RM Balanced Portfolio Update: July 2017

Edited Photo. Source: Flickr - Kirt Edblom

The RM Balanced Portfolio is a "Lazy" investment portfolio I created that is designed to promote investment growth and moderately high returns with some built-in downside protection.

The portfolio is best used for younger investors with long investment timelines. That means a commitment to investing for over 25 years. The longer you stay invested, the smoother and better your overall returns will be.

This Month's Update

With our dollar continuing to appreciate quite rapidly, once again our returns this past month suffered. While this may seem frustrating, remember that our dollar dropped steadily from 2012 through 2016, providing enormous gains in Canadian dollar terms.

Also, let's not forget that we're still up for the year with a healthy return!

Currency goes up and down like everything else, so unless you're employing a market timing strategy it's generally best to invested in products that are not currency hedged. Take advantage currency upswings to buy more units of your ETFs!

International stocks did reasonably well across the board this month. The U.S. stock market climbed nicely and so did international developed stocks. Emerging markets performed great in U.S. dollar terms!

However, our dollar climbed around 4% this month alone relative to the U.S. dollar. This translates into more buying power as the prices of international products are now cheaper in Canadian dollar terms.

Canadian stocks held their own. Financials continued to move down, but on the bright side energy and commodity stocks appear to be turning around... finally.

Bonds continued to drop due to rising interest rates. This could continue for some time. However, it is still important to hold bonds as investors tend to flee to bonds if stock markets get scary.

Gold miners bumped up a little bit. They got hit pretty hard in the last few months, so a correction may be in order.

Overall, this month the Balanced Portfolio suffered a bit. This is purely due to dollar appreciation. The underlying holdings did well once the currency factors are stripped out.

This is the monthly change of our four ETFs as of August 1.

  • XAW.TO down from $23.57 to $23.20 (-1.57%)
  • HXT.TO up from $30.58 to $30.79 (+0.68%)
  • HBB.TO down from $44.56 to $44.15 (-0.92%)
  • XGD.TO up from $11.90 to $12.19 (+2.44%)

Our overall portfolio lost $57.33 (-0.69%) this month. I feel like this currency trend may continue for a while, so returns are likely to be a bit lower in Canadian dollar terms. The best thing is to keep on investing every month in a balanced manner.

I'm very confident that 10 years from now we'll all be sitting pretty fat and happy with a Balanced Portfolio.

To keep balanced a close as possible with our new $500 monthly contribution and the cash from dividends, we will buy XAW.TO and HXT.TO.

We'll also purchase HXT.TO as we let that lag the last few months.

Total holdings:

Source: TheRichMoose.com

Real World, Real Time Performance

In our example RM Balanced Portfolio update, we use a few rules.

In January 2017 we started with $5,000 invested as close as possible to the Balanced Portfolio. We invest another $500 on the first trading day of each month. This is in effort to mimic a person who is just starting to invest in their TFSA (careful not to go over your contribution limit - check your CRA Account online).

We don't fully rebalance each month, instead we use our $500 contributions to try and maintain some balance to the portfolio with purchases only. This keeps our Questrade trading costs low.

The cash portion is just a small amount of leftover cash after buying as many ETF units as we can. Cash goes up at the start of each month because of our $500 contribution and any dividend payments received during the month.

RM Balanced Portfolio Design

The RM Balanced Portfolio has two overall elements: a growth component and a protection component. The growth components consists of Global stocks in the form of XAW.TO and Canadian stocks in the form of HXT.TO. We know stocks grow much quicker than bonds over time because they are riskier. We also know that, as a whole, when US stocks go up stocks in Canada and around the world also go up. That is to say stock performance around the globe is generally somewhat correlated. What tends to vary the most is how much they are correlated. One year US stocks may go up 10% while Canadian stocks only go up 4%. The next year Canadian stocks may go up 15% and US stocks only 6%. Stocks are also more likely to crash hard for short periods during bad times. This is where the protection component comes in.

When stocks fall a lot, gold and bonds tend to fall only a little bit and sometimes can actually go up. Gold and bonds have a low correlation to stocks and can have a slight negative correlation to stocks. This is because they are perceived to be much less risky than stocks so money pours into these assets during "the bad times". Although gold is increasingly considered to be a good short-term "fear asset," it is important to limit your portfolio to no more than 10% gold as a rule. Gold is a non-productive asset and over the long term it is likely to increase no more than the rate of inflation. By investing in gold companies rather than gold itself, the RM Balanced Portfolio offers both gold exposure along with a productive element to benefit from gold miner efficiency.

The Power of Rebalancing

One of the considerations to the RM Balanced Portfolio Design is investing in asset classes that behave differently. Rebalancing your asset positions once a year can help you in effect sell high and buy low. This adds to your overall return. By not rebalancing too often, you let your winners run and keep trading costs down.

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