My take on investment portfolio mix

I used to think that as long as I have the right mix of bond and stock, I will be fine to withstand the market crash. How wrong was I! The 2020 Covid market downturn taught me that lesson. I was very lucky that I didn’t need to withdraw the money then. I had some money in ETF ZAG – the aggregate Canadian bond index. It was recommended by so many websites. One reason is low MER – management expense ratio. The other reason is broad base. However, it has both corporate bonds and government bonds in it. The corporate bond dragged the price down during the 2020 pandemic market crash. Therefore, it is not a good choice to preserve capital during downturn.  I would switch to BMO Canadian federal government long bond ETF – ZFL.  Its price just went down to 52-week low today because the interest rate jumped. Actually its price hits 10 year low today. Last time when ZFL was at this price was June 2011!  If I am 5 years to retirement, I will start to buy it.  For now, I am 100% in equity and zero in bond. I sold all ZAG ETF when it bounced back in mid June 2020 because I knew that the price will go down when the economy recovered.

Government bond is safer than corporate bond during crash. For retirement investment, I think we need that safety. The reason I picked long bond over medium and short bond is the fact that the price difference between high and low is bigger. That means the price can go down more which presents a better buying opportunity and it can go up more during market crash when investors flee to safety. Then, it presents a good selling opportunity. 

That is the reason why I picked government long bond. The reason I picked Canadian government bond because of its reputation. During the 2008 financial crises, Canada banking sector fared better than many other countries. Mark Carney, then Canadian central bank governor, was so admired that he got the top job as UK central bank governor. I do like the Canadian culture – order and moderation that the international financial industry sorely needs. Too much reckless risk taking, too little repercussion.

The other reason is that I got too much US stocks, I need to diversify. Canadian stock market is doing very well this past 2 years thanks to the energy and financial stocks which count almost 50% of the total Canadian stock market. On top of that, material and industrial add another 25% which is also very cyclical. However, I really do NOT want to invest in fossil fuel industry due to climate change. And I missed buying Canadian financial stocks when it was low in 2020.  No worries at all. It will come down one day. I will buy it then.

I would think a combination of Government long bonds, secular growth stocks, Banking stocks and cash equivalent can be a good portfolio mix. When market crashes, the government bond price will increase when everything else goes down. When the inflation is ranging, the Banking stocks price will go up while the bond and growth stock price go down. I always need some secular growth stock in my portfolio to add some long-term growth.

Some might ask how about gold and commodity? I personally prefer gold producer ETF because I want that dividend. Also, in the long-term return of investment of gold is not as good as stocks or bond.  ZWG – BMO Global High Dividend Covered Call ETF could be a consideration.  The MER is higher because of covered call feature. You can take a look at the dividend rate to decide whether it is worthy.

The next key question is how much for each mix? My take is to ensure that I can withstand 6 to 10 years market downturn plus recovery.  That means I don’t have to sell any securities when the price is down.

Also, I might switch to more high-dividend ETF in the portfolio a few years prior to withdrawal or retirement to add more stability to my portfolio. I am OK to scarify some growth as long as it meets my needs.  How much money do we really need anyway? A relaxed peace of mind and a clear understanding on how much is enough is true freedom.

Published by Worthfy

Financial literacy and counselling

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