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Hi all,

I've long since lost confidence in my ability to pick individual stocks, so from here on in I'm just going to bet into the index and let it ride. At least I can't screw up with that, right?

What's a sensible mix of Indexes to invest in if I want global exposure? I'm thinking that since non-North American indexes tend to be a bit more volatile, a split of 40% TSX, 40% S&P 500, 20% MSCI EAFE (Europe, Asia, Far East) TD e-funds. What do you all think? I'm Canadian BTW, if that makes any difference.

Oh and my investment goals are long term (retirement in 30-40 years), so I'm fine with seeing 40% drops in individual years, as long as I know I'm not doing something stupid.
 

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Other investments to consider would include the BMO Nasdaq 100 Index ETF, the iShares Corporate Bond Index ETF, the iShares iBoxx High Yield Corporate Bond ETF, the iShares Real Return Bond ETF for inflation protection, the iShares Canadian Value ETF, the iShares Canadian Smallcap ETF, the iShares Russell 2000 ETF, and a 5% weighting in the RBC Global Precious Metals Fund.

Smallcaps generally provide better returns over time but with more volatility along the way. Value stocks generally outperform the broad markets over time.

You might also consider a 5% holding in an emerging markets ETF such as the Claymore Broad Emerging Markets ETF.

Establish your appropriate asset allocation first between cash, fixed income, and manage your portfolio by rebalancing it whenever necessary by selling some of your winners and investing the proceeds in some of your losers.

Do this religiously.
 

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It sounds like you're on the right track. If you're looking for truly global diversification, don't forget though about Latin America, Gold, and Cash.

I think you have too much confidence in the S&P500, but hey, that's just me :D
 

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The paper referenced by andrewf may already be outdated given what has happened to markets since 2007. Also contains no TSX figures, and data are not normalized to CDN $ returns.

Conventional wisdom for CDN investors has been to spread your equity between TSX, S&P500, and EAFE. However, in an article June 11, 2010, Rob Carrick writes about a recent report by CIBC World markets that debunks the conventional wisdom. Confirming what many have suspected, globalization is resulting in convergence of CDN, US, & International markets. 20 years ago Canada was correlated 55% to world markets; 15 years ago it was 62%; 10 years ago it was 87%; and for the past year it has been 90%. Consequently there may be a general need to rethink this strategy. You may be paying higher MERs and incurring currency risk for no advantage in diversification.

Another issue affecting conventional wisdom is the current sovereign debt crisis in the Euro-zone, and similar debt/deficit conditions in the US. These problems will take time and political will to overcome, so there may be a need to be more careful and/or selective about global exposure.
 

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The paper referenced by andrewf may already be outdated given what has happened to markets since 2007. Also contains no TSX figures, and data are not normalized to CDN $ returns.

Conventional wisdom for CDN investors has been to spread your equity between TSX, S&P500, and EAFE. However, in an article June 11, 2010, Rob Carrick writes about a recent report by CIBC World markets that debunks the conventional wisdom. Confirming what many have suspected, globalization is resulting in convergence of CDN, US, & International markets. 20 years ago Canada was correlated 55% to world markets; 15 years ago it was 62%; 10 years ago it was 87%; and for the past year it has been 90%. Consequenlty there may be a general ned to rethink this strategy. You may be paying higher MERs and incurring currency risk for no advantage in diversification.

Another issue affecting conventional wisdom is the current sovereign debt crisis in the Euro-zone, and similar debt/deficit conditions in the US. These problems will take time and political will to overcome, so there may be a need to be more careful and/or selective about global exposure.
The author of the paper posted an update to sometime in late 2009 (factoring in the 2008 decline, for which the strategy performed very well, leaving the portfolio primarily in cash from Dec 2007 - June-ish 2009).

It's not really out of date because the concept is insensitive to changes in its parameters and asset classes (ie, the results generally don't change much when you change these parameters). It's likely that similar results would hold For the TSX as an equity component.

It's not an investing strategy necessarily, but it's an interesting idea for risk-management.

As for correlations: they aren't stable. Correlations might be high now, but there is no guarantee that will be the case in ten years.
 

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As for correlations: they aren't stable. Correlations might be high now, but there is no guarantee that will be the case in ten years.
Good point, particularly with the "unusual" economic crises current in US and Euro-zone. Canada has avoided the banking crisis and the sovereign debt crisis. But our stock market is still affected indirectly by events outside our borders, and the long-term (20-year) trend appears to have been steady convergence.
 

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I'm saying that concluding that correlation is high now it will always be so, and we can invest in only one asset class to the exclusion of the others, is dangerous, because what's correlated now may not be in the future. This is stuff that huge endowment funds spend enormous amounts of time thinking about. A bit more analysis than a column in the G&M.
 

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The article by Rob Carrick was merely summarizing a report by CIBC World Markets, who I presume are competent analysts. See article at:
http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20100612/FINALSTMAIN12ATL

I haven’t been able to pin down the precise research report from which Carrick got his data, but “Occasional Research Report #68” touches upon the subject. http://research.cibcwm.com/res/Eco/EcoResearch.html
However the author (Grauman), in a related report, also says that the CDN market is more closely correlated with world markets in bad times than in good. This suggests the recent close convergence may be due to the bad times we have been experiencing.
 
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