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Another case for Indexing – Asset Class Returns in 2013

In reading My Own Advisor posts you know I’m following a two-pronged approach to build my retirement portfolio for financial independence:   I invest passively in the market (indexing) and I also buy and hold and hold blue-chip companies that have consistently rewarded investors (dividend investing).

In reading this post over at Canadian Capitalist recently I reflected upon my own portfolio and specifically how my small basket of U.S. blue-chip stocks might have fared against the Dow or S&P 500 index this past year.  Let’s look at some of the starting and finishing prices in 2013 for some popular blue-chip U.S. stocks held by many dividend investors, including myself:

  • Coca-Cola (KO:US): started 2013 @ $37.60 and finished 2013 @ $41.31 for close to 10% gain not including dividends reinvested.
  • Johnson & Johnson (JNJ:US): started 2013 @ $70.84 and finished 2013 @ $91.59 for close to 30% gain not including dividends reinvested.
  • Wells Fargo (WFC:US): started 2013 @ $35.05 and finished 2013 @ $45.40 for close to 30% gain not including dividends reinvested.

Like Ram stated in his blogpost, for years, Canadian stocks outperformed international stocks.  Because of this, I’ve read about investors questioning the need to invest outside Canada at all, preferring to ride the coattails of our Canadian market only.  For investors who did that, they missed out on 30% gains in the U.S. market last year and solid stock price appreciations for Coca-Cola, Johnson & Johnson and Wells Fargo, if they held those stocks directly.  This small sample of U.S. stocks of mine didn’t overpower the index last year but they did help fuel it.

My lesson learned?

While I believe owning some U.S. blue-chip dividend paying stocks outright were great investments in 2013, it’s incredibly hard to argue against the awesome payback a low-cost U.S. indexed product provided investors last year and the simplicity of this approach for investors.

What’s your take on index investing?  Do you own indexed products?  Do you own stocks?   Where is your bias?

Filed in: Index Investing

5 Responses to "Another case for Indexing – Asset Class Returns in 2013"

  1. Income is what I want to generate … Index investing doesn’t generate enough income and you have to change your retirement strategy and focus on a 4% withdrawal rate. My parents have been retired for 35 years with income only from their portfolio. They never touched the principal. It’s not bonds either that is providing the return.

    I don’t believe it is as simple as switching strategy at any point in life. There are many facets to look into at different stages. Personally, I have never advocated that dividend investing was better than index investing and that it performs better. It just does what I need and what I am comfortable with.

    I will also add that rebalancing is a huge key in buying low and selling high as Andrew Hallam does. You can do that with many strategies too.

    Comparing to an index is akin to chasing performance since you are always looking at at the Jonesses …

    My 2 cents :)

    • Mark says:

      I hear what you are saying…income is key for you and in many ways, I’m with you on that since income and cash flow is part of my retirement plan too!

      I guess the premise of my article was to indicate that if total returns are what matters, and I think total returns always matter, then investors could have easily gotten that out of an indexed product last year. That indexed product would have trumped a number of individual U.S. stocks. Then again, some individual stocks including U.S. blue-chips beat the index last year but it’s nearly impossible to predict with any accuracy what those companies would have been in advance.

      If your principal is generating enough income to live from to avoid drawing down the capital (like your parents have done), then you’ve done something very smart when it comes to saving and investing “enough” for retirement. Indexing can give you the same thing, but you’ll need more capital since it focuses on growth and not current yield. With dividend-paying stocks, I’ve always found the inverse is true, more focus on yield and less on growth.

      Switching strategies could be disastrous since you might mess up the portfolio and I agree, there are many facets to look into at different stages during the execution of the strategy, indexing or dividend-investing.

      I’m just saying I needed to work harder to figure out in advance, for 2013, that KO, WFC and JNJ were stocks worth staying the course in vs. using an indexed product that would give me market returns less miniscule fees without much thought.

      Thanks for the detailed comment, always great to hear from you.

      • I agree with the statement that the US index did great compare with many other investments selected from within the index or outside. It’s a very accurate statement.

        My way of looking at the US stock performance is more along the line that you should have invested in the US. It needs to be part of your portfolio. Look at what you missed :)

        My portfolio in my defined contribution plan is indexed and lags my dividend income portfolio. I so wish I could have the option of investing it in stocks and I am not talking about this last year, I am talking about performance over the last 4 years.

        I am rambling but when I don’t find it much of a benefit to compare to indexes. I prefer to set targets. My TFSA and RRSP have an annualized ROR of 18% and 20% respectively. It means that I double my money every 5 years. The annualized ROR for the stock market is around 10% so it’s pretty good. While I didn’t beat the index last year (although I wasn’t far), I do good compared with historical market performances.

        Cheers :) I’d buy you a pitcher if you weren’t across the continent :)

        • Mark says:

          No doubt if folks kept a made-in-Canada portfolio, they missed out on some huge returns in 2013. Glad I wasn’t one of them.

          It sounds like your TFSA and RRSP returns are running at an excellent pace. I hope to return on average about 7-8% in my portfolio, I’m more conservative I guess; anything over 4% real return would be great. At some point we’ll meet up I’m sure for those beers.

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