The Loonie Portfolio: Asset allocation and half-year performance

The bloggers over at TheMoneyWriters have been posting their investment portfolio performance for the first half of 2008, in many cases including their asset allocation as well. I thought I'd throw together my own data, to share my own performance over the last six months.

Allocation

My entire investment portfolio is in RRSP accounts, one self-directed account at my discount brokerage and a group RRSP through my employer. These accounts have the following asset allocation:

Self-Directed RSP

• Canadian Equity Fund (S&P/TSX Composite): ~50%
• US Equity Fund (S&P 500): ~10%
• International Equity Fund (MSCI EAFE ND): ~20%
• NASDAQ Fund (NASDAQ 100): ~10%
• Canadian Bond Index Fund: ~10%

Employer Group RRSP

• Employer Stock: 100%

I contribute to the employer group RRSP on a bi-weekly basis through payroll deduction. Note that my employer's stock is not factored into the percentages in the self-directed account.

Performance

I started the year with a portfolio value of $42,266.23, and the following asset allocation:

• Canadian Equity Fund (S&P/TSX Composite): 47.1%
• US Equity Fund (S&P 500): 9.0%
• International Equity Fund (MSCI EAFE ND): 18.4%
• NASDAQ Fund (NASDAQ 100): 9.5%
• Canadian Bond Index Fund: 9.7%
• Employer Stock: 6.3%

In the last six months, I have contributed $10,478.82 to my RRSPs, including direct contributions, employer matching contributions, and DRIP payments. Excluding these contributions, the "organic" current value of my portfolio is $40,991.66 (the June 30 value of the shares I held on December 31). This represents a loss of $1,274.57 (3.02%), due to an across-the-board decline in the value of my investments.

When I include my recent contributions, my portfolio value increases to $51,799.51, with the following asset allocation:

• Canadian Equity Fund (S&P/TSX Composite): 45.8%
• US Equity Fund (S&P 500): 8.0%
• International Equity Fund (MSCI EAFE ND): 16.6%
• NASDAQ Fund (NASDAQ 100): 8.7%
• Canadian Bond Index Fund: 8.1%
• Employer Stock: 12.9%

My employer's stock now makes up 12.9% of my total investment portfolio, so I'll have to keep an eye on how high this proportion gets. Overall, I'm down $945.54 from where I would be by adding my $10,478.82 in contributions to my starting balance of $42,266.23. If I take $47,505.64 = $42,266.23 + $10,478.82 / 2 as a proxy for my starting balance (basically assuming that half my contributions were invested for the full six months), then this represents a negative annualized growth of -3.94%.

Impressions

4% negative annual returns aren't too great, but there are a few mitigating factors here:

• Only $8,803.48 of the $10,478.82 in contributions was actually out-of-pocket money on my part; the other $1,675.34 came from employer matching and DRIPs, so that makes me feel a little better about the $945.54 loss.


• When I compare my current portfolio to where I would be if I had kept my concentrated position in my employer's stock, I'm up by over $2,500. This alone is enough to make me feel better; I'm a lot better off than I could be, and it's as a result of a conscious choice I made.


• All the markets are down. In fact, the S&P/TSX Composite has dropped nearly 4%, and the Dow Jones, S&P 500 and NASDAQ are all down more than 10% over the last 6 months. My 2% loss over the same period doesn't look too shabby.


• I'm still buying. By continuing my bi-weekly contributions, I'm getting some great dollar-cost-averaging going on, so I'm picking up some great bargains on stocks.

How are your investments doing so far this year?

How do you think of the stock market?

The first time I heard of the stock market was while reading Gordon Korman's novel Go Jump In The Pool when I was eight years old. The story is about students at a boys' boarding school trying to raise money to install their own swimming pool. The students <SPOILER> finally make it happen when "George Wexford-Smyth III", the token rich boy, uses his stock market wizardry to grow their meager earnings to the $64,469.64 they need for the pool</SPOILER>.

This resolution to the plot confused the heck out of my young mind. Where did all this extra money come from? What's a stock? What does a silver mining company have to do with building an olympic pool?

I asked my parents about this, and they gave me a brief explanation of the stock market: you buy part of a company, and when people get excited about that company, the part you own gets more valuable, so you can sell it for more than you bought it for, and that means you've earned extra money. They also focused pretty heavily on the downside: if people lose confidence in the company you own, you might lose money if you have to sell for less than you paid for it. The message I took from this (reinforced by the fictional headmaster in the book) was that stock market investing is basically gambling, and you shouldn't invest money that you can't afford to lose.

It's amazing how truths you learn as a child can stick with you: this is how I thought of investing all through my university years. While I was in university, cell phones really started to become popular, and Qualcomm was a rising star of the NASDAQ. My roommate at the time was watching this stock with a keen eye, and explained to me the concept of a stock split (Qualcomm split 16:1 between 1994 and 2000). He discussed his plans to invest in the stock, and I asked what he would do if the stock went down after he bought it (in my mind, this scenario meant that you sold your investment at a loss to stop the bleeding).

He countered that he would simply buy more of the stock at the lower price. This concept was completely foreign to me: why would you buy something when it was dropping in value? He explained that when the stock rebounded, he would make an even bigger return on his investment, since he had acquired additional shares so cheaply.

That conversation with my roommate was my first practical exposure to how to buy low and sell high. Granted, he was loading up heavily with a single stock, which was amplifying his risk considerably. While you don't expect every piece of a diversified portfolio to collapse completely, a concentrated position in a single stock can quite conceivably lose most or all of its value in a matter of months or even days. Still, where I had always seen the "buy low, sell high" strategy as a total crapshoot, here was an approach to at least managing the buying side of the plan.

Qualcomm has gone from under $4 to nearly $50 in the last ten years (a 29% annual return). My roommate was right about this stock, and although his strategy was very risky in its lack of diversification, he introduced me to the idea of dollar cost averaging.

I think that an investor's ability to ride out an uncertain market depends on how they see the market. Is it all a house of cards that could come crashing down at any moment, or is it a robust, ever growing system that can be expected to provide consistent positive returns over the long run?

I happen to believe the latter, and I owe it all to Gordon Korman.

Hats off to my brave colleagues

As I mentioned last week, Jeremy at Generation X Finance has a new series of posts called "From The Front Lines", in which he chronicles his first-hand experiences with investors' reaction to our current market conditions. So far, he has two posts in the series:

1. From the Front Lines: Investors Selling Stocks in Favor of Fixed Accounts


2. From the Front Lines: Changing Your Risk Tolerance Based on a Bear Market

A lot is being written these days about this being a buying opportunity, but I've recently heard a lot of talk from a few of my colleagues about aggressively timing the market.

I'm sure that, with all the ups-and-downs we've had recently, there is a lot of money to be made (and lost), but I just don't have the courage or recklessness to keep getting in and out and making big wagers with my retirement savings (which currently form the vast majority of my investable assets). I won't go quite so far as to call this a stupid move on my colleagues' part; they're all in their late-20s or early 30s, and have time on their side if they make a misstep. However, I personally can't handle the stress of day trading, whether in a bear or bull market, and I don't have the energy to track stock prices as closely as they do.

No, I think buy-and-hold index investing is right for me. I'm happy with my asset allocation, and I'll keep paying off my debts and dollar-cost-averaging my RRSP contributions.

I wish my colleagues well with their investing adventures, and look forward to some vicarious thrills over the next few months.

Intestinal fortitude: living with a bear market

Jeremy at Generation X Finance has started a mini-series of posts detailing his first-hand experience with investors' reactions to current market conditions (Jeremy's a retirement planning specialist). His first post is on investors fleeing stocks in favour of bonds. He points out the well-worn truth of how much this can hurt your portfolio's long-term performance.

There's no denying how painful it is to watch your investment returns seemingly evaporate as the market takes a dive. It's understandable to want to do something to "stop the bleeding." However, the strategy of dumping your stocks and moving into bonds to ride out the slump is exactly the opposite of "buy low, sell high." Meg at The World Of Wealth illustrated this in a post about her grandparents selling some bonds to help her finance the closing on her new investment property without cashing out her investments at the bottom of the market.

It's still early days, but so far I seem to be able to follow this advice of staying the course. I'm anxious about what the next several months have in store for my investments, but I'm fortunate enough to have decades to recoup any "losses" during this and other down periods. As much as I hate to see my balances drop, the thought of cashing out and moving into "safe" investments at this point makes me physically ill. So I'll be hanging on by my fingertips, and doing my best to enjoy the ride.

On a lighter note, The Consumerist posted this advice today on surviving a bear market:

Investopedia says the best thing to do when you see a bear in the market is the same as when you see one in the woods: "Tuck in your arms and play dead!" In other words, don't go crazy selling stocks at a loss. In both cases, fighting back can leave you bleeding, although toughing it out won't be a pleasant experience either. And if you have money leftover after filling up your car, it's actually a buying opportunity. Which I guess is like playing dead in front of the momma bear while your buddy gathers up all the cubs while mamma is occupied and then later you and your buddy train them to harvest honeycombs for you.

I couldn't have said it better myself.

How cool am I?

So yesterday morning, I demonstrated to the world at large just how cool I am in the face of punishing market drops. My take? The recent slide is nothing to worry about, and we're still in line with long-term forward movement.

Then the S&P/TSX Composite index drops 3% in one day, and I watch my retirement savings shed another $1,300 in market value.

Ouch.

A dose of reality

It's been a bit painful watching the slide in the markets over the past month. So far, my retirement investments have dropped by more than $3,000 in 2008. That's not an easy thing to watch. Granted, I likely have 30 years of market growth to get my money back, but it's hard not to cringe at such a big drop.

Until last fall, I was an extremely passive investor. That's not to say that I had any kind of diversification or strategy; quite the opposite. My approach to investing was to have 6% of my bi-weekly paycheque deducted before taxes, and used to buy my shares of my employer's stock in a group RRSP. I left the shares where they were, so technically I was a "buy-and-hold" investor, but I was really walking a tightrope by holding all of my retirement savings in my employer's stock.

In September, I diversified my investments using low-cost index funds. Since then, I've generally seen better performance than in my old, concentrated portfolio, and I'm very happy with the change. However, it's frustrating to have made a measured, informed decision, and still end up losing so much ground.

John Bogle says that anyone who can't imagine a 20% drop in the markets shouldn't invest in stocks, and my gut reaction to my recent investment performance really underscores this point. I've lost about 8% of my portfolio's value in less than three weeks, and this is turning into a great test of my ability not to panic. I'll be invested in these markets for decades, so I need to learn how to weather some bad times.

The silver lining is that, with dollar-cost-averaging through bi-weekly contributions, I can likely look forward to a period of low-cost purchases in the near future.

Choosing an Emergency Fund

After writing yesterday's post about moving my Emergency Fund to HSBC, I was interested to read what Paid Twice had to say this morning in her post describing her family's rationale for choosing a $1,000 Emergency Fund.

$1,000 is the most commonly recommended size for a starting Emergency Fund, largely based on the popularity of Dave Ramsey's 7 Baby Steps:

1. $1,000 to start an Emergency Fund


2. Pay off all debt using the Debt Snowball


3. 3 to 6 months of expenses in savings


4. Invest 15% of household income into Roth IRAs and pre-tax retirement


5. College funding for children


6. Pay off home early


7. Build wealth and give!
   Invest in mutual funds and real estate

The idea is that $1,000 should be enough to cover most emergencies that would otherwise derail your financial plan in the early stages.

I have a $1,000 Emergency Fund. I started building this amount in May of this year, and crossed the $1,000 mark in October. For me, the decision of how much to save for emergencies was largely based on my 2006 tax return. I had under-estimated the amount of income tax I owed for the year, and when April 30 came around, I found myself with a $1,400 tax bill to pay. At the time, I had no savings (aside from my retirement investments), so this amount went straight on my line of credit. This represented an instant 6% jump in my revolving debt, all due to the fact that I was living completely paycheque-to-paycheque. Having a $1,000 buffer in savings would have made a huge difference.

Until this year, I've never had an Emergency Fund. Sure, there have been times when I've had $1,000 or more sitting in my account for a month or two, but it's always been spoken for, with a specific purchase (or debt paydown) in mind. Now, my savings and debt reduction are completely separate from my Emergency Fund. That $1,000 has no strings attached, and will only be used for an unexpected expense that I have no other way of covering. Over time, I'll gradually build this amount (it currently sits at $1,105.28), but I'm largely going to ignore the growth above $1,000, in order to avoid thinking of this as money that I can spend.

The other key piece of my safety cushion puzzle is my Freedom Account. This is the account that I use to cover predictable periodic expenses, such as car repairs, gift purchases, and license renewals. In the past, all of these expenses have generally qualified as minor emergencies, and have gone straight on a credit card. By putting aside money from every paycheque in my Freedom Account, I'm basically redefining what constitutes an emergency, and leaving my Emergency Fund to cover the truly unexpected expenses.

In my mind, I have $1,000 saved up for minor emergencies. That's more than I've ever had before, and it's an incredible boost to my feeling of security to know that I have anything saved up as a safety cushion.

What's your Emergency Fund strategy?

Investing and the perception of risk

Money Smart Life has an interesting post today on extreme investing. Basically, the idea is that you take a small portion of your investable assets, money that you are willing to lose, and invest outside your usual comfort zone. The key here is that everyone's comfort zone is different, so this doesn't mean making margin trades on penny stocks for everyone; rather, take your "extreme" money and use it to try a new kind of investment.

This post got me thinking about the recent change in my own investment "strategy". For the last seven years, all of my invested money has been in my employer's stock. I didn't feel that I understood enough about investing to make smart choices in allocating my investments, so I left the money in the stocks (two stocks because I've had two employers). It wasn't until September that I sold the stocks and purchased index funds, coming up with something resembling a real asset allocation. It took a lot of hemming and hawing to make this switch, but I'm happy with the result.

The irony, of course, is that I was thinking of this switch in asset allocation as somewhat risky, when in fact I was significantly reducing the risk in my portfolio. I've gone from being invested in exactly two stocks to owning five index funds. I still may not have the ideal allocation, but my eggs are now spread across several baskets, which is a nice feeling.

I just found it amusing that my "bold move" served to diminish my risk. Extreme? maybe not. But I'm sleeping better now.