Don't sweat the small asset allocation details

Don’t sweat the small asset allocation details

Two very opposing equity allocations haven’t affected returns much over the decades


Many investors fret about the small details when it comes to how to divvy up their equity asset allocations. But some wildly different allocations haven’t mattered much to returns over the long haul.

You can see the impact of big differences in stock allocations by studying the returns of two variations of the couch potato portfolio.

The original–or classic–couch potato advocated putting an equal amount of money into Canadian bonds, Canadian stocks, and U.S. stocks. On the other hand, the global variant puts equal amounts into Canadian bonds, Canadian stocks, U.S. stocks, and international stocks.

If you focus only on the stock part of both portfolios, the first has 50% in U.S. stocks and 50% in Canadian stocks while the second has about 33.3% in Canadian stocks, 33.3% in U.S. stocks, and 33.3% devoted to international stocks. That’s a pretty big difference.

Both options also deviate markedly from the global stock market. The MSCI World index provides a handy way to track the developed world’s stock markets. Think of it as being like the S&P 500 for the world’s stocks. These days it has about 60% of its assets in U.S. stocks, less than 4% in Canadian stocks, and roughly 36% in international stocks.

The graph below shows the long-term growth of the equity part of the global couch potato portfolio versus that of the world index. You can see that the two track each other fairly well over the long term despite the huge difference in equity allocations.

Asset allocation

The situation changes more noticeably if you look at the classic couch potato portfolio, which eliminates international stocks entirely.  The graph below shows how it fares against the world index.

Asset allocation

But even in this extreme instance, the returns between the two haven’t been too far off. For instance, in the early part of this decade the classic couch potato was basically running neck and neck with the world index.

I prefer the global variant of the global couch potato, which is more diversified than the classic version. But, based on past history, you probably shouldn’t worry too much if you have, say, an extra 5% devoted to Canadian stocks and proportionately less in U.S. and international stocks.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of April 4. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Name Price P/B P/E Earnings Yield Dividend Yield
National Bank (NA) $42.68 1.54 10.49 9.54% 5.06%
CIBC (CM) $96.87 1.84 10.72 9.33% 4.87%
Shaw (SJR.B) $25.01 2.27 14.21 7.04% 4.74%
Bank of Nova Scotia (BNS) $62.48 1.48 10.79 9.27% 4.61%
BCE (BCE) $59.85 3.98 20.08 4.98% 4.56%
Royal Bank (RY) $74.76 1.76 11.21 8.92% 4.33%
Bank of Montreal (BMO) $78.67 1.32 11.71 8.54% 4.27%
Power (POW) $29.73 1.05 7.71 12.97% 4.19%
TELUS (T) $42.07 3.26 18.37 5.44% 4.18%
Manulife (MFC) $17.99 0.92 16.97 5.89% 4.11%

Source: Bloomberg, April 4, 2016


Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

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