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I've been working on an asset allocation plan for some money I'm planning on investing, so I'd thought I'd share it with this forum:
The overall asset allocation I'm looking at is 65% equity and 35% bonds. This is heavy on bonds for someone my age, but the money is necessarily just for retirement, since there's a real possibility some or most of it could be used for a downpayment on property in the next 5-10 years. I'm also taking into account Graham's advice to stay within a 25-75 range for each section. At this point I'm not looking at other investment types; REITs don't really interest me and the Canadian equity portion gives me lots of exposure to general commodities. Cash isn't included as a percentage allocation, since I'll be holding a fixed amount with any excess used to purchase more assets at rebalancing times.
Speaking of rebalancing, the general rebalancing strategy is to do so 1-2 times per year, with an additional rebalance triggered if an asset is over 50% overweight, although I may still change this.
Specific Allocation (All Percentages of Total):
General Equity - 60%
20% XIC - iShares CDN Composite Index Fund (I like the greater breadth of XIC, but XIU has much better volume/liquidity and a slightly lower MER, so I'm not sure)
20% VTI - Vanguard Total Stock Market ETF (Broad US market exposure and rock-bottom MER. I've been convinced that hedging the CAD/USD exchange rate isn't worthwhile over the long term)
20% VEA - Vanguard Europe Pacific ETF (Since the exchange rate exposure is to a basket of currencies, buying one of the funds hedged to USD doesn't make much sense)
Specific Equity - 5% (My commissions are low enough relative to assets that they shouldn't drag even these small allocations too much)
2.5% - BHI Baker Hughes
2.5% - SII Smith International
I decided to invest a small portion in oil field service companies. Originally I was planning on investing this portion in an oil commodity fund like USL, DBO, or USO, but the problems of contango/backwardation and possible rule changes in the futures market make them unsuitable for long-term investment. I found the integrated major producers either ethically (XOM, Chevron, etc.) or financially (ConocoPhilips) unappealing, but I found some good companies in the oil field service sector. BHI, BJS, and SII are all relatively solid value stocks with good long term potential; since BHI is buying BJS, likely by the end of this year, investing in both would be redundant.
Bonds - 35%
25% XSB - iShares CDN Short Bond Index Fund (Short bonds have lower volatility than longer duration bonds, which is an important attribute for the bond portion of the portfolio)
10% XRB - iShares CDN Real Return Bond Index Fund (Having some inflation-indexed bonds seems like a good idea)
The tax strategy is relatively simple. During 2008 I'll keep most of it in a taxable account and keep my TFSA with ING for their promotional rate, but in 2009 with new purchases and possibly movement of existing assets I'll put the foreign holdings in an RRSP and use the TFSA for holding the bonds. How much of the asset base will end up inside the RRSP I'm not sure, but I'll certainly use all the TFSA room I can.
I've set up an account with questrade, since they offer by far the lower commissions: $5 on most of the trades I'll be making, up to a maximum of 10$. My signup bonus will supposedly rebate my first $50 in trades as well. Idle cash in my taxable account will likely be moved to a high-interest savings account between rebalancings.
The overall asset allocation I'm looking at is 65% equity and 35% bonds. This is heavy on bonds for someone my age, but the money is necessarily just for retirement, since there's a real possibility some or most of it could be used for a downpayment on property in the next 5-10 years. I'm also taking into account Graham's advice to stay within a 25-75 range for each section. At this point I'm not looking at other investment types; REITs don't really interest me and the Canadian equity portion gives me lots of exposure to general commodities. Cash isn't included as a percentage allocation, since I'll be holding a fixed amount with any excess used to purchase more assets at rebalancing times.
Speaking of rebalancing, the general rebalancing strategy is to do so 1-2 times per year, with an additional rebalance triggered if an asset is over 50% overweight, although I may still change this.
Specific Allocation (All Percentages of Total):
General Equity - 60%
20% XIC - iShares CDN Composite Index Fund (I like the greater breadth of XIC, but XIU has much better volume/liquidity and a slightly lower MER, so I'm not sure)
20% VTI - Vanguard Total Stock Market ETF (Broad US market exposure and rock-bottom MER. I've been convinced that hedging the CAD/USD exchange rate isn't worthwhile over the long term)
20% VEA - Vanguard Europe Pacific ETF (Since the exchange rate exposure is to a basket of currencies, buying one of the funds hedged to USD doesn't make much sense)
Specific Equity - 5% (My commissions are low enough relative to assets that they shouldn't drag even these small allocations too much)
2.5% - BHI Baker Hughes
2.5% - SII Smith International
I decided to invest a small portion in oil field service companies. Originally I was planning on investing this portion in an oil commodity fund like USL, DBO, or USO, but the problems of contango/backwardation and possible rule changes in the futures market make them unsuitable for long-term investment. I found the integrated major producers either ethically (XOM, Chevron, etc.) or financially (ConocoPhilips) unappealing, but I found some good companies in the oil field service sector. BHI, BJS, and SII are all relatively solid value stocks with good long term potential; since BHI is buying BJS, likely by the end of this year, investing in both would be redundant.
Bonds - 35%
25% XSB - iShares CDN Short Bond Index Fund (Short bonds have lower volatility than longer duration bonds, which is an important attribute for the bond portion of the portfolio)
10% XRB - iShares CDN Real Return Bond Index Fund (Having some inflation-indexed bonds seems like a good idea)
The tax strategy is relatively simple. During 2008 I'll keep most of it in a taxable account and keep my TFSA with ING for their promotional rate, but in 2009 with new purchases and possibly movement of existing assets I'll put the foreign holdings in an RRSP and use the TFSA for holding the bonds. How much of the asset base will end up inside the RRSP I'm not sure, but I'll certainly use all the TFSA room I can.
I've set up an account with questrade, since they offer by far the lower commissions: $5 on most of the trades I'll be making, up to a maximum of 10$. My signup bonus will supposedly rebate my first $50 in trades as well. Idle cash in my taxable account will likely be moved to a high-interest savings account between rebalancings.