A Right Time To Fix An Investment Wrong?

Includes: DIA, EFA, EWC, SPY, VYM
by: Dale Roberts

I recently came clean and admitted my major investment mistakes, at least the ones I could think of at the time of writing. And boy do I feel better getting that off of my chest.

You can read that article here. It's entitled, I will never make another investment mistake. Fingers crossed on that.

Here are my admitted mistakes from that article.

1. Picking stocks.

2. Lack of diversification.

3. Lack of international exposure.

4. Lack of patience.

5. Having no plan.

Identifying mistakes is only half the battle. The next step is fixing your mistakes. That's not easy in many cases. Why? Because we want to over think it. We want to time the market. We want the right entry price. We want the right entry time. We want to buy at fair value or better. The problem is, there's no way to ever know which way an asset, an asset class, sector, or geographical region is going to go in the short or midterm.

Ironically, after a few decades of study and "investing" I came to the obvious conclusion that no one knows anything. Great, eh? You spend all of that time and energy only to discover that there is no magic potion, no secret formula.

No one knows where the bond market is going to go. No one knows where the U.S., International, Canadian, developing markets are going. I also have no idea when the Maple Leafs will win their next Stanley Cup. My guess on any of the above is about 'as good as yours'.

But back to fixing my portfolio. One of the main mistakes left to fix (recently) was my home bias and lack of U.S. exposure. Now my over exposure to Canada and the resource play that it is turned out to be a lucky event. I outperformed the U.S market and Canadian market - due to concentration in materials and energy and some gold thrown in just to add a little shine to the holdings.

Here's the Canadian materials ETF in blue, Gold in green charted with the Canadian index (NYSEARCA:EWC) in red of course and the S&P 500 (NYSEARCA:SPY) in brown.

(Click to enlarge)

You can see the drastic outperformance of the materials and gold over the broader markets.

And here's the Canadian market vs. the U.S. over a longer period.

(Click to enlarge)

Due to the above trends (and some timely selling) I had a 74% total return from January 1, 2007 to the end of 2011, when looking at our investment accounts. Sometimes you get lucky!

A reader asked what I learned from this luck. My "luck" again was concentration in the Canadian markets and a materials ETF and a couple of gold companies and energy companies, and my Tim Hortons (THI), ha. There was no real strategy there. Just dumb luck. I was overly exposed to a country that is largely a sector play on resources and banking (supported by said resources).

I don't think there's much to learn by getting lucky. Does an inexperienced card player who goes to Vegas, sits down at the blackjack table and is then dealt "21" three times in a row learn anything?

Perhaps he does, if he pockets his winnings and walks away from the table. And chalks one up to luck.

And then of course, my luck ran out. Coming out of the recession, the U.S. has outperformed the Canadian markets. That's now the U.S. in red in the chart below.

(Click to enlarge)

So what to do? As that same reader suggested, why would I add more to the U.S. market when it is already up over 80% from the correction. He also listed the obvious and real issues of U.S. debts, deficits and money printing.

But once again, nobody knows nothing (no offense to RedScourge, it's a very long list that his name is included among, and I'm in there too). To know when to pick an entry point would be impossible. Trying to pick an entry point, one may miss the opportunity to get in at all - perhaps for a very long time. The U.S. stock market rally could end tomorrow. It could continue for another 5 years. Flip a coin. I have a guess, but it's not worth sharing, or acting upon.

There's that old adage - the markets can remain irrational longer than you can remain solvent. And when you have the time horizon, every day is a good day to invest. Especially if you are reinvesting along the way. If the U.S. market becomes more attractively valued, I will be buying then too. I will also be buying the Canadian markets, the international markets (NYSEARCA:EFA) and adding to my cross section of bond ETFs.

My current strategy is centered upon my portfolio income. I am buying the broad based market indices (NYSEARCA:DIA), in concert with dividend and dividend growth ETFs (NYSEARCA:VYM) in the U.S. and Canada. As well as potentially buying the U.S. market at "over valuation" I had to lower the yield on my portfolio to add that U.S. exposure. The ETFs that I held in Canada were offering yields of 3.5-5%, the U.S. ETFs that I switched into offered yields in the 2-3% range.

Here are my returns with portfolio income for one of our accounts. This account is typical of the holdings and income in our other retirement accounts. We can see the income amount and income growth listed in the first two rows.

(Click to enlarge)

While adding a portfolio dividend and income growth emphasis increased my yield considerably from 2010 through 2012, I had to take a step back in 2013 to get that added U.S. exposure. But no regrets, at all. I am happy to add the 30 wonderful companies from the Dow 30 and the top holdings from VYM. The multinationals offer very nice U.S. exposure and some additional (but moderate) international exposure. Buying a market near its top and lowering current income certainly feels counterintuitive, but it's not a move I will likely regret in 5 or 10 years. My portfolio has more international diversification. It holds way more great companies, with increased growth and income growth potential. I have more avenues to profit from North American and International Growth. I have reduced the risk in my portfolio. I have fixed a mistake.

There have been many writers and commenters on SA who detail their transition to a new strategy, or to a better defined investment plan. Many of those writers appear slow to transition, holding on to past strategies and repeating past mistakes.

In the words of a very famous brand I would offer up this advice ...

Just Do It.

Disclosure: I am long DIA, VYM, EWC, EFA, THI, ENB, TRP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Dale Roberts aka cranky is a Streetwise Coach at ING Direct Mutual Funds. Streetwise Portfolios offer the lowest-fee, managed, index-based portfolios available to Canadians. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process

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