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 regular updates on the progress on part our portfolio – via monthly dividend income updates like this one here. But this update different. 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.
In their Nobel Prize winning work on Modern Portfolio Theory, Harry Markowitz and Bill Sharpe showed that one’s tolerance for investment risk should be the primary driver of one’s investment asset mix. Meaning, an investor should only take on more risk if he or she is expecting more reward. This implies smart investors typically only take on the risk they need to, to meet their investment objectives, and very little more. Benchmarking a portfolio should thus occur by keeping an investor’s risk tolerance top of mind but benchmarking alone does not provide full insight into this. No two investors are alike – no two investing objectives are alike. One investor using a “60/40 split” (of 60% stocks and 40% bonds) might be meeting their investment objectives just fine whereas another could be totally failing.
Another big 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
That said, I understand the benefits and merits of this exercise and I’m going to do it more frequently (at least I will try and write about it on this site).
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 remains the iShares Canadian Dividend Aristocrats Index ETF – CDZ. This ETF holds Canadian banks, telcos, utilities, energy and industrial stocks, similar to my individual stock holdings – companies that have paid and raised their dividend consistently over time. In 2018, I’m hoping for more of the same; more dividend increases.
Although I’ve been a dividend investor for more than 5-years now but less than 10, I will focus on 5-year data for simplicity in this post.
Here are the results of CDZ:
I recently checked our accounts and returns are as follows for accounts that hold Canadian dividend paying stocks:
- Non-registered account (5-years) = annualized 11%. Calendar year return for 2017 was 9%. The current dividend yield from stocks held in this account is about 4.2%.
- TFSAs (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%.
Overall, pretty good and I’m pleased with these results. 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. This decision has not come easy for me but you’ll see why it’s the right thing to do when I get to my other results…
In recent years I’ve actually sold a good portion of our U.S. stocks. Instead, we have diverted and invested that money into U.S.-listed ETFs. Vanguard, a low-cost ETF provider has two funds in particular that I like: VTI (Total Stock Market ETF) and VYM (High Dividend Yield ETF). This is not to say other ETFs from other providers may not be a good fit for your portfolio, rather, I’ve simply held Vanguard products for some time. We have owned VTI (a small portion) and VYM (a larger portion) in recent years. I’ve also held international assets via VXUS (Total International Stock ETF) although that international portion is now a very small amount in comparison to the other Vanguard ETFs I listed above. To be honest, returns since inception for VXUS have not been stellar even though 2017 definitely was.
Even after selling a few U.S. stocks in recent years, I still own a number of U.S. dividend payers with no intention of selling them, well, at least this year. Some of those stocks are:
- Johnson & Johnson (JNJ:US) (Up well over 100% return since I bought it)
- Proctor & Gamble (PG:US) (Up considerably since I bought it)
- Kinder Morgan (KMI:US) (Down, heavily since I bought it but I’m banking on a oil rebound for 2018)
- Verizon (VZ:US) (Solid dividend payer and grower; 11 consecutive years of increases)
- AT&T (T:US) (As above; more years of increases)
I hold these stocks for dividend income and capital appreciation.
It wouldn’t be fair to compare the results of my returns, in other accounts, against ETF CDZ for sure or any other Canadian-listed ETF for that matter since it’s not an apple-to-apples comparison. Instead, I think a good benchmark for the U.S.-side of our portfolio is a probably VYM ETF. This Vanguard fund:
- Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
- Follows a passively managed, full-replication approach.
Here are the top holdings in ETF VYM:
Here are the impressive results of VYM:
You’ll note over the last decade returns of VYM have largely mirrored the total return of VTI and the total return of the S&P 500 index I mentioned above.
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 and higher, far beyond 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) low-cost U.S.-listed ETFs inside our Registered Retirement Savings Plans. The current dividend yield from U.S. stocks and U.S.-listed ETFs held in these accounts is about 3.3%. In the years to come I intend to own more VYM or VTI or both.
Note: While we hold some Canadian assets in the CDN-dollar side of our RRSPs; those assets are similar to other accounts; they returned about 9% last year. Our bias is to own Canadian stocks non-registered; Canadian stocks inside our TFSAs and U.S. assets and international assets inside our RRSPs. You can read more about my asset allocation and rationales here.
At the end of the day, I think monitoring your portfolio against a benchmark can definitely help you understand the performance of your portfolio, including the performance after fees for any financial advice you’re paying for. This was certainly a good post to remind me about how I’m doing as a DIY investor.
Benchmarking though is not without shortcomings. Benchmarking will not accurately account for your risks taken (to earn investment returns to date); it says little about taxation mitigation tactics; and of course, the composition of assets within a benchmark is subject to change (as will the asset mix in your portfolio) over time – so it’s a performance tool for a point in time.
Benchmarking will give you a solid indicator into how your portfolio is performing relative to various indicators, such as a broadly-accepted market indexes and popular ETFs that track those indexes. 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?