Programming, Investing and FI

Portfolio definition: Perfect Balance

Context

How to own a really great deal of the world’s equity without a headache and too much volatility? Yup! Perfect balance is the one I would choose if I want more growth than Calm Seas and still a broad exposure. I like this portfolio because it’s starting to look more attractive to financial independence. It might apply to you if that’s what you want to accomplish. Also, you might want to choose this portfolio if you don’t have too much money at hand (less than 20 000 $) or are not too familiar with investing.

Perfect Balance Portfolio

My personal opinion is that you should be wanting to invest for at least 20 years if you choose this one. Remember that financial independence means investing pretty much forever so this constraint will not apply to you if that’s what you’re looking to accomplish.

What I am looking for in this portfolio:

  • Broad exposure to reduce volatility and ensure a great capture of all gains.
  • Fixed income to further reduce volatility in case of market crash.
  • Still a growth but a conservative side for more sensitive people.
  • Goal that aligns with moderate financial independence.
  • Low management fees!

My Estimate

No one can predict the future, but I will still try to guess how much this portfolio is going to bring back per year after inflation. My best shot will be, after a 2% inflation, 5.4% (rounded down conservatively to 5%) since :

  • VAB returned around 2 % and represents 25% of the portfolio.
  • XAW returned around 10 % not really accurate so I’ll make it 6.5 %. It represents 50 % of the portfolio.
  • VCN returned around 6.8 % but is not really accurate either. It represents 25 % of the portfolio.

Note: all my amounts are after dividend reinvestment.

In other words keep in mind that I am conducting educated guesses here and nothing more than trying to figure out the most probable return for this type of portfolio.

Let’s say that we will invest 20 000 $ to start and add 500 $ per month to it for 25 years.

Perfect Balance Portfolio Estimate

I am not considering the tax implication here but since we have quite a bit of equity and ETFs that limit capital gains, it shouldn’t be too too bad.

Creation

I will be using the same method as in the other portfolios for assigning the parts.

  • VAB – 5000 $ that is currently at 25.86 a share.
  • VCN – 5000 $ that is currently at 31.40 a share.
  • XAW – 10000 $ that is currently at 24.26 a share.

Here is the real distribution from the start in Investopedia and in my Excel spreadsheet.

Real Holdings Perfect Balance

Perfect Balance Real

The Funds

Like the Calm Seas portfolio, we’ll review all the funds to make sure they align with our goal of financial independence through “low” (in my opinion) volatility. From my perspective, volatility is different for everyone as it depends on your personal situation. In FI you can generally take on more risks because you intend to keep the money there (almost) eternally and live on the dividends and capital gains. I understand that people might not want to take on too much risk if they’re not used to it or if they think their situation might change. That’s why before everything you should have an emergency fund of 3 to 6 months of salary, always, no excuses!

Still, we will see how this one goes over time!

VAB

Vanguard Canadian Aggregate Bonds – I’ve decided to include some bonds from Canada in this portfolio to soften the volatility curve a little bit. That way it should remain more stable than a full stocks portfolio would be. The bonds are low to moderately risky and should provide a bit of growth.

VCN

Vanguard Canadian All Caps – This is our Canadian stock and income tax friendly ETF! I really like it because it captures the whole market and gave a moderately good return in the past five years of 4-5% per year after inflation.

I honestly feel better having a bit of Canadian stocks in the portfolio because it tends to be a more stable economy, on the other side it makes me a bit more nervous that the Canadian economy has a great deal of oil and financials representing more than 50%. Personal thought but it’s supposedly less volatile and that’s why I included it on the equity side of this portfolio.

XAW

iShares All Country World Except Canada – If you asked me how to get a great exposure to the world’s equity, this is the fund I would suggest. It includes REIT, stocks and even a bit of emerging markets from all over the world at low cost (MER 0.22%). Impressive!

XAW Countries and Sectors Exposure

I decided to put more 50% of the portfolio in XAW because of it’s broad exposure and diversity. I wanted to make sure I would capture more than only the Canadian market which is fairly small compared to the other markets of the world.

Summary

This portfolio is a balance if you would like to attain FI (financial independence) and are not really in a hurry or do not feel really comfortable having an all equity portfolio. I would say that it would best fit in a TFSA because of the 25% bonds but hey, anything is better in an account where you don’t pay income tax on the interest! Simple to rebalance and should be profitable on the long run, being in a bull or a bear market. We will see if that hypothesis is true in a few years!

To remember: in our passive investment strategy to financial independence we do not sell. We add money and rebalance, that’s it!

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