Larry MacDonald, columnist for Canadian Business magazine, has kindly included the Sleepy Portfolio in an article on Canadian “lazy” portfolios. While the Sleepy Portfolio is very simple to assemble, there are some pitfalls to be aware of:
- As I use the Sleepy Portfolio to benchmark the returns of my personal portfolio, its asset allocation makes sense for my personal situation (young, aggressive, growth-oriented investor) and will not be suitable for someone nearing retirement. In other words, you should tweak the allocation so that it makes sense for your circumstances.
- When the portfolio was launched, foreign content in retirement accounts was capped at 30%. If I were launching now, I would replace the XSP and XIN with their US counterparts IVV and EFA, as they are cheaper to own and hedging currency exposure is probably unnecessary over the very long term.
- I would also replace the small-cap Russell 2000 index fund with the iShares S&P SmallCap 600 index fund (IJR) for reasons elaborated in this post.
- As Mr. MacDonald points out in his article, the portfolio has a large allocation to mid-caps (20%) and small-caps (7.5%). This is deliberate as the returns of small-cap stocks are greater than that of large-caps over the long-term (with higher risk). Again, such a high exposure may not be appropriate for less risk-tolerant investors.
- At 45%, the portfolio is over-weighted in foreign equities. I feel that such a high exposure is warranted because Canadian equities are dominated by just two sectors: finance and resources. Investors looking for exposure to sectors such as consumer staples and health care are forced to look elsewhere.
