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Discussion Starter #1
Right now the TSX Composite Index is around the same level as it was in 2007, 13 years ago! Even factoring in the dividends received, that is truly awful performance. I've been saying for years that money put into the likes of XIC and XIU is wasted. Other indexes, especially in the USA do well because they have a pretty good and balanced representation of the economy, and are efficiently traded. The TSX is too heavily weighted to Financials and Commodities. Extracting things from the ground is a very poor businesses to be in... banks are OK but not in such a huge weight.

Anyway the past performance is all said and done and doesn't help anybody now, so I have my 2 cents on the market right now:

  • The volatility has been crazy lately, but holding quality dividend stocks is still a good bet
  • Think the latest rally in the last couple of days is a bit of a dead cat bounce and we'll go on to lower lows
  • The US is not really taking the coronavirus threat seriously, sort of half-assing it between balancing the health and economy
  • I believe a strict 1 or 2 month shutdown would be the best in the long-run, and save the most lives
  • Gold looks good for so many reasons: safety, excessive money-printing, disconnect of spot price and physical/futures price, and portfolio diversification
  • A bad time to sell quality stocks, but still not a super attractive entry point to back-up-the-truck -- I'm looking for a 6-7% aggregate yield on my 6-Pack
Hope you're all doing well and hanging in there and staying safe. I'm working from home and have a 2nd baby due any day now. Going to be hectic!
 

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Congrats on the second kid.
Composition of the TSX index is an issue. For it to do really well, it really needs strength in financials with support from oil, commodities, and materials IMO. And cyclically, it's been a poor decade of those sectors.
On the other hand, it's not like the US markets haven't had their challenges either as the S&P500 essentially went nowhere during the aughts from the peak of the dotcom boom to the fallout from the great recession.
 

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No doubt the S&P500 has had times of great gains, it's been quite the nice run up since 2010. The TSX has it's moments like in 2003 to the 2008 fallout, that was a good run.

Of course that's one reason why we diversify...
 

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+1 Over long periods of time, the TSX Composite has held its own against the S&P500. Homo sapiens tend to have recency bias. Clearly the TSX is not nearly as balanced as some indices but that is often the nature of of a small economy. We could do worse.
 

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Glad to see your account is working again Argonaut!

And while it's true that the TSX is back to its 2007 level, the same is true for the EAFE and Nikkei. So I think it would be more fair to say that the TSX is performing similarly to other global markets; what's wrong with that?
 

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Glad to see you posting again, Argo!

I too am holding off before I pour my cash back in. I think it will drive lower as well.
 

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Great to see you Argo . Dec 18 ,2012 I bought your 5 pack But today it is more like a 15 pack for me lol Overall was great advise :)
 

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Discussion Starter #10
I still argue that the TSX is a bad index, hence the title of the post. Any benefit you'd get from a bull market in commodities can be also had by holding Gold, which I've always said is a good part of a portfolio. And when commodities are out of favour, Gold still hangs in there, at least in Canadian dollar terms. In CAD, Gold has actually been in a bit of a sneaky bull market since its USD bull market ended in 2012.

The 6-Pack (previously 5-Pack) has been great and is almost a decade old now. It was actually a bit positive in 2018 when the TSX had a tough time, but had its first ever year of underperformance in 2019 (by a measly 0.2%) in one of the best-ever years for the TSX.

I don't track the relative performance on anything more than an annual basis, but from what I was seeing the 6-Pack got slammed even harder than the TSX during the market calamity. What I heard was that the big banks were un-hedging and re-hegding their derivatives positions in structured notes (i.e. GIC+utilities) and selling these quality dividend names at any price. But then these dividend stocks came back even harder during the last few days. Down 25% one day, up 25% the next... it's all pretty crazy.

I'm still mostly fully invested and not selling. But in order to dip into my cash weighting or even borrow some money to add more, these names would have to get a bit more cheap. It's possible the bottom was last week and people missed it, and it's also possible we'll be in for more pain. No one is 100% sure on the direction of the market, but if I had to wager one side or the other I'd take the downside.

There's going to be some real pain in New York pretty soon. I'm taking a macro market view here but I definitely have a lot of empathy for the human side of this event.
 

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I'm weighted heavily in XIC because most of my portfolio is in a corporate, taxable account. XIC's dividends are treated much more kindly in a corporate, taxable account -- they increase your GRIP room, enable you to efficiently use eRDTOH, and help me pay myself more dividends at a lower tax rate. The tax benefits can be significant inside taxable accounts, especially corporate ones.

I don't touch XIC inside registered accounts. It is forbidden to enter their domain. Where taxes aren't a consideration, I'd rather own stocks outside of Canada.

I also really like XIC now because the prices look much better.

How will the TSX grow in the future compared to the S&P500? No idea.

I like gold. I always keep around 7-8% of my net worth in gold.
 

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I disagree that the TSX is a bad index. I know you have those reasons Argonaut but the long term performance does not show any major shortcomings. I think you are focusing too much on the recent years of performance versus the S&P 500 and forgetting about the longer term picture.

Here's the longest term picture I can put together, based on the earliest trading date of XIU. This chart shows SPY (a benchmark S&P 500 index ETF) versus XIU (the earliest benchmark TSX index ETF) both on a CAD basis.

S&P 500 is green, TSX in black:

20054


From 2000-2020 -- that's 20 years! -- this chart shows that the TSX mainly outperformed the S&P 500. In fact I think this is a very nice time period to look at because what you see is
(a) the TSX outperformed for the first decade
(b) the S&P 500 outperformed for the second decade

And they ended up in the same place. The total returns by today are virtually identical!

How can you call TSX the inferior index, when the S&P 500 went nowhere from 2000 - 2013? That's 13 years with no gains!

In my view, these indexes both perform well over time, but at different times. This is the reason one must have international diversification. For most of these years, I have held equal weights of the TSX and S&P 500 and have been very happy with that.
 

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I still argue that the TSX is a bad index, hence the title of the post. Any benefit you'd get from a bull market in commodities can be also had by holding Gold, which I've always said is a good part of a portfolio. And when commodities are out of favour, Gold still hangs in there, at least in Canadian dollar terms. In CAD, Gold has actually been in a bit of a sneaky bull market since its USD bull market ended in 2012.

The 6-Pack (previously 5-Pack) has been great and is almost a decade old now. It was actually a bit positive in 2018 when the TSX had a tough time, but had its first ever year of underperformance in 2019 (by a measly 0.2%) in one of the best-ever years for the TSX.

I don't track the relative performance on anything more than an annual basis, but from what I was seeing the 6-Pack got slammed even harder than the TSX during the market calamity. What I heard was that the big banks were un-hedging and re-hegding their derivatives positions in structured notes (i.e. GIC+utilities) and selling these quality dividend names at any price. But then these dividend stocks came back even harder during the last few days. Down 25% one day, up 25% the next... it's all pretty crazy.

I'm still mostly fully invested and not selling. But in order to dip into my cash weighting or even borrow some money to add more, these names would have to get a bit more cheap. It's possible the bottom was last week and people missed it, and it's also possible we'll be in for more pain. No one is 100% sure on the direction of the market, but if I had to wager one side or the other I'd take the downside.

There's going to be some real pain in New York pretty soon. I'm taking a macro market view here but I definitely have a lot of empathy for the human side of this event.
Hey Argo, nice to see you posting. I recall years ago there was much good discussion on your 5 pack but not sure if you have made some changes. If I may ask, can you refresh us on what your six pack consists of now?

I have pared down my holdings significantly and want to try to get to a Canadian 6 pack and a US 6 pack myself.
 

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Discussion Starter #14
It's a good point that the TSX outperformed the S&P 500 for the first decade of this century. I suspect a lot of the back-and-forth between the two is simply due to the exchange rate. However, I do advocate for a Canadian weighting -- but to substitute the index for some home-picked stocks. These aren't any wild choices, most of them are names we all know and have been around for decades. This approach has beat the TSX handily since inception, an aggregate of 12% annually! I can't guarantee that will continue, but am happy to continue to hold.

Here's the 6-Pack in equal weight with some examples. Can double up to a 12-Pack if portfolio is large enough.

Banking: RY, TD, BNS
Railroad: CNR, CP
Telecom: T, BCE
Utility: FTS, AQN, NPI
Pipeline: ENB, PPL, GEI
REIT: CAR.UN, SMU.UN, GRT.UN

I like that it's balanced halfway between economically sensitive sectors (Bank/Rail/Pipe) and interest rate sensitive sectors (Telecom/Utility/REIT). Obviously all the stocks will have some degree of economic and interest rate sensitivity, but I try to think in simple terms.

It's possible that this approach will underperform the general TSX for a period of time. Two scenarios I can think of: a huge commodity bull market, and a period of rising interest rates. For the first instance, I hold Gold in the asset allocation anyway. And in the second instance, I wouldn't mind that because it would mean Fixed Income would finally become attractive again. But it seems central banks are incapable of raising interest rates much ever again, so who knows?
 

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I do like those stocks, and my own 5-pack is very similar, but I still want to correct what I think is a misconception that the TSX is somehow flawed or sub par.

There is lots of evidence this isn't true. Besides the fact that 20 year performance is identical to the S&P 500, we also have a longer term study. You can look up the Credit Suisse Yearbook of stock returns (called something like that). This includes over 100 year returns for most countries, including Canada, using a reasonable cap weighted index. That kind of index will be comparable to the TSX Composite.

What that showed is that Canada had one of the strongest equity returns in the world. We are in the top tier, similar to the US.

There is no reason to think that the TSX (or a generic cap weighted Canadian index) is inferior to the S&P 500. Yes the weightings are different, but at least for the ~ 100 years of data that exists, Canadian stocks have performed about as well as US stocks.

That actually puts Canadian stock performance above the global average. What this means is that if you're buying the TSX Composite (XIC) you are buying a market that, historically, has one of the best performance in the world.

I think that much of the complaining about the TSX is a recency bias. Since the 20 year performance is the same as the S&P 500, and the 100 year performance is similar as well, I don't see how anyone can argue that the index is flawed, or inferior.
 

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I can see how the TSX by itself might not be an appropriate comprehensive investment for most people.

I don't see how the TSX is an awful index, the various indexes typically do a reasonable job communicating the listed companies aggregate pricing changes.

The goal of the TSX index (any of them) isn't to provide a good investment vehicle for you.

As far as the recent drop we've had, well, that's the problem with equities, particularly when they're highly leveraged.
If we all did a "proper" balanced couch potato we'd be doing much better.
 

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It's a good point that the TSX outperformed the S&P 500 for the first decade of this century. I suspect a lot of the back-and-forth between the two is simply due to the exchange rate. However, I do advocate for a Canadian weighting -- but to substitute the index for some home-picked stocks. These aren't any wild choices, most of them are names we all know and have been around for decades. This approach has beat the TSX handily since inception, an aggregate of 12% annually! I can't guarantee that will continue, but am happy to continue to hold.

Here's the 6-Pack in equal weight with some examples. Can double up to a 12-Pack if portfolio is large enough.

Banking: RY, TD, BNS
Railroad: CNR, CP
Telecom: T, BCE
Utility: FTS, AQN, NPI
Pipeline: ENB, PPL, GEI
REIT: CAR.UN, SMU.UN, GRT.UN

I like that it's balanced halfway between economically sensitive sectors (Bank/Rail/Pipe) and interest rate sensitive sectors (Telecom/Utility/REIT). Obviously all the stocks will have some degree of economic and interest rate sensitivity, but I try to think in simple terms.

It's possible that this approach will underperform the general TSX for a period of time. Two scenarios I can think of: a huge commodity bull market, and a period of rising interest rates. For the first instance, I hold Gold in the asset allocation anyway. And in the second instance, I wouldn't mind that because it would mean Fixed Income would finally become attractive again. But it seems central banks are incapable of raising interest rates much ever again, so who knows?

Big fan of the 6-Pack approach and I have largely followed a 12-pack (with extras) for a decade now. No intention of changing now even with COVID-19 crisis.

Will be trying to load up on U.S. stocks or ETFs (like ITOT) to offset CDN assets and grow the portfolio after this is over in the coming quarters.

Stay well Argo and all!
 

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Going a bit off topic here, I have notice a lot of investment/finance blogs have gone silent these past few weeks. I certainly hope they don't come out when the market recovers bragging about how well they've done during the downturn. Thanks MOA for writing about finance and investments religiously in both up and down markets. Many here have benefited from your blog and Argo's 6 pack. The bulk of my investments are in a 6 pack. Just never was quite able to get a Canadian RR. Have done well with CSX though. If the market continues to decline will be picking up a RR this week.
 

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Index funds in general are bad, so comparing a tsx index fund to a sp500 one doesn't make the tsx one good. Just weed the crap out of an index and pick from what's left and one will do better than the index. I never understood why holding crap for the long term was a good idea. A huge component of successful stock investing is not picking the absolute best performers, its avoiding mistakes. Don't buy the crap. And if you do, by mistake, fix the mistake pronto.
 

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In my view, these indexes both perform well over time, but at different times. This is the reason one must have international diversification. For most of these years, I have held equal weights of the TSX and S&P 500 and have been very happy with that.
You hit the nail on the head. But what weight should a Canadian have towards a domestic equity index and the CAD? To many it is probably 75%. To me a diversified portfolio would probably be about 5-15% Canadian.
 
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