This isn’t quite hockey but, regardless of the sport, we like to beat our neighbours to the south on the field of battle! When it comes to investing, it’s tough to beat the national teams of either country. And low-cost index funds for both the US & Canadian markets are a bit like the national investing teams. The outstanding performance of the American S&P 500® index in recent years has been impressive. Recency bias might suggest we stick with the winner. However, there are no guarantees that it will work the same way going forward. At least not for the potentially shorter timeframe that some retirees might need it to. People loved this American index in the 90s too. In January 1994, if you had invested a million dollars in SPY (the SPDR® S&P 500® ETF Trust from State Street Global Advisors), with all distributions reinvested, it would have turned into more than $3.6 million by August of 2000. That’s pretty astounding growth, eh? Who wouldn’t want a piece of that action!

Imagine Andy retiring in January 2000. He’s got a million dollars to invest for retirement &, based on its recent performance, he sticks it all into SPY. His sister, Anita, prefers to stick with Canada & she puts a million into XIU, the iShares® S&P/TSX 60 Index® ETF. They both have some government pension income but they need their investment portfolio to provide an additional $40k a year for a comfortable retirement. That’s conveniently aligned with the withdrawal rate of Bill Bengen’s 4% Rule. This rule is more a guideline, but the idea is to plan on the money lasting ’til Andy & Anita move on from this earth. While $40k is 4% of the portfolio in the first year, they both want to increase that income every year by just enough to keep pace with inflation. In addition, rather than run the portfolio down to zero, they would both prefer to leave a little something for their heirs. With both siblings retiring at the start of the new millennium, let’s see how that plays out.

Fortunately, both portfolios have survived up to today & they are both enjoying their golden years. More importantly, they were both able to withdraw an increasing amount each year, in line with inflation. Most recently, they were both able to withdraw almost $73k for living expenses in 2023. The strategy worked for both funds. Today, the value of Andy’s American portfolio is a hair under $326k. While Anita’s Canadian portfolio is worth a little over $1.5 million. Andy’s portfolio showed a money weighted rate of return of about 3.34%. Anita’s was 6.06%. You can get some further insight on MWRR (Money Weighted Rate of Return) here. As a side note on the potential benefits of diversification, a portfolio of 50% allocated to each of these index funds, & rebalanced annually, would have a portfolio value just short of $1.1 million today.
But the end result is interesting, eh! Who’d have thought that the less diversified, less growth oriented, Canadian market fund would have outperformed one of the best indices on the planet?

That’s just one snapshot in time, however, & it included SPY taking a bigger hit when the dot-com bubble burst in 2000. And it took another huge hit with the financial crisis that occurred around 2008. That’s a great example of the sequence of returns risk that retirees worry about. If the first few years of retirement are bad, the longer term outlook might not be as rosy. At least not for the kids hoping for a big inheritance!

Things can look different with even a short change in the timeline though. If the guys had invested their million dollars at the start of 2002, for example, Andy’s portfolio value would be worth $2.3 million today. While Anita’s would be at $2.46 million. The 50/50 portfolio would be just over $2.5 million. Just missing the worst of the dot-com bubble bursting made a big difference to the relative performance of SPY over this slightly later timeline. Missing the dot-com crash made a huge difference for the American fund.

For this final example of a traditional balanced portfolio, I used a 40% allocation to FBNDX, the Fidelity® Investment Grade Bond Fund, as this is one of the older bonds funds available for comparison. The remaining 60% was equally divided between SPY & XIU. The annual income remained the same for all three since January 2000, & the balanced portfolio is worth just over $1.2 million today. That compares to the $326k for SPY & the $1.5 million for XIU that we looked at previously. If we look at the 2002 start date, the resulting values are $1.7 million for the 60/40 portfolio, $2.3 million for SPY, & $2.46 million for XIU. The bonds helped when things went off the rails for SPY, but the bond allocation hurt the long term returns once we got past the dot-com bubble bursting.

That’s all just history though. And it’s difficult to interpret what’s going on today in light of that history. Is the American index overvalued? Maybe, but that doesn’t mean it can’t go up more. And there may, or may not, be another lost decade in sight for the American index during our retirement years. Will the Canadian index continue to do it’s boring trudge upward? Possibly. But that’s not guaranteed either. They could both continue to go up. Or down. Some crazy event might impact one or both markets in the future. Would adding some developed & emerging market diversity help? Again, possibly, but there are no guarantees. Despite bonds taking a dive at the same time as the markets in 2022, is there a place for bonds in a portfolio? I think there is. Does a cash position make sense with today’s higher interest rates? Again, I think it probably does. Particularly for those going into retirement. But in what proportion is anyone’s guess & the allocation may be more appropriately decided on based on individual risk tolerance. There are studies that suggest that stocks are less risky than bonds over the long haul. But if the long haul data is looking at a 50 or 100 year time period, that may not help a retiree with a 20 or 25 year retirement span. Especially if a major event hurts market returns during the early decumulation years.

With investing there are always more questions than answers. And the answers will be different for each of us. There are a wide range of solutions offered to help with such problems these days. There are relatively low-cost, all-in-one, asset allocation ETFs now, for example. These are ETFs consisting of globally diversified equities, combined with a weighted allocation to bonds, based on the investor’s risk tolerance. But it’s also possible to make a case for buying such funds individually, rather than in the all-in-one basket. Some retirees prefer income generating assets. Other prefer to leave it all in the hands of a professional money manager. There is no one way to do this. And the vagaries of time and the markets will always produce different results over different timelines.

I wish there was one right answer to this question. But the purpose of this post is more about using the lessons of history to counter the influence of recency bias. While betting big on the currently successful US index may pay off, doing that has delivered some hurt in the past. In other words, if you can tolerate the potential pain, you may achieve the gain you want. Though you may have to live longer to appreciate the results! Asset allocation & diversification can be of value in mitigating those effects. For better or worse. A younger investor with the right risk tolerance may be in a position to take on more risk. Older investors, maybe not so much.

If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Data may not be accurate, check the current & historical data carefully at each fund’s website. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.