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 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:

CDZ ETF

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:

VYM ETF holdings

Here are the impressive results of VYM:

VYM ETF

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.

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, 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?

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

39 Responses to "Benchmarking my portfolio – January 2018 update"

  1. I’ve never done a benchmark to any market. I might compare to inflation but that’s about it. No particular reason, just never did it. Never saw the need and I think it would be too complicated to attempt. With stocks, index funds, GICs and debentures it would be a lot of work for not much in the way of benefit.

    Reply
    1. It can be a lot of work Lloyd. I think for me, as a gravitate to owning simply a U.S. listed ETF in my RRSP and CDN stocks elsewhere it will be an easier exercise. I think if your investing goals are met, regardless of how the market performs, there is little need to benchmark but that’s just me. I know other investors might not feel the same!

      Reply
      1. Certainly the fewer variances in types of assets one holds, the easier it would be to benchmark. I can’t imagine there would be a benchmark for my overall portfolio and if there was, I’m not sure what it matters if I beat it or not. As long as I’ve got a reasonable expectation of capital preservation AND a decent gain vis a vis inflation I’m good.

        Reply
  2. I’ve never compared to a more specific benchmark, but do use the S&P 500. Maybe something more like VYM would be a better one and I’ll have to look at that over the next few weeks. Your Canadian holdings are crushing an investment in CDZ which is pretty impressive. Regarding benchmarking/comparing to an index, I like to do it because I want to know if it’s even worth my time to try and invest on my own. However, I focus mainly on whether my dividend objectives are being met which is the primary purpose of the portfolio.

    Reply
    1. “Regarding benchmarking/comparing to an index, I like to do it because I want to know if it’s even worth my time to try and invest on my own.”

      Agreed JC.

      At the end of the day, while I like benchmarking the real thing that matters is your investing goals and objectives are met. Benchmarking is just another tool to help with that as needed; it’s not a must.

      Continued success to you.

      Reply
  3. The two benchmarks that I compare my performance to on an annual basis are the S and P 500 index and the TSX composite index. I do this on an annual basis, but I don’t put too much weight in the comparison.

    I have a personal benchmark that I try to assess my net worth against every year. If my net worth increase by 10%, then I consider my year a success. I believe that this number is much more meaningful than any other benchmarks as it’s based on my own standards and I am working according to my own pace. I am only competing against this goal and nothing else.

    Reply
  4. As you say, its difficult to compare ones portfolio to an index because no ones portfolio matches any one index. But as I’m an Income investor and 100% Cdn stocks I thought I’d look at CDZ and compare Income to Income. How much Income did CDZ payout the past 7 years and what was the growth of that income and compare it to my Core holdings for the same period.

    CDZ from 2010 to 2017 had a 7 year dividend growth average of 3.40%

    My Core from 2010 to 2017 had a 7 year dividend growth average of 7.41%

    Again not an exact match, but by investing in a select group of DG stocks, rather than the CDZ ETF my income growth was more than double over the 7 yr period.

    Reply
      1. Looking at the yearly changes the contrast is even greater.
        CDZ
        2011 Down 19.37%
        2012 Down 2.69%
        2013 Up 31.7%
        2014 Up 3.58%
        2015 Up 3.13%
        2016 Up 9.57%
        2017 Down 2.15%

        My Core
        2011 Up 6.46%
        2012 Up 6.11%
        2013 Up 7.38%
        2014 Up 6.53%
        2015 Up 10.60%
        2016 Up 8.08%
        2017 Up 6.38%

        Reply
    1. Not really. It doesn’t matter that portfolios are different. It’s really a matter of comparing the strategy you are using to a bench march reflecting that strategy or market. Eg. Canadian dividend investing to a Canadian dividend ETF, or Canadian large cap value ETF. And it’s the total return that matters, not just the dividend growth.

      Reply
      1. For those who don,t need to sell shares to cover expenses, it is the income growth that really matters and we would like the growth to be consistant and reliable.

        Reply
  5. I benchmark against the Couch Potato portfolio since if I wasn’t actively managing that is what I would use. I simply update the values of the 3 (or 5) ETFs in the couch potato portfolio. I also compare my results with a Goal. I am on the cusp of retirement and my retirement financial model shows I need to make 3% plus inflation. Again, a simple calculation using the CPI.

    Reply
    1. If you only need to take on some risk in retirement, then that’s good. I’m of the mindset that smart investors need only take on the amount of risk necessary to achieve their goals. Nothing more. If you need to make 3% after inflation is factored in; i.e., this is your real return, then likely you don’t need nor should you have 100% equities.

      Continued success Russ.

      Reply
  6. Just curious, why do you compare your dividend stock to CDZ and not the standard TSX composite index? If the idea is to compare what index investing would do, CDZ is not the right benchmark ?!? The TSX60 is probably a better index over CDZ for Canadian anyways since it has nearly all of the top Blue Chip stocks along with the best dividend payers (i.e. it includes the banks).

    Also, why do you benchmark each separate accounts as opposed to the entire portfolio? Is it a limitation of the software and tracking? I pool all the money together and establish my rate of return, which is 12.30% and compare it to a benchmark split between the TSX Composite and SP500 based on my USD ratio which is about 50/50.

    Reply
    1. Hey Dividend Earner,

      I think CDZ is a decent benchmark since it’s an aristocrats index (as you know). Even if I compared my CDN portfolio against XIU, I would have beaten it but only matched it in 2017.

      As for separate accounts, I find it easier this way. I suppose I could pool all my money together and weight against it but I should also consider a small LIRA I have and then maybe I should also consider my pension and other assets. Where does it end? 🙂

      Ultimately what I want to know is if the stocks I own, in general, are generating more returns than some low-cost ETF alternatives. So far on the CDN side they are. U.S. side not so much.

      Reply
      1. You should benchmark against the alternative you would select if you were to switch. Let’s say you had to pick 2 strategies for investing, you use your #1 to invest and then you benchmark against your #2. If you were to sell all of your Canadian Dividend stocks and decide to do index investing, where would you invest? All in CDZ? if not, then your benchmark is wrong since it’s an unrealistic alternative.

        As for the total portfolio, you should not include your pension since you are not selecting the investments. It really should include everything that corresponds to your portfolio where you invest and could decide to choose an alternative. I don’t include the RESP in the performance since it’s not really my money. I also do not include my company plan since I don’t really have the options. Once I transfer inside my stock account, then I start counting it. Again, benchmarking is to assess if the alternative is better, otherwise why compare? Why go through the emotions of being behind unless you are willing to change?

        Also, are you generating your rate of return for the last year or since 2009 for example? I personally do not care if I beat or not in the last 12 months, it’s the aggregation of the years that matters. In fact, I don’t even look at year to date or calendar performance. The reason for a long evaluation is to really understand the expectations of my growth. If I look at one year, I cannot really use the value to forecast 10 years down the road but if I have 8 years of data giving me a 12.30% annual rate of return, I can feel confident that I would at least generate above 10%. That means I can establish that I would double my portfolio in 7.2 years using the rule of 72 without any added contribution.

        Anyways, that’s why I benchmark. Should I switch to the alternative or not?

        Reply
        1. Good points to raise.

          I would likely gravitate to CDZ for income and growth if not investing the way I do for CDN stocks, or XIU, or VDY, or a few other CDN dividend ETFs. Which one is right? If I focus on banks more then maybe VDY? If I simply take a large cap view then maybe XIU? This the challenge I have in benchmarking and I wrote about it in my post. It’s not accurate and at a point in time and the constitution in your benchmark can change – so can your own investing needs over time. I’m not saying it’s not a good thing to do – but you see the challenge.

          I have been a dividend investor since 2009 but only a few stocks were held at that time. It wouldn’t make sense to benchmark against something that is not complete. I have slowly grown my CDN stock portfolio over the last 8-9 years. I didn’t really have a decent, comprehensive portfolio until about 5 or 6 years ago.

          I understand the premise of benchmarking to look at alternatives; but the list of alternatives can be huge and varied.

          Reply
        2. You need to benchmark against what you are invested in, not what an alternative strategy might be. The point of benchmarking is to see if you are underperforming the market you in. If you are, you probably want to think about changing strategy. It is long term returns that matter, but you ought to benchmark each year otherwise you may go a long time without realizing you underperforming. Benchmarking is not about forecasting future returns, it’s about checking you are not underperforming the market.

          Your RESP is your money and you are responsible for it until it’s paid out to your kids, so you need to benchmark that money too as part of your portfolio.

          Reply
          1. I see both sides of benchmarking – i.e., comparables but also a firm standard such as an index. I put examples of that in my post.

            Agreed – benchmarking is not about forecasting future returns. I don’t see any value in that. Benchmarking can only be done in hindsight or like I wrote about, for a particular point in time. It’s not a forecasting tool. There are limitations with benchmarking. Besides, if I keep with my strategy and it works out well for me/us in 10-years (i.e., we realize our goals) then to be blunt I don’t really care about benchmarking 🙂

            If we want to compare my CDN stocks saying I should try and beat the market (TSX) over 5-years, then I have done that. Easily.
            If we want to compare my US stocks and ETFs to VTI only, well, I have underperformed over the last 5-years.

  7. I think it’s very important to benchmark your portfolio against appropriate indexes in order to see that you are not underperforming the market. It’s not uncommon for people think they are beating the market, but when their portfolios are benchmarked, not so much. I think CDZ is a reasonable benchmark to use for Canadian dividend stocks, although you might consider XCV, the iShares Canadian Value Index. Dividend investing is essentially a large cap value strategy (although you are leaving out the non dividend payers), so that would also be a good benchmark to use. Don’t forget about international stocks (I know you have small amount of VXUS) – international (XEF) was up 17.7% and emerging markets where up 27.7% last year.

    Reply
    1. Wouldn’t want XCV in my holdings.
      Dividend History
      2011 Down 8.31%
      2012 Down 0.46%
      2013 Up 0.83%
      2014 Up 139.27%
      2015 Down 56.46%
      2016 Down 3.77%
      2017 Up 1.90%

      Reply
    2. Thanks Grant. Yes, I’ve looked at XCV but I’m not sure I’m a value investor but rather I focus on dividends and dividend growth for the CDN-side. I could probably also benchmark against VDY as well but it’s too heavy in financials.

      Yes, I have a very small portion of VXUS and I’m actually considering selling the rest of it and focusing more on just CDN and U.S. assets. I know you’d probably advise against that but I think VYM and/or a combination of VTI+VYM and then let my (30-40) CDN stocks ride is still a good and simple long-term strategy given historical returns and how global more and more CDN and U.S. companies are becoming.

      Thoughts? 🙂

      Reply
      1. I wouldn’t dump international/emerging market equities, as you’ll lose the diversification benefit. I have 1/3 each of Canada/US/international with 1/3 of international in emerging markets. People often think that owning US multinationals give you international diversification, but it doesn’t work like that. Stocks respond much more to their local stock market than they do to where their earnings come from, so you need to own stocks in international markets.

        https://www.cbsnews.com/news/why-us-multinational-companies-dont-provide-international-diversification-benefits/

        http://www.etf.com/sections/index-investor-corner/swedroe-diversify-globally-limit-risk?nopaging=1

        Reply
        1. Global diversification hasn’t really helped investors over the last 10-years though. Just being a devil’s advocate here. Meaning, look at VTI vs. VXUS.

          An investor with 100% VTI or VYM would have done VERY well over the last decade. Not as much for investors with say 25% VXUS and 25% VTI and the rest a mix of bonds or Canadian stocks.

          Diversification is a great argument to reduce risk but that only gets accurately measured in the past, just like Larry did.

          I’ve got more thinking to do on this 🙂

          Reply
          1. Yes, but 10 years is a fairly short time in investing. 20 years really qualifies as long term. Over the long term, international and US have had similar returns, but one outperforms the other at different times, providing the diversification benefit. Eg, for the 5 year period ending June 2006, US returned only 3.8%, whereas international returned 10.9%, and emerging markets returned 20.4%. Currently, international and emerging markets have much lower valuations than US, so therefore higher expected returns, so now is a probably a good time to diversify into those markets.

            http://awealthofcommonsense.com/2016/12/diversification-is-no-fun/

          2. You’re right Grant, for sure 20 years is better than 10. I guess you have an advantage, you’ve seen “this drill before”; more market ebbs and flows. You’re older I recall 🙂

            Maybe I’ll reconsider throwing in a bunch of money in 2018, inside my RRSP, for more VXUS. It would be good to get VXUS DRIPping at some point in that account. Will keep thinking about!

          3. Good post Mark and some interesting comments from others.

            I find it difficult to do accurate benchmarking with our mix of con stocks, etfs for us/isn’t, varied mix of FI & cash. However the easiest and somewhat close source I’ve found is PWL capital model portfolios. My returns since retiring and reconstructing our portfolio 4 yrs are fairly close to this. Most importw

          4. Same. I mean I have stocks, ETFs, LIRA, etc. I also have a pension at work and you could go as far as to determine opportunity costs associated with your real estate investments. I mean, where does it end?

            In the end, I think if you’re getting about 8-9% equity returns overall, over many years of investing, that’s pretty good and you shouldn’t sweat the small stuff.

          5. Good post Mark and some interesting comments from others.

            I find it difficult to do accurate benchmarking with our mix of cdn stocks, etfs for us/int. plus a varied mix of FI & cash. However an easy and IMO a reasonable resource to compare as a balanced investor is PWL capital model portfolios. My net returns since retiring and reconstructing our portfolio 4 yrs ago are fairly close to this. For me this is a “guide” only but worthwhile reviewing and understanding.

            More importantly we are handily meeting our investment goals, banking some money doing these “good times”, and living well.

            I think you’re wise to consider your investment mix and benchmarking but I personally wonder the value of cherry picking time performance snapshots to review for various geographic equities/allocations/assets as the basis for dropping int/em. Does it matter now in hindsight that 100% VTI did better than diversified mix the past 10 yrs.? Will it in the next 10 yrs or could that mean there may be better opportunities elsewhere given valuations? As you know there have been long dead periods for the US before too. Although long term performance since the US is (was?) a runaway world leader has been very good and I would agree world stock markets seem increasingly more interdependent. Long term results and belief or not in diversification seem to be keys.

            Good luck with your thinking on this.

  8. You aren’t going to beat the market (probably). Flip a coin 4 times, flip it a hundred, flip it a million (simulation). You will approach 50%. The stock market is the average. You won’t beat it (probably)…never say never but you may as well buy lottery tickets (never say never). I’m a neophyte at this but this is also why you don’t need a financial advisor. Index baby!

    Reply

Post Comment