Sunday, February 27, 2022

Two Stock Portfolio - ETF Experiment Continued

In May 2016, I posted about my ETF experiment involving buying VCN (Vanguard FTSE Canada All Cap Index ETF) and VXC (Vanguard FTSE Global All Cap ex Canada Index ETF) for my son's Registered Education Savings Program ("RESP"). Although this was a clear departure from my normal dividend growth investing strategy, the main reason that I pursued the strategy was simplicity. Having added my daughter to the RESP after she was born in July 2017, the two stock portfolio continues to be straight-forward, as shown in the below diagram. 

On a yearly basis, I spend about fifteen minutes on the strategy. The first five minutes relates to re-learning what is a needlessly complicated bill payment I have to use to make the annual contribution through Scotia itrade. A day or two later, after the contribution "magically" appears in the RESP account (sadly, I'm not making that up), I spend another five minutes calculating how much VCN to buy in order to keep the position sizes relatively equal, accounting for future government matches (both federal and to a lesser extent provincial) and upcoming dividends that will be added to the account. The last five minutes are split between buying VCN, and then waiting to see that both government matches hit the account before buying VXC.

Some of the advantages of this two stock RESP include:

- Very simple: Compared to the amount of time I spend on my normal portfolio, 15 minutes a year is awesome!
- Good country diversification: With half the portfolio allocated the Canada, VXC provides me exposure to the U.S., Japan, China, France, Switzerland, Germany, etc. at a very reasonable 0.27% management expense ratio. 
- Minimal cost: Beside VXC's 0.27% management expense ratio, VCN has a management expense ratio of only 6 basis points, and the two buys a year cost me a total of $20 in commissions. 
- Can do it all online: It's only been in the last three years that Scotia itrade hasn't required I send in a physical cheque to fund the annual contribution. 

On the flip side, there are disadvantages to the two stock RESP as well:

- Owning companies you'd rather not: With market capitalization being a dominant factor, there are a handful of companies in VXC I'd rather not own (i.e. Tesla, Facebook, etc.).
- VXC's holdings are not reflective of global market capitalization: VXC is heavily tilted toward the U.S. (60.5% of the ETF's holdings), and ignores some large international companies that are publicly traded (i.e. Saudi Aramco). 
- Scotia itrade's shortcomings: Charging $10 for buying an ETF, seeing your annual contribution disappear for a couple days, waiting an extra day or more to pay out dividends...all the frustrating parts of being a client of itrade continue to impact this RESP strategy.

The longer the two stock RESP experiment runs, the more I continue to love the simplicity of the strategy. I fully plan to stick to the strategy until my daughter turns 16, at which time the federal and provincial governments will no longer partly match the contribution. The only change I envision is potentially moving away from Scotia itrade given the shortcomings outlined above. 

Sunday, February 6, 2022

Water Your Flowers, Not Your Weeds

 "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."
- Peter Lynch

An ongoing theme of my purchases in recent months is adding more to my positions in companies whose shares have increased in value ("winners"). Acknowledging this reality led me to explore the reasons behind this choice. Below are some of the key reasons why I have chosen to follow Peter Lynch's advice.

Accelerate the Compounding Process
Letting the power of compounding work for you by not selling winners early can lead to huge gains. My small October 2013 purchase of Microsoft grew to one of the largest positions in my portfolio. Before adding to this position in December 2021, I simply let the compounding process happen, but didn't accelerate it by adding additional shares. The choice to add to one of my biggest winners seems obvious in hindsight, but felt challenging over eight years given most of the metrics I track never led me to believe Microsoft's stock price would continue to rise.

Momentum is a Strong Force
Newton's first law indicates that "an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force". Extrapolating to a company's shares would seem to imply that stock prices will continue to go up unless there's a good reason they should stop or reverse course. Historically, I haven't put much faith in momentum when it comes to the stock market, and mentally have a very hard time "averaging up" my purchases. However, having seen the negative impact of averaging down on a couple of holdings (including Nortel around 20 years ago), I decided to make momentum my friend instead of fighting against it.

Lower Fear of Missing Out
After going through a phase of selling companies after I thought they became over-valued ("cutting the flowers"), that included exiting Home Depot prior to it tripling in price, managing my fear of missing out became more of a priority to tackle. Although I don't know who said it first, the idea that a company's stock price can always climb higher than you think is reasonable is something I've been trying to park at the front of my mind. Instead of trying to profit off of short-term stock price movements upward, being a long-term investor, I'm more interesting in sticking around for years when stock movement becomes indicative of business success.

Be Comfortable with Larger Positions
For years, I have tried to limit position sizes to a maximum of 5% of my portfolio. I have no idea why I used 5%, nor do I remember where the thinking came from. As I have tried to decrease my holdings over the past couple years, I started to question the 5% maximum, and now realize it's less realistic given only 35 holdings. Going forward, I'm scrapping 5%, and am comfortable if my large positions best represent my conviction and confidence in certain holdings. 

Clearly, the concept of adding to winners, and not averaging down on losers has been difficult for me. That said, I consider the implementation of the philosophy to be a journey, that will likely lead to a better destination as I follow this new path.