Benchmarking my portfolio – January 2018 update

Benchmarking my portfolio – January 2018 update

Inspired by other blogposts of late, regarding their net worth updates and various benchmarking returns for 2017, I thought I’d share my own update on our portfolio given the birth of another investing year has occurred.

Now, it’s not that I haven’t benchmarked my portfolio before.

I did so here and I will continue to provide updates now and again. Maybe!

Today’s post will provide more detail into where I stand against various indexes.

Benchmarking concepts and challenges

You see, one of the biggest challenges for an investor is to determine how well (or how poorly) their investment portfolio is performing against another meaningful portfolio or an index.  Here are some popular indexes:

S&P/TSX Composite Index – Canada
This is probably Canada’s best-known benchmark index. This index tracks about 250 companies listed on the Toronto Stock Exchange, with financial, energy and materials companies making up the bulk of Canada’s equity market.

S&P 500 – U.S.
This index is made up of 500 large-cap U.S. companies; this index is one of the most widely used benchmarks of U.S. equity performance.

MSCI World Index – Global

This index tracks large and mid-size company stocks in developed markets from around the world.  This index is most often used to benchmark against global equities (including Canada and US).

Like most competitive aspects in life, it’s hard to know where you stand unless you measure where you are. 

You can’t manage what you don’t measure.

A common approach to portfolio benchmarking is to compare an investor’s portfolio against an index, like the ones I listed above. But few investors (very, very few investors) are 100% TSX or 100% U.S stocks or 100% global equities – so comparisons are not straightforward.  That’s one small challenge with benchmarking. 

I would say a bigger challenge with benchmarking is taxation.  I don’t know about you but last time I checked, I pay a great deal in taxes.  I therefore strive to invest tax efficiently while seeking to meet my investing objectives (such as growing dividend income and achieving capital appreciation over time; although neither is ever guaranteed).  While benchmarking a portfolio remains prudent work for the DIY investor, because taxation is involved, it doesn’t tell the entire portfolio investment strategy.

My Own Advisor results

When it comes to benchmarking we have a few accounts to consider. 

Specifically for Canadian dividend stock portfolio that I write about in these updates, I think a decent benchmark for me is iShares S&P/TSX 60 Index ETF (XIU)

I think XIU makes sense because my portfolio is based on Canadian banks, telcos, utilities, energy and industrial stocks that have paid their dividend consistently over time. 

I recently checked our accounts and returns are as follows for accounts that hold mostly Canadian dividend paying stocks at the time of this post:

• Taxable account (5-years) = annualized 11%. The current dividend yield from stocks held in this account is about 4.2%.
• TFSAs x2 (5-years) = close to 9% each account. Calendar year return for 2017 was about 8% for each account; not surprising given different bank, telco and some utility stocks are in this account vs. others. The current dividend yield from stocks held in these accounts is about 4.6%.
• RRSPs x2 (5-years) = also close to 9% each, given many of the Canadian stocks I own inside our TFSAs are replicated in our RRSPs. 

With my portfolio, I’ve basically created my own Canadian dividend ETF that charges no money management fees other than a few transactions per year.

While I love dividends I’ve learned to embrace the benefits that come from investing in low-cost Exchange Traded Funds (ETFs) – for extra diversification beyond Canada’s market. In recent years I’ve actually sold a good portion of our U.S. stocks and instead, invested that money into U.S.-listed ETFs. I believe there are many great reasons to use low-cost, broad market ETFs for your portfolio. Read on here!

What makes a great Exchange Traded Fund?

Even after selling a few U.S. stocks in recent years, I should highlight I still own a few U.S. stocks for primarily dividend income and growing dividend income. Examples include:

• Johnson & Johnson (JNJ:US) (Up well over 100% return since I bought it)
• Proctor & Gamble (PG:US) (Up considerably since I bought it)
• Verizon (VZ:US) (Solid dividend payer and grower; 11 consecutive years of increases) – although likely to be sold at some point for lower yield and higher, dividend income growth. 

What about my U.S. accounts?

I think a good benchmark for the U.S.-side of our portfolio is a probably VYM ETF, a fund I used to own.

Here are the top holdings in ETF VYM at the time of this post:

Here are the impressive results of VYM at the time of this post although the financial future is always cloudy!

I recently checked our U.S. accounts and returns are as follows:

• USD-dollar RRSPs (5-years) = 10% (under-performing!!)  Although our calendar year ending 2017 was a solid 13% in USD-dollar terms, I failed to measure up to my benchmark index, including last year when the U.S market were absolutely roaring. To be honest, watching the market climb higher than some of my U.S. holdings was the necessary trigger (read in kick-in-the-ass) to continue to gravitate to owning predominantly one (or two) ETFs inside our Registered Retirement Savings Plans (RRSPs) for simplicity. In the years to come I intend to own more VTI or maybe low-cost XAW to further simplify. 

You can read more about my asset allocation and rationales here.

Benchmarking summary

At the end of the day, I think monitoring your portfolio against a benchmark can definitely help you understand the performance of your portfolio but that’s where it ends.

Benchmarking is not without shortcomings. 

1. Benchmarking will not accurately account for your risks taken (to earn investment returns to date).
2. It says little about taxation mitigation tactics and where you invest certain assets for those reasons.
3. The composition of assets within a benchmark are subject to change of which you have no control over. Therefore, it’s a point in time performance measure.

Benchmarking will provide a decent indicator into how your portfolio is performing relative to various indicators but just be mindful there are other important factors that determine investing success.

What’s your take on benchmarking?  Do you benchmark your portfolio?  Why or why not?

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.