to the currency variable. We own both Markets so we should do fine! If you have a portfolio of 200K by the time you are 30 you will be well on your way to become financially independent in your 40s. Congrats! And thanks for coming down here. Appreciate the nice comment!

    ReplyDelete

Thanks a lot for your comment.