Time to dump dividend stocks

Time to dump dividend stocks

Time to dump dividend stocks An influential financial blogger has started a new trend that could impact your business.

For those of you that don’t know Engen or his Boomer & Echo website, it was created in August 2010 as a way for the mother and son team to talk about financial planning in a differentiated manner from what was out there at the time.

Four years on and they’re still banging out the posts to nearly 6,000 subscribers.

In addition, they’ve started a fee-only financial planning service in the past year that charges by the project – $1,000 for an individual for the first year; $500 per year thereafter. Couples are $1,400 in year one and $700 per year after that – offering only common sense advice selling absolutely no financial products of any kind.

So how does someone so committed to dividend investing switch to a two-fund ETF solution? Apparently, quite easily.

Post-2008, Engen decided individual stocks were a better place to invest than expensive mutual funds. Behavioural finance issues such as overconfidence (his stocks gained 35% in 2009) begun to expose cracks in Engen’s stock-buying process that finally caught up to him this year when his portfolio failed to beat his benchmark for the very first time.

At the same time his fee-only service has him recommending research that in his words, “suggests active management is for suckers and that indexing will beat the majority of mutual funds.” Looking to eat his own cooking, Engen began searching for ways to move his 23-stock portfolio into a simple, low-cost portfolio.
 
The two-fund solution, which invests in Vanguard’s All World ex-Canada Index ETF (VXC) within his RRSP and Vanguard’s Canada Index ETF (VCE) within his TFSA, gives him a broadly diversified portfolio. “By simplifying my portfolio with this two-fund solution,” says Engen, “I'm willing to accept a B+ rather than chasing an A and ending up with a C (or worse).”
 
Does this simplified portfolio make sense for everyone?
 
WP reached out to John DeGoey, one of Wealth Professional’s top 50 advisors, for his take on the two-fund solution. DeGoey responded that “things should be as simple as possible, but not simpler. A two-fund approach is simpler, but not in a good way.  I recommend a six asset class portfolio. Different people define asset class differently, so five, seven and eight classes would likely get you to a similar place.  Holding a portfolio of only two asset classes, however, provides insufficient covariance to do much good.”

It seems the debate rages on. 
2 Comments
  • Grant 2014-12-07 10:39:01 AM
    There is a huge advantage in simplicity. Bogleheads.org promote a 3 fund solution, which is the same as the two fund with the addition of an aggregate bond fund, as does Allan Roth in his book " How a second grader beats Wall Street". I disagree that a 2 or 3 fund portfolio has "insufficient covariance" to do much good. It will outperform most more complicated slice and dice portfolios over the long term, in part because of decreased cost. Of course, financial advisers like to make things more complicated so you will think they are smart and it's worth paying their fees.
    Post a reply
  • Will Ashworth 2014-12-09 9:03:28 AM
    Hi Grant,

    This is a debate that will carry on for many years to come. It's almost as contentious as the "active" vs. "passive" argument although that one seems to finally have been settled in most people's eyes.

    Thanks for reading WP and taking the time to comment.
    Post a reply