Lessons learned in diversification – reducing my Canadian home bias
Many financial advisors, analysts and investing gurus alike argue in favour diversification.
That said, there are some experts who claim owning about 30-40 individual stocks, in various industry sectors, will provide modest diversification to mitigate portfolio risk.
You can find some of those expert opinions on how many stocks are enough in this post here.
Dedicated readers of this site will know I’m a fan of portfolio diversification myself, since I adhere to some personal rules of thumb when it comes to my DIY portfolio. Here are some of those rules of thumb:
- I strive to keep no more than 5% value in any one individual stock.
- I’m working on increasing my weighting in low-cost ETFs over time, more specifically, owning more of the U.S. market since I’ve had a long-standing bias to Canadian dividend payers in my portfolio.
You can always review some of my current holdings on this standing page here.
Portfolio diversification aims to lower the volatility of my portfolio because not all asset categories, industries, nor individual stocks will move together perfectly in sync. By owning a large number of equity investments in different industries and companies, and countries, those assets may rise and fall differently; smoothing out the returns of my portfolio as a whole.
“There is a close logical connection between the concept of a safety margin and the principle of diversification.” – Benjamin Graham
As I contemplate semi-retirement in the coming years, this is what I’m considering for cash on hand to support any bearish equity markets or to ride out unfavourable market returns.
Diversification – applying some knowledge and lessons learned
With 2020 almost in the rear-view mirror now, and a trying investing year for many to say the least (!), I decided to make a few portfolio changes so I could embrace diversification more while simplifying my portfolio as those needs for capital preservation draw nearer.
Today’s post outlines some of those changes, by account, and why.
I’ve admittedly been wrestling a bit for what to invest in, inside this account for the coming 2021 contribution year.
I know I need some more U.S. and international exposure even with the recent comeback in many of my Canadian stocks since the market calamity began in March 2020.
In looking at my sector allocation to the oil and gas industry, I decided to cut complete ties in late-2020 with Inter Pipeline (IPL) after their dividend cut of 72% earlier in the year. You can see some of that dividend news I reported in this previous dividend income update.
I will use that money, along with new TFSA contribution room in 2021 to invest in some all-world ETF XAW amongst other investments.
XAW will provide far less yield inside my TFSA going-forward, which will impact the income generation machine that is my TFSA, but more importantly I think this fund will provide some much needed total return growth from ex-Canada.
Quite simply, as a fund of funds, iShares XAW is a simple, low-cost way to own U.S. international, and emerging market stocks.
I’ve long since listed XAW as one of the many great funds to own on my dedicated ETFs page. So, I’m eating my own cooking!
In a taxable account, Canadian dividend paying stocks earn favourable tax treatment thanks to the dividend tax credit. So, I keep those stocks there and see no reason to change that approach.
Investments in our RRSP, that’s different.
Since I own enough Canadian banks, other pipeline stocks (including after selling IPL), utility stocks and other Canadian assets in my taxable account, I know I’ve had a bias to Canadian companies vs. “the world” like I mentioned above. I’ve been working on changing that.
In recent years I’ve gravitated to owning more ETFs for low-cost investing to capture U.S. market returns – and I will continue to do so. So, I’ve sold off many U.S. stocks in recent years even though I still own just over a handful directly, such as:
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
- Microsoft (MSFT)
- BlackRock (BLK)
With some U.S. stocks like the ones above, propping up the portfolio, I’ve decided to sell off some individual stocks. Beyond the ones above along with a few U.S. telco stocks (Verizon and AT&T in particular – I may or may not sell those too in the future), I moved the money late this year into low-cost Vanguard Total Stock Market Index Fund VTI.
I’ve been fortunate to have the U.S. dollar side of my RRSP return about 14% over the last 5-years with thanks to the recent comeback from March 2020, so I figured it was a good time to make this move into more indexed products versus selling off low.
It’s certainly hard to argue with the results that lazy, passive investing can offer in the U.S. market. This means owning VTI should serve me well years down the road as I intend to buy more of it to offset my Canadian dividend paying equities owned in other accounts.
Am I done with the portfolio changes?
Not sure yet.
But I am convinced that more diversification and simplification of our portfolio is wise because managing dozens of stocks from both Canada and the U.S. was getting a bit unruly. Really though, the major driver for these changes is diversification since I’m overdue in addressing my Canadian home bias – I figured this reflection time at year-end was an appropriate time to make changes.
I’ve been very fortunate with my returns in recent years, specifically inside our RRSP. Even in the last six-months, BlackRock (BLK) has powered ahead delivering over 30% returns. I simply wish I owned more! Going back much longer term, my JNJ and PG holdings are up well over 100% since I’ve owned them over the last decade. I will continue to ride those winners for now.
With time though, I’m going to consider more changes to my portfolio to simply and reduce individual stock exposure as I progress towards semi-retirement and full-on financial independence.
I’ll keep you posted as major changes occur in hopes my strategy might help you with your personal plans as well. Until then, I remain a hybrid investor.
What do you make of my indexed investing move? Thoughts? Good or bad timing? I look forward to your comments.
Further reading aligned to this post: