The S&P 500 is the cornerstone of my investments

The S&P 500 is the cornerstone of my investments. Everything else I own in the stock market is compared with the S&P 500.  I always ask myself: “How does this investment compare to the S&P 500?” And as much as possible, I use Vanguard as the main provider of the investment products I purchase.

In particular, I use ETFs, I don’t use Mutual Funds. Mutual Funds have a slight tax disadvantage (to be covered in a future post) wherein Index funds you get a small bill for capital gains. That doesn’t happen for ETFs.

These are the two ways in which you can get the S&P 500 in Canada and the U.S.

• S&P 500 for US residents (VOO). MER 0.04%
• S&P 500 for Canadians. (VFV) MER 0.08%

Ancillary investments

Once my S&P is established as the benchmark, I go into other sectors.

In Canada

In Canada, there is not that much choice. The Canadian market is very small. Financially we are smaller than many of the states of the U.S. Most of the Canadian market is concentrated among a few oil companies and a handful of banks.

The main Canadian ETF is to consider is a Canadian ETF composed of the 60 biggest Canadian Companies. This ETF is put together by a company called Black Rock, which is a financial product distributor as big as Vanguard.

Here it is iShares S&P/TSE 60 (XIU). MER 0.18%

Look at the MER. 0.18%. That’s more than twice the MER of Vanguard for the S&P 500. That’s why I love, unequivocally, Vanguard. Vanguard has created what’s called in the industry, “the Vanguard Effect.” Which means that they are forcing all the other financial products distributors to lower their prices.

Internationally

I like to be exposed to other markets. I own the following ETFs sold by Vanguard:

• FTSE Developed All Cap ex-North America Index ETF
• FTSE Developed Asia Pacific All Cap Index ETF
• FTSE Developed Europe All Cap Index ETF
• FTSE Emerging Markets All Cap Index ETF

Subsectors of the U.S. Stock market

My favorite is Small Cap Value. This is from the premise that small companies grow faster than big companies and that value companies perform better than growth companies.

Here it is Vanguard Small Cap Value (VBR). MER 0.07%

The ETF advantage

This is quite significant. Please notice the low price of all these investment vehicles. All of them are less than half a percentage point.

Most Canadian mutual funds sold by other distributors, are above 2.00%. This is a disgrace!

This makes a HUGE difference in anyone’s portfolio. Unfortunately, the people who need to know this information are not reading this blog, they are probably watching Netflix right now. But you, you who are reading this blog, you can save a significant amount of money by being in ETFs as opposed to mutual funds sold by a “free” financial advisor.

What about Target Funds

I don’t like target funds. Target funds are the equivalent of kneecapping your investments.

With Target Funds, as time passes by, the investment company shift your investments from stocks to bonds. When you are older, when you probably need your money the most, your money will be producing less.

As I have written in previous articles, I don’t like bonds. We all know that bonds underperform stocks. Why would you willingly hold a underperformer? Because you want less volatility? Then just hold cash. Holding bonds is not an acceptable compromise.

When can you hold bonds?

The only time when I think it’s acceptable to hold bonds is when you have reached your Financial Independence goal. Let’s say that you Financial Independence goal is one million. Then, if you have more than one million, you may hold it in bonds. After you have enough money to live, you can put the excess money into something very safe (like bonds) or very risky ( like cryptocurrencies or individual stocks). It really doesn’t matter, if you hold bonds, you will be holding investments that don’t produce a great return on capital, but it’s o.k.  because your capital needs will be taken care of.

What does Warren Buffett Think?

When Warren Buffett was asked if target funds were added value, he said:

“No, probably not,”

One of the pitfalls of target-date funds is their fees. The other one, as mentioned above, it the bond allocation.

What is Warren Buffett’s recommendation?

“The S&P 500 Index Fund is the one to use. That’s the one I used in that bet I made for ten years. It’s the one I’ve told the trustee for my wife to put 90% of the funds I leave her in to.”

In his 2005 shareholder letter, Mr. Buffett wrote that investors — both small and large — would be better off putting money in low-cost index funds. Active management professionals (mutual funds, hedge funds, etc), as a group, would underperform the returns achieved “by rank amateurs who simply sat still.”

According to Mr. Buffett, active managers who collect massive fees would leave their clients “worse off” than the amateurs who simply invested in unmanaged low-cost index funds.

The one million dollar bet

In 2007, Warren Buffett bets a million dollars that an index fund (The S&P 500) would outperform a collection of hedge funds over the course of 10 years.

10 years later, 2017, Warren won the bet. The s&P 500 delivered an average annual return of 8.5% vs. the fund of funds delivery of 2.4%

Investing internationally for a higher level of security and diversification

Jack Bogle and Warren Buffett think that investing in the S&P 500 is enough diversification.

I see this way of thinking a bit arrogant. Warren says that investing in the S&P 500 is like “buying America,”

I would like to remind both legendary investors that America is losing its competitive advantage relative to other countries. There is nothing that guarantees that the U.S. will always be the leader in manufacturing, services, and technology.

In the 1800s, England was the economic powerhouse of the world. At that time, sage investors of the caliber of Warren Buffett and Jack Bogle believed in the English system. Well, those investors missed out on the spectacular growth of the U.S. Don’t let that happen to you. Put a percentage of your investments outside North America.

My point of view is that a bit of international diversification can only add stability to a portfolio. If any of the other countries start taking the lead, you, as an investor, you will be there-there to enjoy the ride. At the very least, international investments stabilize your portfolio, as some countries zig when the North America zag.

Related Posts

1. My Favorite Vanguard ETFs
2. “Sell In May And Go Away” hasn’t panned out this year
3. Trust the system