Weekend Reading – Building your own index

Weekend Reading – Building your own index

Hey Folks,

Welcome to one of my final Weekend Reading editions for the 2022 calendar year, about building your own index.

Before we tackle that, a few recent articles:

Last weekend, I referenced a BlackRock global outlook study that mentioned a worldwide recession is coming in 2023.

Since I can’t accurately predict the future (!), I took Retirement Manifesto’s 5 important factors to heart when it comes to my decision to semi-retire.

You can take the same simple quiz/five questions to answer in that link above yourself 🙂

Weekend Reading – Building your own index

Should you consider building your own index?

You probably already know my decision but before I get back to that, my inspiration for this week’s theme came from this MoneySense article:

What is direct indexing? Should you build your own index?

Weekend Reading - Recession

“Direct indexing” is not so much about DIY investing, via buying and holding and/or updating your preferred basket of stocks over time, rather, it’s the newest financial industry term for promoting “…advisors to brew up their own portfolios for clients using quant/other metrics and pick up the benefits of direct investing like tax loss harvesting.  It’s an interesting way for advisors to add some value.”

Interesting concept. 

Further in the article, Roger Paradiso, executive chairman of Franklin Templeton’s O’Shaughnessy Asset Management, goes on to say:

“Advisors are drawn to bending client portfolios to their specific needs, whether it is taxes, values based and/or concentrated stock positions. We believe that trend is only going to grow.”

Ya, it should.

I mean, why work with any advisor that doesn’t work on a needs-based premise? My goodness. 

And herein lies some of the rub for me, why I became My Own Advisor and why the author behind that MoneySense article (Jon Chevreau) also follows some core and explore – amongst many other (a growing list…) of DIY investors: it makes sense and it meets his objectives. 

I’ve learned over the years:

  • Nobody will ever care more about your money – than you do. 
  • Lower fees, all things being equal when it comes to money management, are better. Why would I want to pay for someone else’s yacht? This means the less fees I fork out to others, generally speaking, the more money I should keep for me/us. 
  • While index investing (i.e., the passive investing approach whereby you own a low-cost index fund that tracks a reputable index) is good, it’s not perfect. With indexing you have to hope for your self-made dividends via capital gains. Indexes do not provide protection from market corrections. There are other ways to invest. Index funds own studs and duds at the same time. If you don’t believe me, then look at tech sector returns in 2022. It has been hammered. Look at this asset quilt below: broad-market stocks held within the often-touted S&P 500 index don’t always thrive. Different sectors let alone markets around the world can shine from time-to-time. 

Asset Class Quilt

  • The concept of being a passive index investor is wonderful, in theory, but living through the daily or yearly market volatility is something else entirely. Emotionally-driven decisions could lead to long-term under-performance. A better solution IMO is to develop the same strong emotional temperament that some successful active investors have to develop – a DIY hybrid investing approach can help with that. If you are a DIY investor, while potentially more risk on your shoulders, you can also be a bit more tailored and selective to your needs, which means: personal finance is forever personal and therefore you need to invest in a manner that meets your goals/objectives, manages your risk, and helps you remain invested over time. That may or may not tied to a “direct indexing” financial product. 

In The Psychology of Money, gifted writer Morgan Housel wrote:

“…few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.”

Indeed. 

And U.S. financial planner, and investment sketch-guy, Carl Richards, has a nice image I use from time to time to cement this point:

Weekend Reading - Build Your Own Index

Source: The Behavior Gap

Please don’t let any financial advisor or money manager tell you otherwise…

In closing, I believe:

  • The best answer for you when it comes to your money management decisions will usually be: “it depends”.
  • The best investing strategy is not an index-investing approach or absolutely nothing. I believe the best investing strategy for you will ultimately be your high, sustained savings rate and a financial plan that meets your investing objectives – nobody else’s.
  • Cashflow is always king and second to that, keeping some cash is wise to navigate any market volatility or financial surprise. 
  • Managing debt before debt manages you is always a good thing. 
  • You don’t have to be a great investor. You just have to be a good one by avoiding many big financial mistakes.

You can check out how I invest as a hybrid investor on these key pages here:

Dividend stocks I own and why.

ETFs I own and why.

More Weekend Reading…beyond building your own index

On Cashflows & Portfolios we shared our best posts from 2022, including links to a few free retirement income case studies and much more!

Gotta like these Canadian bloggers that support craft beer! Keep up the great work, Brandon!

Brandon - November 2022

 

Source: https://candivstocks.wordpress.com/2022/12/03/november-2022-dividend-update/

Benjamin Tal, Deputy Chief Economist at CIBC, talks with Financial Post’s Larysa Harapyn about how this could be end for Bank of Canada hikes.

What do you think? I suggest the answer is “we’ll see”…

If rate hikes do go up in 2023, Dale Roberts has some advice for you in his Sunday Reads article.

Check out my upcoming event with TD! Free!

Check out my upcoming chat with the folks at TD Bank where some of these Laws of Wealth factor into my retirement income drawdown plan.

The Laws of Wealth

Just click this link or the image below to register for the free event in January!

Mark-Seed-TD

And last but not least…

How does dividend growth investing work in a bear market?

I hold a few defensive stocks purposely for a year like 2022. 

My buddy Mike from DSR breaks it down from his side.

A reminder a more complete listing of dividend stocks that rock can be found via my deep lifetime discount with Dividend Stocks Rock (DSR). Head on over to the top of my Deals page and to save a whopping 33% on your DSR subscription – making sure you only own dependable dividend growers and performers during any market cycle.

Lots more snow in Ottawa this weekend but I’ll still get out to enjoy the weather. 

Have a great weekend!

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.

15 Responses to "Weekend Reading – Building your own index"

  1. You are right about how portfolios’ in general can evolve over time with the introduction of some of these ETF products and with the foreign content rules no longer impacting these decisions. We have held XDG in a spousal RSP account since 2017 (I can’t believe its been that long), it rebounded quite nicely from the March/April 2020 lows in the market. Sometimes I do think about selling it and buying some of the top 10. Perhaps that idea is worth a look in 2023. For now, nice and boring is good 🙂

    Reply
    1. Nice and boring is very good, Sue! I’m potentially going to get some BCE, CNQ or maybe some ATD for the TFSA in 2023. I could also be even more boring and just buy XAW 🙂

      I own a few stocks in the top-10 of XDG in fact.

      Thanks for your comment!
      Mark

      Reply
  2. Mark and DividendsOn, I’m intrigued by your discussion about XDG; in checking it out I see 3 ishares funds: XDGH (hedged to CAD), XDG as you referenced, and XDG.U (USD). Any thoughts on which would be preferable if I were considering this ETF for my TFSA? Thanks; love your newsletter and the comments, always a great discussion!

    Reply
    1. Not advice of course, but XDG CDN would be good for the CDN-side of the TFSA. Those distributions are in CDN $$.

      The USD just trades in USD $$ and you would need to convert CDN $$ to USD $$ to hold it in the USD-side of your TFSA.

      Thanks for your kind words, Barbara!
      Mark

      Reply
    2. I couldn’t answer it any better than Mark.

      If you haven’t seen it, MSCI has some interesting returns data for both the CAD and USD versions.

      MSCI World High Dividend Yield Index (CAD)

      https://www.msci.com/documents/10199/3acb5991-c32b-4dc9-9b62-16579e191e94

      MSCI World High Dividend Yield Index (USD)

      https://www.msci.com/documents/10199/74fe7e16-759e-405c-96aa-8350623fae65

      When looking at 3 to 10 year returns the CAD version outperforms the USD. Going further back to 1995 and the USD version outperforms CAD.

      Over shorter time periods 3 to 10 years and MSCI World outperforms the MSCI World High Dividend Yield index. Back to 1995 and it’s the high yield index that’s ahead in both currencies.

      Reply
  3. Thank you Mark for this great post!
    Loved the Asset class of Quilt , it clearly shows that every sector will outperform and underperform each year so consistency doesn’t exist and all you can do is to hold companies in different sectors and keep adding money and be patient or else just buy the index and own them all big and small 🙂 but to me i realised after having a ccp portfolio that my goal in retirement is a growing income and if i just hold those etfs the income will differ in every payment and the share price for those etfs plunges and you’ll end up selling at a discount price when the market is down so I’m sticking to our Canadian dividend growers and by the way I added ATD in my wife’s RRSP so now in total we have 30 holdings and except for AQN’s unkown future of dividends everything else is good , on January first I’m planning on adding BIP.UN in her TFSA as for mine I’m adding to my RY holding , it’s funny that I hold all six banks but RY is my smallest % even though it’s the biggest of them all , still waiting for your post on what would be on your list for 2023 tfsa contribution 🙂

    Reply
    1. Ha. Likely to get some BCE and other assets in 2023 for the TFSA.

      I will post 🙂

      Interesting you added ATD to your wife’s RRSP; great work. I’m tempted to own that too inside my TFSA for some growth.

      All the best and thanks for your comments and contributions!
      Mark

      Reply
  4. Hi Mark, Merry Christmas to you and yours. I always learn something new reading your blog. So thank you. My question is about your buckets. Do you intend for your dividend bucket to be approx the same size (dollar value) as your low cost ETF bucket ? Cheers

    Reply
  5. Oh yeah, for sure Mark. All our individual dividend paying Canadian companies are in the taxable account. I make it easy, by not trying to play analyst anymore. I just follow the dividend in each individual company and add to whichever sector is down in our own portfolio and pick out a company within that sector that I’d like to add extra money to.

    Reply
    1. Seems very smart, but biased, since that’s largely how I rebalance my taxable portfolio.
      I add to the lagging sector or beaten up stocks in various lagging sectors since it has a better valuation IMO.

      Great stuff,
      Mark

      Reply
  6. Oops, my bad. I forgot that in the RRSP’s we were limited by law to only 10% invested in international (including the U.S.) holdings during the 1980’s and 90’s. The other 90% of the portfolio had to be Canadian only.

    Reply
  7. Hi Mark,

    I’ve been doing DIY investing for the last forty years with a few hits and too many misses, especially in the early years. I figure I was doing international direct investing in the 90’s (although I didn’t know it then) through some U.S. listed stocks and ADR’s in the taxable portfolio. That portfolio got sold during the bull market of 1999 for a nice large down payment on our small house. Once the mortgage was paid off in 2003 I started portfolio two in the taxable account. This one was quite different in that it was individual all Canadian dividend stocks. After having to endure the tech crash in our RRSP’s in the early 2000’s and then seeing what happened to my bright idea (not) of buying a mix of Canadian and U.S. based dividend ETF’s in 2007 (right before the 2008 through early 2009 financial crisis) I decided to get involved in direct investing again by taking more control of the sectors in our all Canadian taxable account in 2010. So far, so good and still in the slow building stage even in retirement. Again in 2010 our dividend ETF’s in the RRSP’s got switched to TD e-series funds and started with these same funds in our TFSA’s. Since 2020 I decided to switch out the TD index funds for ZBAL in both registered portfolios. It’s taken me literally decades to learn how to simplify investing and invest within my own circle of competence.

    As an aside I looked at XDG for the first time yesterday and thought I wish we had something like that back in the early 80’s instead of all these ridiculously expensive mutual funds. Something like that would have been a perfect fit for the RRSP’s at the time.

    Reply
    1. Excellent stuff.

      “Since 2020 I decided to switch out the TD index funds for ZBAL in both registered portfolios. It’s taken me literally decades to learn how to simplify investing and invest within my own circle of competence.”

      I assume you continue to keep your Canadian dividend paying stocks in your taxable account though?

      XDG is an interesting product. Nice and boring. I like the U.S. healthcare and consumer angle to the fund for sure and own some of those stocks directly in fact for that reason in the top-10.

      It will be interesting to see how my portfolio evolves over time…subtle changes here and there 🙂
      Mark

      Reply

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