Designing Your Portfolio

Co-Pilot  The right portfolio for you

Many People wonder how to manage money, build a portfolio, and where to get investment advice and guidance conveniently at a reasonable price. Investing on your own can be difficult, time consuming, and emotionally taxing. It is challenging to build and maintain an efficient portfolio that is properly diversified, minimizes fees and taxes, and avoids overlapping assets. Many people lack the inclination to manage their own investments. Those that do that are inclined and do have done so with poor results on average. The Dalbar* report on investor returns is released annually. In this report is compares the returns achieved by individual investors compared to the general returns of the market over a 20 year period. The results from the 2011 report are shocking:

  • The average return of a stock fund investor in the U.S. is just 3.4% annually compared to 7.81% for the S&P 500 Index (This index roughly measures the return of the U.S. large cap stocks).
  •  The average return of a Bond fund investor in the U.S. is only .94% annually compared to 6.5% for the Barclays U.S. Aggregate Bond Index (This index roughly measures the return of the U.S. bond market).
  • Over that time period inflation averaged 2.0%

Average Investor vs. Markets
January 1, 1991 to December 31, 2011


The reason for the large performances discrepancies is that people tend to make emotional trading – buying at or near market highs and selling at or near market lows. This is fueled by the media encouraging panic and greed throughout the economic cycles. Many investors confuse the news as a source of information when to a large degree they are just sources of entertainment. Another reason for the difference in performance (albeit significantly less) is fees. Fees have a direct impact on your performance, with many of these hidden costs from view.


When people talk about the performance of a stock market they are generally talking about the change in the market “index” not all the individual stocks that trade in that market. To simplify tracking a smaller basket of stocks that represent the whole market is used. In Canada it is S&P TSX Composite index. This basket of stock remains relatively static, with stocks being added or subtracted on rare occasions. The financial performance of stock investors within a market is usually compared to the performance of the stock index for that market. When we compare a fund manager’s performance to their respective market many come up short. Standard & Poor’s produces a report each year that compares the performance of actively traded investment funds. The results show that over a 5 year period only 18% beat the compared market index.The odds are in your favour if you use an indexing strategy. We help you do this!

Full Diversification

Proper diversification goes beyond “don’t put your eggs in one basket”. Many people do not understand the concept of effective diversification. Not only is it important to diversify by industry, but also by size, relative valuation, and geographic location of companies you invest in. The diagram shows that it has been impossible to predict which international market was going to do the best or worse in any given year.A typical example was during the technology bubble in the 1990s. People purchased a basket of different types of technology stocks thinking this would protect them. Unfortunately, when this sector collapsed it affected all technology stocks.

Investors benefit from diversification when the different types of investments in their portfolio do not move the same directions in a given market condition. Specifically, you do not want a high level of correlation among your investments. This makes it important for the investor to focus on the overall returns of the portfolio – not individual investments. The result is a portfolio return with lower volatility.

The diversified portfolio has not only provided higher historical returns, but it has done so with fewer negative quarters.

Dimensional funds Canada diversifies not only in the amount of securities it holds (thousands) but in the range of capital market strategies it explores and develops. In this way, investors focus on the factors that drive investment returns and reduce excess and undesirable risk.

This is the power of diversification: the whole is greater than the sum of its parts.

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*Average stock and bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB), 03/2010, QAIB calculates investor returns as the change in assets after sales, redemptions, and exchanges.  This method captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges fees, expenses and any other costs.  After calculating investor returns, two percentages are calculated: total investor return for the period and annualized investor return.  The fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will be successful in the future.