Dave at Investing Intelligently noticed that my benchmark Sleepy Portfolio returned a stellar 14.7% in 2006 and asked the obvious question: Why do I even bother with individual stocks instead of taking a passive approach using ETFs? It is a good question and as a matter of fact, I am slowly increasing the percentage of portfolio that is indexed. However, there are some very good reasons why I am not getting there sooner:
- I still plan to represent the Canadian equity portion of the portfolio using stocks because our capital markets are concentrated in just two sectors: resources and financials. The financial sector can be captured using just a few stocks and I am not very keen on the resource sector for the long-term: it is too volatile and too cyclical.
- It is possible that my stock selections would be truly awful (I once held Nortel and JDS-Uniphase) but I am willing to live with that. Canadian equities form just more than 20% of my total allocation.
- Most of our new money is invested through RRSPs, ESPPs and RESPs. I’ve noted before that I invest my RRSPs in a Canadian mutual fund. We do not have much choice in ESPPs and the RESPs are indexed using TD eFunds.
- I do plan to eventually replace every US stock I hold with ETFs such as VTI, EFA and EEM/VWO. I do not think that it is prudent to sell them en masse but as I sell them periodically, I will buy an index fund with the proceeds.
In a few years’ time, I hope to have a mostly indexed portfolio with a handful of Canadian equities.