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Short Summary
Main recommendation: Build a globally diversified stock allocation covering all major markets, then add bonds according to your risk tolerance and consider factor exposure (small-cap and value stocks beyond market-cap weights), since asset allocation has no provably optimal mix in hindsight. Ben Felix frames the total market portfolio as the starting point, with a tilt toward Canadian stocks mainly for tax reasons.
Key Points
- Asset allocation means deciding how much to hold in each asset class (stocks, bonds, REITs, alternatives), and the speaker says there is no optimal allocation in hindsight, so the best guide is academic literature.
- The Capital Asset Pricing Model (CAPM), developed by Sharpe and Lintner, ties expected returns to market beta, and the speaker argues that betting on specific segments adds idiosyncratic risk without a positive expected outcome.
- Combining Canadian, US, international developed and emerging market stocks improves risk and return versus any single part; the optimal geographic mix is unknown, so global exposure matters more than the exact split.
- Canadian-heavy model portfolios (about one third of equities in Canada) are justified mainly by tax treatment: foreign withholding tax on dividends in registered accounts, and preferential treatment of Canadian dividends in taxable accounts.
- Fama-French three-factor (market, size, value) and later profitability factors have shown low or negative correlations with each other, and the three-factor model explains about 90% of return differences between diversified portfolios, versus about two-thirds for CAPM alone.
Details Worth Noting
- Concrete instructions:
- Start with a total market index fund as the market portfolio base.
- Diversify across Canadian, US, international developed and emerging market stocks to achieve global exposure; the exact split is largely arbitrary.
- Consider a Canadian tilt (roughly one third of equities in Canada, as in PWL Capital, Wealthsimple, Vanguard asset allocation ETFs and Canadian Coach Potato portfolios) for tax efficiency.
- Choose a stock/bond mix based on your ability, willingness and need to take risk.
- For factor exposure, do not rely on a total market index's small-cap or value holdings; overweight small-cap and value stocks beyond market-cap weights. The speaker's illustrative test split each geographic region into one third market, one third value and one third small.
- The illustrative portfolio used in the video was 10% Canadian bonds, 6% US REITs, 28% Canadian stocks, 28% US stocks, 20% international developed stocks and 8% emerging market stocks; the speaker notes REITs may be unnecessary given factor exposure, since REIT returns are explained by market, size, value, term and credit factors.
- Historical figures cited (Canadian dollar, January 1990 to July 2018): an equal Canadian/US/international stock split returned 8.17% with 11.92% standard deviation; adding 10% Canadian bonds gave 8.13% and 11.83%; adding 6% REITs gave 8.32% and 10.6%; the factor-tilted version returned 9.17% with 10.36% standard deviation.
- The speaker cautions that falling interest rates over that period made bonds look especially strong, so future bond returns may be lower; bonds are typically added to reduce risk, not boost returns.
- Factor exposure is harder for DIY investors in Canada due to limited products, and the speaker avoids alternatives like hedge funds, managed futures, preferred shares and high-yield bonds because of unfavorable characteristics discussed in past content.
Bottom Line
Global stock diversification and a considered bond mix form the foundation, and factor exposure is a worthwhile but often hard-to-implement refinement that the academic evidence supports.
