Dow or S&P?

RYAN  By Guest Blogger Ryan Lewenza

We recently received a request from one of the blog’s avid readers (“GreaterFool.ca is total awesomeness”) to speak on the differences between and merits of holding the S&P 500 versus the Dow. And since my current topic idea about the merits of diversification seems as exciting as Kevin O’Leary’s (sorry “Mr. Wonderful”) announcement that he is jumping into the Conservative leadership race, I thought I would address this topic in today’s blog post.

A bit of history first. The Dow Jones Industrial Average (Dow) is one of oldest financial indices with its origin dating back to 1884. Charles Dow, a journalist and co-founder of the Dow Jones & Company and the Wall Street Journal, created his first stock average in 1884, which consisted of nine railroads and two industrial companies. He then officially launched the Dow Jones Industrial Average on May 26, 1896 with a starting index level of 62.76. Of the 12 companies in the Dow at the time of launch only one still exists today – General Electric.

The S&P 500, initially called the Composite Index, launched in 1923 and with a small number of holdings. A few years later 90 companies were added and then in 1957 it expanded to 500 stocks.

There are a few key differences between the two indices. First is the number of holdings, with the Dow holding just 30 stocks and the S&P 500 holding 500 stocks. In fact, the S&P 500 should be renamed the S&P 504, since there are currently 504 companies in the index. Something tells me that would be an expensive endeavour and it would lose some of its marketing cache since it doesn’t really have the same ring calling it the S&P 504. The second important difference is how they are constructed. The Dow uses a price weighting while the S&P 500 uses a market cap weighting. While each methodology has its drawbacks, the Dow is the most antiquated given its price weighted.

An example will help. Goldman Sachs and JP Morgan are both included in the Dow. Goldman’s share price is US$234 and has a market cap of US$93 billion, while JP Morgan’s share price is US$84 and has a US$300 billion market cap. Despite JP Morgan being 3.2x larger than Goldman Sachs based on market cap, Goldman represents 8.2% of the Dow versus JP Morgan at just 2.9% due to JP Morgan’s much lower share price. This to me is quite silly, and in part explains the differences in returns of the two indices over time.

The main downside with the S&P 500’s construction is that stocks with large and rising market caps (think Amazon) take up a larger and larger weight in the index. We saw this going into 2000 when information technology stocks were soaring and represented 32% of the S&P 500 (versus 21% today), and in 2015 when the FANG stocks (Facebook, Amazon, Netflix and Google) drove most of the index’s movement.

Now to determine which index may be the better one to invest in we need to look at a few different factors.

Returns
From a return perspective which index typically outperforms? Well that largely depends on which time frame you’re looking at. Over the last 12 months the Dow has outperformed with the Dow up 26.6% versus the S&P 500 at 23%. However on a 3-, 5- and 10-year basis the S&P 500 has outperformed. And going even further back, on a 20-year basis the Dow has outperformed. So the answer all depends on which time frame you look at.

Returns of Dow and S&P 500 (%)

Source: Bloomberg, Turner Investments

Sector Weights
Now a major reason for the differences in returns is due to differences in sector weights and, bigger picture, what type of market environment we’re in. The Dow has a higher weighting in some of the cyclical sectors like Industrials (9.5% higher weight), Financials (+2.2%), and Consumer Discretionary (+2.2%). Where it has little to no exposure is in the interest sensitive sectors like real estate (2.6% lower weight), utilities (-3.2%) and telecom services (-0.8%).

With Trump’s policies possibly leading to higher growth and inflation, this has led to a sizable increase in government bond yields and a steepening of the yield curve (difference between 91-day T-bills and 10-year Treasury yield). This is typically supportive of financials, which have rallied smartly, and industrials have done better on expectations of higher growth. This in large part explains the stronger performance from the Dow over the last 6 – 12 months.

Given our expectation for higher interest rates and stronger economic growth, this could give the Dow a small advantage to outperform over the next the year.

Sector Breakdown of Dow and S&P 500

Source: Bloomberg, Turner Investments

Fundamentals
Finally, to complete the analysis in trying to determine which index is better to invest in we need to compare some of the key fundamental metrics of the two indices. On valuation it’s a bit mixed since the S&P 500 is more expensive on a price to forward earnings basis (17.4x versus the Dow at 16.5x) but cheaper on a price to book basis (2.1x versus the Dow at 3.2x). The Dow is superior with respect to dividend yield at 2.6% versus the S&P 500 at 2.1%. However, analysts expect the S&P 500 to see a 20% rise in earnings this year versus the Dow at 11.5%. Finally, on a volatility basis the Dow is slightly better with a 10-year monthly standard deviation of 4.3% versus the S&P 500 at 4.6%.

The combination of higher earnings growth potential and a lower valuation (on a price to book basis) for the S&P 500 provides a support for the broader S&P 500 Index.

Fundamentals of Dow and S&P 500

Source: Bloomberg, Turner Investments

So what’s the conclusion? Basically there are times when the Dow outperforms and times when the S&P 500 outperforms. Despite the slightly better macro environment for the Dow over the next 9-12 months, we continue to believe the S&P 500 is the better index to invest in over the long run given it’s much more diversified both in holdings (504 vs 30) and across sectors. And given we put so much emphasis on diversification at Turner Investments we’ll stick with the S&P 500 for our clients. Sorry Charles Dow! We still love the Wall Street Journal though!

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

129 comments ↓

#1 crowdedelevatorfartz on 01.21.17 at 1:51 pm

My head hurts

#2 TurnerNation on 01.21.17 at 1:55 pm

Price inflation in Canada is so bad they ask you when paying up: “Will that be cash or chagrin?”.

I predict peak GTA housing market will occur when Dollarama begins accepting credit cards – necessity driven.

Cash is King but leverage is The Joker.
(Jest charge it.)

#3 Shawn on 01.21.17 at 2:08 pm

Why not just invest in total stock markets (i.e. VTI/VUN)? I always thought holding mid and small-cap stocks boost returns over the long haul?

However I also read that once an ETF holds over 400 different companies the merits of diversification become smaller and smaller.

Regardless great post Ryan. I have a hot date tonight, mind if I borrow the Porsche? I’ll bring it back with a full tank of premium octane. ;)

#4 calgarytran on 01.21.17 at 2:13 pm

A wall for US/Canada.

#5 Ponzius Pilatus on 01.21.17 at 2:23 pm

So what’s the conclusion? Basically there are times when the Dow outperforms and times when the S&P 500 outperforms.
————-
So, basically it’s crapshoot.
Also, who’s we?
Did your secretary write the report.
Sorry, but still in a nasty mood after Trump’s speech

#6 InvestorsFriend on 01.21.17 at 2:27 pm

The ROEs of the DOW and S&P 500 are jaw-dropping

Excellent and informative analysis of the DOW and S&P 500.

From it I can calculate the forward ROE of each index. (This is the return on the current book value of equity)

ROE = profit/book=price/book divided by price/earnings

For DOW projected ROE = 3.2/16.5 = 19.4%

For S&P 500 projected ROE = 2.7 / 17.4 = 15.5%

So, the largest companies in America are earning 15% to 19% PER year on every dollar they have in book value. (How’d you like to do that on YOUR investments?)

This is enormous and explains why we have to pay about 3 times book value to buy in.

And these high ROEs are no aberration, the historic achieved ROEs have been around this range for years.

Theory, suggests that competition should drive the ROEs down. So much for theory.

You might think these ROEs are explained by the fact that much of the book value represents old assets purchased years ago at low prices. Good theory, but that is not the case. Due to massive retained earnings you will find that the weighted average age of the book value is not all that old (like maybe 10 years…)

Big companies make big profits. As consumers we can’t beat ’em. As investors we must join ’em.

#7 InvestorsFriend on 01.21.17 at 2:39 pm

Today, Being “Right” is Obsolete, at least in Politics

In Science, at least historically, being “right” was everything. Galileo Galilei’s theory’s about the solar system and universe were not popular but he was right and that was what mattered in the end.

Darwin’s theories were also not that popular but as he was right, he prevailed.

But these days scientists may be facing more censorship and populism than has been the case for a long time.

Still, in science, being right will ultimately allow your theories to prevail.

In politics however, being popular is what matters. Trump is free to deny proven facts and video evidence and lie through his teeth as long as he popular.

Is free trade the “right” way to run the economy? It won’t matter if it is unpopular.

Did China “steal” U.S. jobs? It does not matter if they did or not. What matters is it popular to believe it.

Is the U.S. economy with 4.7% unemployment in pretty good shape? It does not matter as it is popular to say it is in terrible shape.

In the age of celebrity, being popular is everything.

#8 O'Leary on 01.21.17 at 2:43 pm

thanks for mentioning him!!

please spread the word.

bye bye Trudeau

#9 Gulf Breeze on 01.21.17 at 2:48 pm

Thanks Ryan. I appreciate the time and effort you put into your article. Basic education about the structure and function of the markets is vital to everyone.

I enjoy reading your posts and am sorry you have taken such a lambasting here recently. It must seem like a thankless task.

#10 Tony on 01.21.17 at 2:53 pm

The problem with the DOW is the long term trend line dating all the way back to 1884 cuts through on a graph at the 3,500 to 4,000 level today. Also seeing the same chart we can see the blatant manipulating started all the way back in the year 1993. Now we know why people are looking for alternate investments. I think long term (25 to 50 years) Platinum certificates are the thing to hold. Platinum was 500 dollars an once in the mid 1960’s and rarely trades lower in price than gold. Unlike comex gold platinum certificates will be honoured.

#11 For those about to flop... on 01.21.17 at 2:57 pm

Madonna just ordered some fried chicken ,3 times ,live on CNN…

M42BC

#12 Metaxa on 01.21.17 at 2:58 pm

Ryan, allow me to say thank you.

This is info that is germane to my situation.
Allow me to briefly explain.

I played all my working life, restaurant worker, manager, partner, owner in an industry where you made a living but sure don’t get rich unless you are lucky.

A tiny bit of [email protected] and an ongoing project with my brother of investing in rental houses.

30+ years later he passes, I sell the real estate portfolio and suddenly have a whack of actual money and zero desire to be in real estate anymore.

But also an almost zero knowledge of the how, when and who of proper investing.

I got lucky once again and took advice from friends and acquaintances who directed me to a lady who almost perfectly mirrors your firm’s philosophy except for a couple of S class mutuals with MERs less than 1. Mawer small cap at double digit returns for less than 1% MER is fine by me.

So all this to say while the weeks B&M sessions on real estate are fun, the weekends with the two of you giving me real info, real tutelage is the highlight of my week…for sure.

Thank you from my heart.

#13 InvestorsFriend on 01.21.17 at 3:01 pm

Dollarama and Credit Cards

#2 TurnerNation on 01.21.17 at 1:55 pm said:

I predict peak GTA housing market will occur when Dollarama begins accepting credit cards – necessity driven.

************************************
Dollarama makes an unbelievable 15% profit on sales (unheard of in mass retail) partly by not giving 2% or whatever of every sale to the credit card companies.

They are one of Canada’s very best run companies.

Another smart move: NO Returns. All sales are final.

Also, no advertising. They don’t need to.

They are incredibly smart. They sell for less than others and yet make far larger profits. It’s win for consumers and investors. (Not so much for Canadian manufacturers however, as they source mostly in low-cost countries)

#14 NoName on 01.21.17 at 3:01 pm

Wally world vs Cost co, that is question, where we will be buying stuff when Lary wins.

#15 coins on 01.21.17 at 3:11 pm

Thanks that was useful.

#16 David McDonald on 01.21.17 at 3:25 pm

Thanks Ryan. That was crystal clear. What is symbol for the Canadian ETF that follows that Dow 500?

#17 Dan on 01.21.17 at 3:29 pm

DELETED

#18 Dan on 01.21.17 at 3:34 pm

Ah yes, Mister Beautiful is some mix of arab and something whose parents very likely came to Canada as refugees. So he is a champion of success in Canada and if you attack him you are racist and hater, so please think about your mortgages and food for your children…
This is just society and all of you can be friends of Mike Harris if you try hard…..

#19 Thank you on 01.21.17 at 3:46 pm

For mentioning O’Leary

He’s our hope !! We r at trunp’s mercy !! Trudeau is a disaster

#20 Vun etf on 01.21.17 at 3:49 pm

Greater diversification

Hxs for taxable accounts

Silly easy

#21 cmj on 01.21.17 at 3:54 pm

excellent analysis between Dow 30 and S&P 500. Would you buy S&P hedged?
Thanks!

#22 hope & ruin on 01.21.17 at 4:27 pm

So what’s the conclusion? Basically there are times when the Dow outperforms and times when the S&P 500 outperforms
____________________

What’s the joke about wanting to meet a one-armed economist.

Because on the one-hand….but on the other hand….lol

Just joking, very informative, thanks for the insight Ryan.

#23 Kevin's Fanzone on 01.21.17 at 4:28 pm

A great Kevin video. I hope you watch it all:

https://www.youtube.com/watch?v=45-h3dnutk4

#24 Penny Henny on 01.21.17 at 4:33 pm

What are your thoughts on the Russell 2000 index?

#25 conan on 01.21.17 at 4:56 pm

There has always been a “math problem” when showing index returns over long periods of time.

People who owned in the earlier stages had many of their shares de-listed. Same with the Can index. People who owned Nortel, that portion of their money vanished.

Their index returns are greatly affected. X does not equal X plus growth because they lost money along the way.

At some point, an adviser, or the investor, has to man handle their portfolio and sell the losers.

Buy and hold index investing……. its not sold properly.

#26 Waveygravy on 01.21.17 at 4:57 pm

Why not invest in both?

#27 Kevin Lee on 01.21.17 at 5:07 pm

Stock markets are too risky. Wealthy newcomers prefer more guaranteed investments.

We have the convenience of juwai.com and other companies in China that specialize in safe and desirable Canadian real estate investment. The friendly Ontario government makes it easy for wealthy newcomers to secure our properties, no questions asked. Nobody in China is putting their hard earned fortunes into S&P500. GTA north is much better investment.

#28 Ryan Lewenza on 01.21.17 at 5:14 pm

Shawn” Why not just invest in total stock markets (i.e. VTI/VUN)?”

Yes you can do that but we prefer to pick and adjust our geographic weights based on our analysis. This is the active part of our strategy. When buying VTI you’re buying the entire global equity markets. We prefer to actively over/underweight countries and markets. – Ryan L

#29 David McDonald on 01.21.17 at 5:15 pm

Sorry I mean what Canadian ETF follows the S&P 500?

#30 TurnerNation on 01.21.17 at 5:17 pm

(Underpriced) totally sht bung sells for 1m

http://www.blogto.com/city/2017/01/sold-toronto-bungalow-fetches-double-asking-price/

– Divestors Friend if Wally Mart can swipe plastic so can DOL. Broke & house poor Kanadians will demand it.

#31 Ryan Lewenza on 01.21.17 at 5:19 pm

cmj “excellent analysis between Dow 30 and S&P 500. Would you buy S&P hedged?”

Yes as a part of your US exposure. For example, if we want a 10% exposure to the S&P 500 we’ll put 50% in an unhedged ETF (SPY-N) and 50% in hedged ETF (XSP-T). We don’t make active currency calls so we like to be middle of the road when it comes to currency exposure. But if you’re being tactical, you could look to adjust your S&P 500 exposure and switch to a hedged ETF if the CAD dollar gets below 70 cents. – Ryan L

#32 Dave on 01.21.17 at 5:22 pm

“The majority of people should just by the S&P 500 index fund and hold it until retirement” Warren Buffett. THis also minimizes fees, which are the biggest drain on your returns.

#33 Kevin Lee on 01.21.17 at 5:23 pm

Savvy investors should direct their fortunes to where the capital will flow in the future. Most of the new wealth created in the last decade, TRILLIONS, will be flowing into the GTA north. Get in now and enjoy easy gains, risk free. Hint: GREENBELT.

#34 crowdedelevatorfartz on 01.21.17 at 5:26 pm

@#18 Dan

….aaaaaand HOW did you earn your day pass?

#35 Ryan Lewenza on 01.21.17 at 5:28 pm

David McDonald “Thanks Ryan. That was crystal clear. What is symbol for the Canadian ETF that follows that Dow 500?”

Look at ZDJ-T. This is BMO’s Dow Jones Industrial Average hedged to CAD dollars. I think this is what you want. BMO is new to the ETF space but they’ve done a decent job bringing new products to market and at reasonable fees. – Ryan L

#36 Ryan Lewenza on 01.21.17 at 5:40 pm

Metaxa “So all this to say while the weeks B&M sessions on real estate are fun, the weekends with the two of you giving me real info, real tutelage is the highlight of my week…for sure. Thank you from my heart.”

Wow, that is incredibly nice of you and I’m happy to hear your finding our weekend blogs helpful. I’m so use to getting ripped apart by the Blog Dogs that I don’t know how to react to this kind gesture. Thank you! – Ryan L

#37 For those about to flop... on 01.21.17 at 5:43 pm

On the surface it would appear some Pink Snow falling in Victoria.

The evidence suggests they got carried away by paying 1.588 for a building assessed at 980k and tried to do a quick flip.

My one reservation is that the b.c assessment beds and bath dosen’t match up to the listing as it is presented as a duplex/ triplex.

I might need a second opinion on this one…

M42BC

1856 Crescent Road, Victoria

Nov 11:$1,899,000
Jan 20: $1,699,888
Change: – 199112.00 -10%

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDBITkVRWg==

http://www.vicrealestate.ca/listing/373397-1856-crescent-rd-victoria-bc-v8s-2g8/

#38 Capt. Obvious on 01.21.17 at 6:01 pm

You should do a post on Fama – French. Might blow some minds.

#39 dogman01 on 01.21.17 at 6:06 pm

Thanks Ryan!

This one is a keeper, copy paste into Evernote.

#40 Entrepreneur on 01.21.17 at 6:08 pm

Like the history lesson but have to go buy ink as it ran out, a keeper. Thanks RL, great lesson.

Trump had no problem removing Obama’s signed deals. The “no problem” bothers me! Jean Chrétien said that he would get rid of the GST if elected in 1993 but as soon elected he said it was too hard to remove. But Trump had no problem with just a signature.

Maybe someone else can explain why Chretien could not remove the GST and/or why it would be too hard.

A lot of middle class family businesses have closed their doors because of the GST or moved away.

#41 Wrk.dover on 01.21.17 at 6:13 pm

Great read tonight. Wow.

#42 Pete on 01.21.17 at 6:22 pm

Darwin’s theories were also not that popular but as he was right, he prevailed.
———————————————–
Darwin has been relegated to the trashbin of history. His lame theories have never been proven to have even a scrap of truth to them. There remains so much about the world that is still unknown that to say that he ‘was right’ is laughable. Remember that all of the other ‘great thinkers’ and their theories ‘were right’ at a certain point in time too.

#43 Joe on 01.21.17 at 6:26 pm

whats the current currency strategy for purchasing the S & P 500 .
I understand holding it in your RRSP is a good for tax reasons. But what about CAD $ vs Currency neutral vs $US?

Right now i have the TD US Index currency neutral e series

#44 InvestorsFriend on 01.21.17 at 6:39 pm

It’s the Age of Me and Only Me

People say the government should listen to “we the people”. They really mean listen to “me” and do what “I” want.

America First really means “me first”

If someone does not like what the media says then it must be a conspiracy of the main stream media.

It’s really getting tiresome how bitter people get at every little thing that does not go their way.

And the anonymous internet lets people vent and name call all day.

#45 A Yank in BC on 01.21.17 at 6:44 pm

Nice article Ryan. One thing that might not be clear to all is that when one owns the S&P 500, they own all 30 Dow companies as well.

#46 Ponzius Pilatus on 01.21.17 at 6:49 pm

So what’s the conclusion? Basically there are times when the Dow outperforms and times when the S&P 500 outperforms.
———————-
Let’s take another stab at it:
Really nothing to see here, move on.
Just regression to the mean and arbitrage at work.
That’s why diversification works.
Any 3rd grade statistician would come to the same conclusion.

#47 InvestorsFriend on 01.21.17 at 6:52 pm

Dollarama and credit cards

#30 TurnerNation on 01.21.17 at 5:17 pm reponded:

– Divestors Friend if Wally Mart can swipe plastic so can DOL. Broke & house poor Kanadians will demand it.

*****************************************
Sure they can. Anytime they decide that is best for them. Add Dollarama could someday see its profit on sales drop to the 3% level that Walmart “enjoys” rather than the 15% of Dollarama.

If Sam Walton were around today (and was not 110 years old or whatever) he would be looking closely at a store like Dollarama and learning from it. Under Sam Walton, Walmart did it’s own thing but also copied from other successful retailers.

#48 yorkville renter on 01.21.17 at 7:05 pm

#40 – they didnt get rid of it because it makes lots and lots of $$$$$$.

personally, I think we should have a flat 20-30% income tax, no deductions, and a 20% GST. consumption taxes are the fairest of them all.

#49 Buy High, Sell Low. on 01.21.17 at 7:07 pm

#32 Dave on 01.21.17 at 5:22 pm

“The majority of people should just by the S&P 500 index fund and hold it until retirement” Warren Buffett. THis also minimizes fees, which are the biggest drain on your returns.
+++++++++++

https://www.advisorperspectives.com/dshort/updates/2017/01/04/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

#50 Ylam on 01.21.17 at 7:38 pm

What are your thoughts on exposure to the uk market/ftse100 and GBP… especially with ongoing brexit concerns. Which product would you use to gain exposure?

#51 FIsh on 01.21.17 at 7:39 pm

Great post
Thankyou Ryan

#52 RYAN on 01.21.17 at 7:39 pm

Thoughts on that russell 3000 index?

#53 For those about to flop... on 01.21.17 at 8:12 pm

Well ,I will do another post for my blog buddies on the island since a couple of people appreciated my effort the other day.

Nanaimo price reductions have picked up in pace with 48 reductions and 3 increases for the month of January,as reported the other day the average reduction is small but the overall numbers are telling.

The people below will do well to get most of their money back.

Victoria is still kicking and screaming and is not sure what to do.

In comparison to Nanaimo the numbers in Victoria are closer with 14 reductions and 8 increases, but one thing that has changed in the last little while is the discount has doubled from 12 and a bit to 24 and a bit thousand.

This is being dwarfed by what is happening in Vancouver ,but nevertheless to those people thinking about buying in this region do your homework first.

Ryan ,as everyone else said good post ,and I did write you a nice (nice for me) post the other day thanking you and Doug for your time…

M42BC

6172 Dennie Lane, Nanaimo

Nov 11:$474,900
Jan 20: $439,900
Change: – 35000.00 -7%

https://evaluebc.bcassessment.ca/Property.aspx?_oa=RDAwMDA0TkxNRw==

#54 stage1dave on 01.21.17 at 8:16 pm

Very informative, Mr.Lewenza; TY!

Articles like this are the biggest reason I keep lurking around here…never too old to learn, ‘specially about the history of how it got from there to here.

#55 Newbie on 01.21.17 at 8:16 pm

There’s a bet made by Warren Buffet on S&P 500
http://longbets.org/362/

#56 Self Directed on 01.21.17 at 8:17 pm

#5 Ponzius Pilatus on 01.21.17 at 2:23 pm
………………………………………………………………
Here it is again, if you want to relive it.

President Donald Trump’s full inaugural address remarks – Jan 20, 2017

http://www.politico.com/story/2017/01/full-text-donald-trump-inauguration-speech-transcript-233907

#57 Newbie on 01.21.17 at 8:17 pm

*Buffett

#58 mike from mtl on 01.21.17 at 8:34 pm

I’ll stick with VFV or VOO thanks. If I want dji ‘concentration’ I’ll simply add more industrials like CWW. however I don’t see the point, as small & medium cap is more important to capture long term than dji.

#59 };-) aka Devil's Advocate on 01.21.17 at 8:35 pm

#86 Damifino on 01.21.17 at 12:02 am

#44 };-) aka Devil’s Advocate

Not long ago (15 years) you could buy a Kelowna South post war bungalow for a quarter what you’d have to pay today. Why would it be any different in another 15 years? No more, or less, difficult to believe today than it was then 15 years ago
——————————————–

It would be much more difficult to believe. If the price of a home rises by a factor of 4 in 15 years and continues at that rate for another 15 years that’s an average increase of 9.6% per year for 30 years.

Graph that curve. Now graph the curve of a 3% national inflation rate over 30 years. Finally, graph the difference between these two curves.

After 15 years, the house price has exceeded a very liberal inflation rate estimate of 3% by a factor of 2.4. That’s impressive!

But after 30 years, the house price has exceeded the same inflation rate by a factor of 13.6.
That’s madness!

So yes, it definitely would be much more difficult to believe a 9.6% increase continuing through the second 15 years than the first 15 years.

Yet, such is as it has been for the past 15 years. So, again, why would it be so unfathomable that so it might be for the next 15 years?

#60 WUL on 01.21.17 at 8:37 pm

Thanks Ryan. While I am not an investor, I have been interested in one aspect of the Dow, namely the history of which companies came and went. Can you imagine having told someone a while back that someday US Steel and DuPont will be dropped from the Dow in about the year 19??.

The following is about rate of change and is drawn from some link on the web that on my iPad “copy” hence I cannot “paste” due to my laziness. Technology Review or some rag like that.

In 1958 a company could “expect” to stay on the S&P 500 for 61 years. By Sept. 2013 the average was 18 years.

Facebook, Google, meet US Steel and DuPont.

#61 Ryan Lewenza on 01.21.17 at 8:49 pm

Joe “whats the current currency strategy for purchasing the S & P 500?”

We usually break it up, having 1/2 in us dollars and half hedged back to cad. We don’t make active currency bets so we structure it this way. – Ryan L

#62 Francis on 01.21.17 at 8:50 pm

“When buying VTI you’re buying the entire global equity markets. We prefer to actively over/underweight countries and markets. – Ryan L”

I don’t know if you miss read or really explain it poorly but vti is not a global equity index is just US equity.

Also was under the impression that your firm was against active call. If I was about to look for a firm to manage my money, I would be consern about this statement.

#63 Md on 01.21.17 at 8:53 pm

What’ with this Kevin Lee and GTA north he’s obsessed about..no one loves gta north…It’s Crap out there…not even Chinese people want to live there

#64 Ryan Lewenza on 01.21.17 at 8:54 pm

RYAN “Thoughts on that russell 3000 index?”.

That covers the total us market. We generally invest in the S&P 500 with a smaller weight to the russell 2000. This gets us exposure to the higher growth small caps but we reduce risk by having a smaller weight. We prefer that to buying the russell 3000. – Ryan L

#65 A on 01.21.17 at 8:55 pm

Ryan- Would love to hear more about your take on Schuller’s predictions. I.e. Trump causing financial collapse given he (Schuller) was right on the housing crash and the ’08 market crash.

The only thing we can expect with Trump is uncertainty which we know is bad for markets. Combine that with protectionism and general insanity – I would like to know if you still think that riding the market up and down and down is sound strategy? Isn’t it tempting to sit out for a year. In cash. ? See where the chips fall. In his own words, this is unpresidented.

#66 mike from mtl on 01.21.17 at 9:00 pm

#43 Joe on 01.21.17 at 6:26 pm
whats the current currency strategy for purchasing the S & P 500 .
=====================================

Personally I’d hold something direct like VOO or VTI as the dividends are totally non withholding taxed. To get US$ can be tricky depending on your broker but in an RRSP is its best place for taxation. No DRIP but that means less to forex come contribution time & rebalance.

Check out that as an option.

#67 mike from mtl on 01.21.17 at 9:06 pm

#43 Joe on 01.21.17 at 6:26 pm
=====================================

To be honest DRIP is better handled by Mutuals however as you’d probably guess the MER and general ‘active’ aspect negates any of this advantage. In fact despite that advantage, I find mutuals really lacking in even basic fixed income of 2-3 years most likely due to silly high MER.

#68 acdel on 01.21.17 at 9:10 pm

Great article tonight Ryan, this is a serious question, how do you or your peers equate emotional trading in your graphs and expertise?

#69 Interstellar star stuff on 01.21.17 at 9:12 pm

#42 Pete on 01.21.17 at 6:22 pm
Darwin’s theories were also not that popular but as he was right, he prevailed.
———————————————–
Darwin has been relegated to the trashbin of history. His lame theories have never been proven to have even a scrap of truth to them. There remains so much about the world that is still unknown that to say that he ‘was right’ is laughable. Remember that all of the other ‘great thinkers’ and their theories ‘were right’ at a certain point in time too.
..
We are all part Neanderthal. So what are you for- a Bebe Jesus dude or aliens?

#70 ROTFL on 01.21.17 at 9:17 pm

Why invest in a cap weighted S&P 500 when there are now low fee equal weighted S&P 500 ETFs?

By definition, you’re buying too much of overvalued stocks and too little of undervalued stocks with a cap weighted ETF… even if you don’t know which are which. With an equal weight ETF, you reduce this problem. And get higher returns.

#71 Andrew Woburn on 01.21.17 at 9:18 pm

Ryan, I too am a big fan of the Saturday posts and I thank Garth for sharing his blog with his well informed colleagues.

Neither of you should be bothered by the negative comments (and I doubt you really are) since they are mostly pretty ignorant. The internet seems to have replaced washroom walls.

Garth gets enough stupid comments and he would get a lot more if he wasn’t always ready to savage the whiners and hit the delete button. Those of us who come to learn probably wouldn’t mind if you followed his example.

are really all that bothered by the negat

#72 Smoking Man on 01.21.17 at 9:19 pm

Soory fans at my kids wedding. Not allowed to drink. No bozze nothing good to write about.

See ya tomorrow

#73 WUL on 01.21.17 at 9:21 pm

I should not have libelled Technology Review above. It is MIT’s and is by Regalado in September 2013.

#74 Barb on 01.21.17 at 9:25 pm

…and General Electric hasn’t done bugger all since.

Great explanation, thank you!

#75 Kat on 01.21.17 at 9:31 pm

If that is your sign of a crash that must be why Vancouver is now crashing as Dollorama here takes MasterCard.

#76 Gasbag Boomer on 01.21.17 at 9:37 pm

Thank you Ryan. I always appreciate the posts.

#77 Self Directed on 01.21.17 at 9:38 pm

I think Trudeau’s Cabinet is waking up this morning to the sobering reality called the Trump Administration.

Yup! It’s actually here.

http://www.cbc.ca/news/politics/5-trump-cabinet-members-canada-will-come-to-know-best-and-their-canadian-counterparts-1.3943859

I feel bad for Catherine McKenna, Canada’s Minister of Environment… Idiot Trudeau put “Climate Change” right in her job title. Perhaps we should not mention WHICH DIRECTION we want the climate to change? Talk about wearing a bulls-eye and showing your hand, at the same time.

This could be the tipping point for Exports, Housing, the whole Economy…. Kevin Li, are you taking notes? LOL! Didn’t think so.

#78 Matt from Poli-Sci on 01.21.17 at 9:42 pm

As to the orig post #40
>>Trump had no problem removing Obama’s signed deals.

Ah, no he hasn’t. What’s been done is using his new Presidential Executive Orders to over-ride the previous Exec Orders. Everything else is just what he says he will do (like re-negotiate NAFTA).

>>Chrétien: GST ‘too hard to remove.’ Explain why?
The GST was designed to replace all the ‘hidden’ taxes that the feds slapped on goods imported into Cda. Consumers never saw the taxes as they were included in the sticker sale price. Orig FTA (then NAFTA) prevented these sorts of tariffs so the GST was made to reclaim the lost revenue.

During the First World War when trade dried up its no coincidence they introduced the income tax in 1917.

“Prior to the war, customs duties, postal rates, and tariffs on imported goods had accounted for more than 85 percent of government revenue.” – http://www.warmuseum.ca/firstworldwar/history/life-at-home-during-the-war/the-war-economy/finance-and-war-production/

Chrétien didn’t mean it was ‘too hard’ legislatively to remove the GST – he meant politically and fiscally it was too hard.

#79 jay on 01.21.17 at 9:47 pm

Here is another reason to invest in U.S stock market’s. http://www.businessinsider.com/r-canadian-exporters-fearing-border-tax-scramble-to-shift-production-2017-1

#80 Yanniel on 01.21.17 at 9:54 pm

Hi Ryan,

Very insightful post. Thank you.

I wanted to ask you about this statement of yours, please.

“if we want a 10% exposure to the S&P 500 we’ll put 50% in an unhedged ETF (SPY-N) and 50% in hedged ETF (XSP-T).” – Ryan.

My reasoning about your statement is as follows: SPY is valued in USD. Holdings in SPY would allow us to get exposure to a stronger USD dollar; thus a 50% allocation in SPY, would act as a currency hedge protecting us from a weaker CAD. Is this reasoning correct?

And now here is my dilemma: For the purpose of currency hedging, wouldn’t it be the same just to buy an ETF like VFV (non-hedged ETF, valued in CAD)?

In this case, if the USD strengthens vs the CAD, then a position in VFV would swell, because the underlying securities are valued in USD, but the ETF itself is valued in CAD. This difference should result in a positive gain for the ETF holder.

So, by buying VFV (valued in CAD) as opposed to SPY (valued in USD), am I not achieving the same thing (that is: hedging myself against a strong USD/ weak CAD)?

I ask this because the burden of exchanging CADs to USDs is significant. So, I thought that using the approach above would save me the currency exchange fees while hedging me against the raising USD.

On this topic, and pardon me for overextending, Garth seems quite fixated on keeping 20% of the portfolio in USD.

“Keep 20% of your portfolio is US$, since currency fluctuations could be large. “ – Garth
http://www.greaterfool.ca/2017/01/12/next-9/

“There’s one good reason 20% of your portfolio should be in USD.” – Garth
http://www.greaterfool.ca/2017/01/18/canada-goose/

I want to understand his take. Does this mean buying an ETFs valued in USD like SPY or buying an unhedged ETF whose underlying securities (individual stocks inside the ETF) are valued in USD?

Save me from my ignorance Ryan.

Thank you and have a nice weekend.

Yanniel.

#81 d'Edmonton on 01.21.17 at 9:54 pm

#2 TurnerNation on 01.21.17 at 1:55 pm
Price inflation in Canada is so bad they ask you when paying up: “Will that be cash or chagrin?”.

I predict peak GTA housing market will occur when Dollarama begins accepting credit cards – necessity driven.

Cash is King but leverage is The Joker.
(Jest charge it.)
——————————-
Coming soon, for sure.

They already accept credit cards in Deadmonton at least. Just after they raised their minimum price to $1.25

#82 Metaxa on 01.21.17 at 10:48 pm

I’m so use to getting ripped apart by the Blog Dogs that I don’t know how to react to this kind gesture. Thank you! – Ryan L

I think that quite a few of the so-called Blog Dawgs would benefit mightily from sprinkling a tablespoon of Restoralax into their morning smoothie.

#83 leinad on 01.21.17 at 10:51 pm

Gold Diamonds and Real Estate have beaten the Sand P and the Dow…hands down since 2000 as currencies have lost their value……The TSX is actually down looking at the value of our dollar since 2014….
Trump will impose an energy tax on Canadian Oil…US Frackers will prevail….Poloz will have to kill our dollar to compete and Gold will soar past 2000CDN…and real estate will soar more…as smart peeps flee a dollar worth less….

#84 South Etobicoke Trump Campaign Field HQ on 01.21.17 at 10:58 pm

Top notch posting Mr. Inflewenza.

We’re hoping Mr. Trump’s invisible market hand grabs the S&P500 right into the 2,500 range.

#85 Leo Trollstoy on 01.21.17 at 11:22 pm

I dunno what to say….

#86 No Mercy on 01.22.17 at 12:21 am

#36 Ryan Lewenza on 01.21.17 at 5:40 pm

> Wow, that is incredibly nice of you and I’m happy to >hear your finding our weekend blogs helpful. I’m so >use to getting ripped apart by the Blog Dogs that I >don’t know how to react to this kind gesture. Thank >you! – Ryan L

Ryan, you are much appreciated here.

Kevin Lee and his repetitive posts of Toronto whatever should be cleansed of this blog.

Anyone else vote for KL to be banned?

#87 the Awaken One on 01.22.17 at 12:58 am

Woof Wooff ! Nice treat Ryan: I enjoy this one, good education. A sincere Thank-You! Blog Dawgs sure can learn a thing or 2 from an Earl Grey drinker.

You have proven your mettle to be a real Dawgs Whisperer … ( until they rip into your finely-tailored silk pants again on the next post: some days you lead the pack, other days they drag you along ! :O)

#88 Damifino on 01.22.17 at 1:52 am

#59 };-) aka Devil’s Advocate

I take it you are unmoved by mathematical argument and the fact exponential growth eventually bangs into real-world hard limits. The longer such growth goes on the more likely a ceiling will be hit.

That’s why, in your example, the first 15 years of constant annual exponential growth are much less likely to continue for a second 15 years. Not that they wont… just that it’s far less likely.

Maybe the following extreme example will help:

Say a bacterium floating the ocean spits in two once every hour. After only 96 hours there will be 2^96 of them. Given that the size of a single-celled life form is about one cubic micrometer, that’s 10^20 cubic meters of bacteria, equal to the volume of the all the oceans on earth. Yep… pretty much all the water there is will have turned into bacteria. Is this likely to happen? Why not?

But… how many bacteria will there be after only 48 hours (i.e. exactly half the time)?… a mere 280,000 cubic meters. That’s about that’s about the volume of sewage New York City processes in two months. Is this likely to happen? Well, it’s a lot more likely than the first scenario. And that’s my point.

#89 Henry Morgan on 01.22.17 at 2:16 am

Ryan your OK, doesn’t matter what ‘they’ say about ya eh.

Could you please explain ETF (commodity?) erosion and its dangers?

#90 westcdn on 01.22.17 at 6:18 am

I use stock screeners to find the companies with the best ROE. It puts me into the hunt but it is no guarantee that I will make the right decision. It does minimize my mistakes. I bought a solar panel and a 6 volt golf cart battery to play around to go with my wood burning stove. It looks like I need more canned tuna. I like you, Lewenza… tough to find a good honest man.

#91 bankish on 01.22.17 at 7:41 am

There is so much investment BS going on. Here is a simple investment strategy for us blue collar working types.
I own the 6 Big Canadian Banks and was fortunate enough to get a 30% return this year. If you had bought $10,000 of each of the Big 6 20 years ago and reinvested the dividends your $60,000 would have earned 14.05 % annually and be worth $867,419.00 today.(longrundata.com)
Now I have $300,000 more in my RRSP. Is it perfect,no of course not,but it works for me.

#92 jess on 01.22.17 at 7:59 am

index divisions

https://www.bloomberg.com/news/articles/2017-01-13/moody-s-to-pay-864-million-to-settle-subprime-ratings-claims

index divisions as promotional tools / marketing
http://www.forbes.com/sites/janetnovack/2015/05/08/built-for-marketing-why-the-sp-500-and-dow-are-misleading-investors/#3320f3495b6e

http://www.reuters.com/article/us-s-p-settlement-idUSKBN0L71C120150203

#93 JimH on 01.22.17 at 9:28 am

#16 crowdedelevatorfartz on 01.19.17 at 6:16 pm
“… The world will awake on Saturday to The Donald schlepping in the White House.

Impeached in less than 2 years……….”
=============================
Well, we now know what we awoke to yesterday morning!
But I still think you’re wrong!
The Swamp Thing won’t make it 18 months!

#94 Ryan Lewenza on 01.22.17 at 9:29 am

Yanniel “My reasoning about your statement is as follows: SPY is valued in USD. Holdings in SPY would allow us to get exposure to a stronger USD dollar; thus a 50% allocation in SPY, would act as a currency hedge protecting us from a weaker CAD. Is this reasoning correct? And now here is my dilemma: For the purpose of currency hedging, wouldn’t it be the same just to buy an ETF like VFV (non-hedged ETF, valued in CAD)?”

VFV will essentially return the same as SPY without having to invest in USD. So yes this is a good strategy to avoid having to make an FX transaction. However, as you referenced we like having a net 20% exposure to the USD in portfolio so that’s why we structure it this way. The USD is a good diversifier, and acts as a hedge if things worse. Also many of our clients have a need/utility for USD so that’s another reason to have a USD account and US dollars. For the roughly 40% overall exposure in US and international stocks, 1/2 of it is hedged and half unhedged. This allows us to get some exposure to USD and other currencies, without leaving us overexposed to currency risk. Buying VFV will return roughly the same as SPY, but you won’t then have exposure to USD which we want for clients. – Ryan L

#95 Ryan Lewenza on 01.22.17 at 9:41 am

Francis “I don’t know if you miss read or really explain it poorly but vti is not a global equity index is just US equity.”

Yes you are correct it is total US equity versus total global equities. I misread it when I pulled up the ETF page. We prefer to make the call regarding our exposure to small and large cap versus just buying a total US ETF. For example coming out of a downturn/bear market your better off overweighting or having a larger exposure to small caps, but then as you get deeper into a bull market its better to overweight large caps since they are less sensitive to rising interest rates and there is a natural rotation from small to large. Since we prefer to make those active calls we do not invest in total market ETFs. – Ryan L

#96 Ryan Lewenza on 01.22.17 at 9:53 am

Henry Morgan “Ryan your OK, doesn’t matter what ‘they’ say about ya eh. Could you please explain ETF (commodity?) erosion and its dangers?”

Thanks! This is easy. When you buy an equity ETF you are just buying specific stocks based on the weight in the underlying index. For commodity ETFs you (generally) are investing in futures of the underlying commodities. Since futures have a maturity date (one month, three month, one year), you have to keep rolling the futures contracts to maintain exposure. For example, an oil based commodity ETF will have to buy the new next month futures contract on oil, once the old one expires. If the commodity is trading in contango, where the futures price is above the spot price, every time you roll the contracts your paying a higher price and eroding your value. Basically since commodities are based on futures contracts versus the underlying, and futures mature, the ETF always has to roll their contracts to maintain the exposure which ends eroding the ETF value. Here’s a better explanation – Ryan L
http://www.schwab.com/public/schwab/nn/articles/Commodity-ETFs-Spot-and-Futures-Prices

#97 Ryan Lewenza on 01.22.17 at 10:00 am

ROTFL “Why invest in a cap weighted S&P 500 when there are now low fee equal weighted S&P 500 ETFs?”

Yes a case can me made for this. I always like to look at the technicals between the equal weighted and normal market weighted S&P 500 to see which one is out/underperforming. If the equal weighted one is outperforming it tells me the rally is more broad-based then being driven by a few stocks. But there are downsides with equal weighted to, as it can lag behind the market cap weighted ETF when a few strong stocks (i.e. FANGS) are doing most of the heavy lifting. So there is no perfect ETF for all markets at all times. Each one has its pros/cons and depending the current market conditions at the time, one will out/underperform. – Ryan L

#98 Ryan Lewenza on 01.22.17 at 10:05 am

Ylam “What are your thoughts on exposure to the uk market/ftse100 and GBP… especially with ongoing brexit concerns. Which product would you use to gain exposure?”

I would just buy the unhedged EWU-N. The hedged version HEWU has killed the EWU recently, but I think value is surfacing in the GBP and when it inevitably bottoms you will want exposure to the GBP so just buy EWU. – Ryan L

#99 statsfrats on 01.22.17 at 10:11 am

Ryan

One of the tricks/scams of these indices is that they are constantly dropping deadbeat companies and replace them with high performing ones. This gives the illusion that they are always on the up and up…..maybe you can put together a chart from Year 1 which factors in all of the duds that have been dropped thru the years to give a truer indication of performance.

#100 Braj on 01.22.17 at 10:35 am

#27 Kevin Lee on 01.21.17 at 5:07 pm
Stock markets are too risky. Wealthy newcomers prefer more guaranteed investments.

We have the convenience of juwai.com and other companies in China that specialize in safe and desirable Canadian real estate investment. The friendly Ontario government makes it easy for wealthy newcomers to secure our properties, no questions asked. Nobody in China is putting their hard earned fortunes into S&P500. GTA north is much better investment

That’s how Markham became unlivable in. Nobody in China is putting money in the S&P500 because not many know better.

A solid portfolio will do someone much better. Then again, the Chinese have this weird fetish for nice homes and cars, an outward appearance of wealth. A solid portfolio is essentially the opposite.

The more Chinese that immigrate here, the more that are likely to continue to immigrate. Like attracts like. That’s all fine and dandy, I can see why rich Chinese would want their money away from the Chinese government anyways. Not only that but you have a way out of the country with a home in a beautiful (relatively uncrowded) new one.

A property here is maybe a good investment to for a rich Chinese immigrant, but not for an average Canadian.

Considering population size there are simply many, many more Chinese millionaire than Canadian ones.

#101 };-) aka Devil's Advocate on 01.22.17 at 11:03 am

#88 Damifino on 01.22.17 at 1:52 am
#59 };-) aka Devil’s Advocate

I take it you are unmoved by mathematical argument and the fact exponential growth eventually bangs into real-world hard limits. The longer such growth goes on the more likely a ceiling will be hit.

That’s why, in your example, the first 15 years of constant annual exponential growth are much less likely to continue for a second 15 years. Not that they wont… just that it’s far less likely.

Maybe the following extreme example will help:

Say a bacterium floating the ocean spits in two once every hour. After only 96 hours there will be 2^96 of them. Given that the size of a single-celled life form is about one cubic micrometer, that’s 10^20 cubic meters of bacteria, equal to the volume of the all the oceans on earth. Yep… pretty much all the water there is will have turned into bacteria. Is this likely to happen? Why not?

But… how many bacteria will there be after only 48 hours (i.e. exactly half the time)?… a mere 280,000 cubic meters. That’s about that’s about the volume of sewage New York City processes in two months. Is this likely to happen? Well, it’s a lot more likely than the first scenario. And that’s my point.

Oh I get it. What’s more I agree. But as you wrote “the first 15 years of constant annual exponential growth are much less likely to continue for a second 15 years. Not that they wont… just that it’s far less likely”. While this ponzi scheme economy is without question unsustainable, you obviously get my point and agree with me too. When will it hit a wall? Who knows. Right here, right now, while the market has softened it certainly has not softened or changed direction and there is no indication what-so-ever that it will in the foreseeable future.

We keep kicking the an down the road. No one wants to experience the economic pain of a “correction” and we will continue to seek and implement ways to avoid such at all coasts – future costs to be bourn by future generations.

My point is… if you are trying to speculate on when to get in, or out, of the real estate market you are likely wasting your time and all the benefits that you could otherwise now be enjoying.

He who hesitates is lost.

#102 The Technical Analyst, CSTA, CPD on 01.22.17 at 12:02 pm

Standing Ovation!

Now, THIS is the type of blog Greaterfool should strive towards. THIS was one of the best posts in the last few years.

Well done!

#103 Renter's Revengr! on 01.22.17 at 12:03 pm

#86 No Mercy on 01.22.17 at 12:21 am

Anyone else vote for KL to be banned?

============

Nay. It’s more fun to have someone to make fun of.

Even jokers have a useful role in society.

#104 Smoking Man on 01.22.17 at 12:16 pm

Ur welcome Donald

Nictonites got your back.

https://www.google.ca/amp/m.disclose.tv/amp/news/aliens_give_escort_to_us_president_donald_trumps_plane_in_washington_dc_jan_19_2017/137521?client=ms-android-samsung

#105 crowdedelevatorfartz on 01.22.17 at 12:32 pm

Another week.
Another govt with unaffordable govt employee pension cut.
A harbinger of things to come Canada? Provinces? Cities?

http://www.reuters.com/article/us-taiwan-pension-protests-idUSKBN1560EM

#106 crowdedelevatorfartz on 01.22.17 at 12:36 pm

@ #86 Ming the Merciless
“Anyone else vote for KL to be banned?”
********************************************

Nah, its way more fun when he’s spewing realtor bs to an unreceptive audience……

#107 For those about to flop... on 01.22.17 at 12:44 pm

Things are getting pretty interesting down south ,but I’m not worried about NAFTA getting ripped up or the BAT being applied as an indicator of deteriorating relations between the two countries.

The key thing to look for at the moment is to wait and see if Danny DeVito tries to renegotiate his contract with HBO to play ‘The Ol’ Shuffle Bunny’ Mike Duffy in his life story.So make sure you pay attention to the DDI ( DeVito/Duffy Index)

If this happens we will know we’re on our own…

M42BC

#108 Break-even Analysis on 01.22.17 at 12:50 pm

Here’s something to think about when you’re setting your target asset allocations for the year:

If your stock portfolio drops in value by 1/x in a given year, it has to rise by 1/(x-1) the following year just to break even (x cannot be 0 or 1).

For example, if the value drops by 1/4 one year, it has to rise by 1/3 the next year just to break even.

I’ll leave the proof as an exercise.

#109 Ponzius Pilatus on 01.22.17 at 1:07 pm

#99 statsfrats on 01.22.17 at 10:11 am
Ryan

One of the tricks/scams of these indices is that they are constantly dropping deadbeat companies and replace them with high performing ones. This gives the illusion that they are always on the up and up…..maybe you can put together a chart from Year 1 which factors in all of the duds that have been dropped thru the years to give a truer indication of performance.
———————–
Don’t be so negative!
Always play nice. We are Canadians.
For those who don’t get. I’m being sarcastic.

#110 InvestorsFriend on 01.22.17 at 1:18 pm

Investing in Canadian Banks only?

#91 bankish on 01.22.17 at 7:41 am said:

If you had bought $10,000 of each of the Big 6 20 years ago and reinvested the dividends your $60,000 would have earned 14.05 % annually and be worth $867,419.00 today.(longrundata.com)
Now I have $300,000 more in my RRSP. Is it perfect,no of course not,but it works for me.

***************************************
Congratulations, well done.

Banks returned that 14% compounded because they had ROEs even higher than that. (A 16% ROE with one third of earnings paid out as dividends at 4% yield will compound money at 14.7% for example, assuming a constant P/E)

If one saw that banks have some of the highest ROEs in the market and that that the ROEs are relatively steady and if you expected the ROE to remain higher than the market average then it might be wise to go very very heavily into banks.

No licensed adviser can recommend this because it is considered to lack diversification. But if you are pretty sure that banks would continue to do better than the market than you might not want diversification. (But yes you are taking the risk that banks will under perform the market in future)

Someone will be happy to calculate that your return is lower than 14% on a risk-adjusted basis. You should laugh in his face since the concept of risk adjusted does not apply the same way to events that have already happened. Also it is impossible to exactly quantify risk and therefore impossible to exactly quantify a risk adjustment going forward. The math is precise but the underlying assumptions are far from precise.

#111 DON on 01.22.17 at 1:38 pm

Thanks for the info Ryan – much appreciated!
as for the blog jackals – at least you have not been introduced to ‘Joseph’ . Garth banished him a while back.

#112 Braj on 01.22.17 at 1:45 pm

#108 Break-even Analysis on 01.22.17 at 12:50 pm
Here’s something to think about when you’re setting your target asset allocations for the year:

If your stock portfolio drops in value by 1/x in a given year, it has to rise by 1/(x-1) the following year just to break even (x cannot be 0 or 1).

For example, if the value drops by 1/4 one year, it has to rise by 1/3 the next year just to break even.

I’ll leave the proof as an exercise.

I think it’s a product of the way we think, if the market drops 50%, it has to recover by 100% to reach where it was before. It’s not necessarily intuitive.

#113 InvestorsFriend on 01.22.17 at 1:46 pm

Why did Bankish invest in banks?

Because that’s where the money is made?

#114 Braj on 01.22.17 at 1:47 pm

#102 The Technical Analyst, CSTA, CPD on 01.22.17 at 12:02 pm
Standing Ovation!

Now, THIS is the type of blog Greaterfool should strive towards. THIS was one of the best posts in the last few years.

Well done!

Agreed. Good on Garth for bringing em in.

#115 InvestorsFriend on 01.22.17 at 2:00 pm

Are Stock Indexes biased upwards due to dropping failuures?

#99 statsfrats on 01.22.17 at 10:11 am stated / asked:
Ryan

One of the tricks/scams of these indices is that they are constantly dropping deadbeat companies and replace them with high performing ones. This gives the illusion that they are always on the up and up…..maybe you can put together a chart from Year 1 which factors in all of the duds that have been dropped thru the years to give a truer indication of performance.

*************************************
Your logic sounds good but is not correct. The index tracks the return from owning the companies in the index. There is no need to adjust for companies no longer in the index.

Well there would be if your idea is to buy the stocks in the index on a given date and hold those forever. Of course THAT would not match the index. Index investing requires you to rebalance and hold what is actually in the index and in the proper weights. Index ETFs do this for you.

Owning the index over time provides great return because the companies in the index make fat profits. It is truly THAT simple. Volatility confuses picture but the the substance of the matter is profits drive returns.

#116 Bankish on 01.22.17 at 2:06 pm

#110 InvestorsFriend on 01.22.17 at 1:18 pm
Thanks for the kind comments. I would just like people to realize that there are options out there that are against the norms of usual investing but are very rewarding. My bank advisor (appointed for free due to previous condo line of credit investing) has officially warned me against it. The bank says it has a 9% future annual return value, but I say as long as one does not panic and sell low in time of recession(as in 2008 and I stuck it out ) I should do well.
The $50,000 a year in dividends will keep the wolf from the door if things go south and time seems to heal a broken market.

#117 TRT on 01.22.17 at 2:22 pm

Looks like MSM and special interest groups/anarchists are preparing for a coup with recent marches as evidence.

These groups can’t be allowed to succeed in toppling the government that was democratically elected in the USA. We must stop these groups with all available force; otherwise democracy will be toppled and we descend into anarchy.

We must defend the pillars of democracy at all cost.

#118 DON on 01.22.17 at 2:24 pm

6172 Dennie Lane, Nanaimo

Nov 11:$474,900
Jan 20: $439,900
Change: – 35000.00 -7%

https://evaluebc.bcassessment.ca/Property.aspx?_oa=RDAwMDA0TkxNRw==

**************************

Flop….funny thing…I have been following this new strata neighborhood since the land was being cleared on the side of the Inland 4 lane, noisy highway. The development is perched approx. 40 above the highway with the front row of houses overlooking the highway and a stunning view of a lake and mountain in the distant. The front row also has small back yards, and fences a foot from a nasty gravel decline to the highway. The houses in the front row are arms length apart. I can only imagine the back row houses (this one) have no view and are at least situated back from the constant noise and fumes from what is dubbed as the Nanaimo Speedway. Then again they are marketing to retirees.

One good thing, there is a good pub around the corner, Black Bear Pub, patio, lake view and good food all day if you aren’t enticed by the Ferry food on the way over.

As for Victoria – was visiting friends yesterday and had to travel through several neighborhoods. Saw approx. 8 real estate “sold”…but I only saw one for sale sign. It was strange the sea of for sale signs is gone, of course I was not in Oak Bay.

Things seem eerily quite. Maybe the flow or retirees has started to run out on the island. Most people I know own houses, only know of three couples that don’t own and are waiting. One friend lives in a giant house alone and the other couple bought a big old house with no immediate plans to have children – they already had the new roof leak.

It’s strange to say the least.

#119 DON on 01.22.17 at 2:29 pm

Also should have added that those I know who own houses are penny pinching and complaining about their increased electric bills during the cold spell aka winter.

#120 Yanniel on 01.22.17 at 2:44 pm

Ryan, thank you very much for answering my question above.

I have another question, but please, feel free to ignore me this time. You have already used so much of your time that I am starting to feel bad for asking…

My question is about this quote of yours:

“if you’re being tactical, you could look to adjust your S&P 500 exposure and switch to a hedged ETF if the CAD dollar gets below 70 cents” – Ryan

What’s the counterpart of that statement? I mean, at which point would your switch from a hedge to an unhedged ETF? I am looking for a rough number here, something like ‘if the CAD dollar gets above 90 cents… we can switch to an unhedged ETF’.

Thank you.

Yanniel.

#121 Jag on 01.22.17 at 2:45 pm

kevin li, lee
#########
Garth,
WHY ARE YOU ALLOWING THIS PATHETIC SCUM, kevin li, TO CONTINUE TO PROVOCATE THIS BLOG??? HE CONTINUES TO INSULT ALL CANADIAN’s WHO HAVE ADDED VALUE TO OUR COUNTRY. ENOUGH IS ENOUGH!!!

#122 Euro observer on 01.22.17 at 3:46 pm

https://ca.finance.yahoo.com/news/ontario-premier-writes-open-letter-184109678.html

I guess she is itchy.

#123 Metaxa on 01.22.17 at 4:49 pm

Jag writes:
kevin li, lee
#########
Garth,
WHY ARE YOU ALLOWING THIS PATHETIC SCUM, kevin li, TO CONTINUE TO PROVOCATE THIS BLOG??? HE CONTINUES TO INSULT ALL CANADIAN’s WHO HAVE ADDED VALUE TO OUR COUNTRY. ENOUGH IS ENOUGH!!!

Kevin Li wrote a couple of posts expressing his point of view. As is custom he was castigated for holding a contrary opinion.

Kevin Lee is a troll who is using a similar name to keep the ball rolling so to speak. It is bait, bait which you and many others have swallowed.

Try and keep up.

I’d rather a ban on folks who use all caps myself.
The triple exclamation points seals the deal too.

#124 Reply to #112 on 01.22.17 at 4:52 pm

To put it into perspective, Braj, it would take Warren Buffet 3.33* years to recover from a 50% drop in BRK.A share price.

*Based on the rule of 72, and a compound annual rate of return of 21.6% over 50 years (see Fortune, “Grading Berkshire,” Mar 5, 2015).

#125 I like cookies on 01.22.17 at 5:09 pm

Ryan said: “Buying VFV will return roughly the same as SPY, but you won’t then have exposure to USD which we want for clients.”

This makes no sense. There is no difference in returns (other than index tracking error) between these two ETFs.

http://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/

#126 I'm Still Around on 01.22.17 at 5:59 pm

Great post Ryan! Very informative. Just goes to show, start investing early. I bought my first mutual fund in 1997, at age 14. Moved onto index investments 5 years ago. Wish I had made the change sooner.

#127 Tater on 01.23.17 at 12:41 pm

The return numbers for the Dow and S&P seem low. Are they price appreciation only? And if so, why were dividends excluded? Even if you don’t re-invest them every year, they are still a portion of your return.

#128 New here on 01.23.17 at 3:42 pm

Hi – can I suggest another topic for the blog? Let’s say we really messed up because I was scared of investing and now we have several hundred thousand to invest (this is outside of our 401ks as those are good and we faithfully invested 10% of our income each year since we started working in our 20’s and we will be 40 this year). It doesn’t seem like we should just dump it in all at once….or should we?

#129 crowdedelevatorfartz on 01.23.17 at 7:15 pm

@#128 Nerd Hear

Nah, just cash it all in and go to Vegas with your 200k. Put it ALL on one roll of the dice a a Craps table and If you win!
Do it again.
And again.
aaaaaaannnd
again.