May Portfolio Update

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FIRECracker and I do periodic reviews of our investments as part of our normal financial health check, and on our wall of to-do items, there’s a big, bright, yellow reminder that says “Q1 Portfolio Review!” But this year, we kinda, sorta forgot.

Having a baby is a very personal experience for everyone, and depending on who you talk to, becoming a parent is either a joyous part of the human experience, or a complete shitshow that nobody should ever attempt. However, one thing that every parent agrees on is that babies are distracting as HELL.

I can’t count how many times my day has been interrupted by something I didn’t even know was a thing that could happen. Trying to get some work done? Well, you can’t, because the baby’s decided now would be a good time to take off his poopy diaper, stick his foot in it, and then try to eat his own foot.

So now, with April already over, I was doing some cleaning, found my post-it note reminder, and I realized “Oh shit, I haven’t looked at my portfolio for months!” Not the best look for a financial blogger, but in my defence, shut the Hell up. I blame the poopy foot eater over there.

But anyway, enough excuses. Let’s see what’s been happening in the markets, and how it’s affected our retirement portfolio.

To recap, our current portfolio looks like this.

Our asset allocation is configured as 75% equity/25% fixed income, with the equity portion split evenly between Canada, the US, and the International EAFE Index. The big deviation I made from a traditional stocks/bonds portfolio is I replaced our typical aggregate bond index with Preferred Shares. I explained my reasoning for doing so in my 2023 Portfolio year-end post, but in a nutshell I thought that interest rates would stay higher for longer, plus I wanted the higher yield of 6%, so this seemed like a good place to position myself.

I always get a little nervous posting our personal portfolio decisions because no matter how many disclaimers of “This is not a market call, this is just what we’re doing personally” we surround these posts with, inevitably some of our readers copy our portfolio. So…let’s see how we, and by extension those of our readers who copied our moves, are doing.

Equity Markets Up, But Moderating

Equity markets ended 2023 on a tear, pulled up primarily by tech stocks amid optimism surrounding A.I., and while the party has continued into 2024, the momentum isn’t quite the same as it was last year due to increasing global uncertainty surrounding the wars in Ukraine, Israel, and the US presidential election.

Still, the Canadian stock market clocked in at an impressive 5.27% YTD.

Canada’s stock market is viewed as a proxy for oil prices, so as oil prices increased around 5% during this time period, our stock market got pulled up as well. However, the largest sector of our stock market is actually financials, and even though one of our banks was recently caught up in a money laundering scandal involving Chinese fentanyl dealers (!?!), this sector will continue to benefit from higher interest rates for the foreseeable future. As it turns out, even though Canadian homeowners will bitch and moan about their mortgage payments going up on renewal, they still pay up. We’re just not seeing the wave of foreclosures or power-of-sales that some of us thought we would.

International markets as tracked by the MSCI EAFE index did similarly well, posting gains of 5.4% YTD.

However, the US stock market has led the world once again, posting a stunning gain of 7.63% YTD.

Sometimes it’s useful to step back and see how things look from a longer time frame, because even though recently the news has been blaring headlines of stock market drops and increased volatility, this year has still been quite positive for equity markets. The US benefitted from the same factors that helped the rest of the market, plus a red-hot tech sector still being pulled higher by A.I.

What About Fixed Income?

Bonds, on the other hand, have been another story.

The big economic story driving the fixed income market going into this year was the expectation of interest rate cuts. Not just interest rate cuts, but deep interest rate cuts. Especially up here in Canada, economists, bank executives, and real estate companies were predicting cuts of between 1% and 1.5% on the benchmark rate, rationalizing that the central banks couldn’t allow interest rates to stay this high without risking a crash to the housing market.

This caused yields to drop and the yield curve to heavily invert as investors piled into longer-duration bonds. These bonds are the ones that rise in price the most when interest rates drop, so while this may seem like a rational trade, so much money flooding into this position caused yields to drop way too much. A bond index fund that covered the entire bond market paid only 3.5% while money market funds were paying north of 5%. That means that bond investors have to accept 1.5% lower yield than the risk-free rate in order to make this bet.

This always seemed like a shitty deal to me. While I agree with the broad consensus that interest rate cuts are coming, I was never convinced with how specific these market predictors were about when and how deep those cuts would be. A quarter cut in March! Then two more in the summer! And then maybe 4 more over the rest of the year! Really? Are you basing that off of any hard data, or are you just hoping for it to be true so that you get saved from your mortgage payments jumping up?

Lots of factors need to line up for the central bank can begin cutting rates, the biggest one being inflation, and inflation data is not supporting rapid cuts yet. The latest inflation reports showed 3.5% in the US and 2.9% in Canada. Interest rate cuts tend to increase inflation, so inflation needs to be at the low end of the central bank’s 1% to 2% target before rates can be cut significantly. We’re just not there yet.

As a result, I think bond investors are getting impatient, and are starting to abandon their positions because they’re sick of getting such a low yield. Here’s what the BND ETF, which tracks the US bond market, looks like this year…

And here’s the Canadian one…

But like I said before, we replaced bonds with Preferred Shares. I believed that rather than seeing rapid rate cuts in 2024, rates were going to stay higher for longer, and if cuts did come, they would be later than people anticipated, and less drastic as well. In this environment, rate-reset Preferred Shares, like the ones tracked by the ETF ZPR, should see some upside.

So how did this position do? Well…

Holy shit.

Preferred Shares are up 12.4% YTD!

Stunningly, Preferred Shares is the best performing asset in my entire portfolio for the year, even beating out the US stock market!


Put it all together, and we are sitting on an overall portfolio performance of 7.7% YTD, and a total portfolio value of…

Yikes. $2.1M. At the beginning of the year, our portfolio was sitting at $1.97M, so I was kind of expecting to cross the $2M mark at some point this year from dividends alone, but it looks like we crossed it, and then kept going!

Hmm…so did I actually get a market call right? Or was this just dumb luck? The two are famously difficult to distinguish, but the forces that have been pushing Preferred Shares upwards should continue in the near term even if rates fall somewhat since preferred shares are still going to be resetting higher from when they were last issued 5 years ago. If this performance is driven by those fundamental forces, we should see Preferred Shares’ good fortune continue.

Have you checked your investments lately? How has your portfolio done this year? Let’s hear it in the comments below!

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19 thoughts on “May Portfolio Update”

  1. I think now is a good time to buy S&P500, specifically SWPPX. Or on May 1st it was, anyway. It was down from March, so… Anyway glad to see your investments doing well!! Congratulations again on the baby! Will you have another one???

    1. Ha, thanks! Our current stance is “HELL no” on a second one, but they also say don’t trust your own answer to this question in the first year, because every new parents says that.

  2. I must say the imagine of the poopy diaper / insert foot here made my day! And congratulations on the portfolio! I am anxiously waiting for our net worth number to hit $3M. We have been hovering at $2.87 for a bit now. Not that we need it to, it’s just that close so I want it! LoL!

  3. What is your best guess on when the Preferred Shares gravy train will end?

    Can you give us a heads up when you decide to change your allocation?

    1. I think when I can get a decent return on bonds (i.e. when the yield curve normalizes) I’ll start looking for an off-ramp. Either way, I’ll be sure to let everyone know here when that happens 🙂

  4. I have about a 2 to 3m …. a paid off house, GICs, a lot in tesla , index funds, part time stuff and a car etc …still waiting for tesla to fully develop fsd and august 8th reveal their cyber cab / robotaxi and stock to 10-20x over the next 5-7years lol 🙂

    1. You’re in good company. I think Carl from Mr. 1500 is also heavily invested in Tesla as well.

      I don’t know enough about the auto market to play in this space, but I will be rooting for you guys from the sidelines.

      1. Thanks …. there are many ways one can tweak this retirement game – it depends on your circumstances (age, health etc) , desires (kids, cars/bikes, home GCC bought a place in California for a mill I believe? etc ) and needs (diapers, more cash etc) … which may need adjustment from time to time – God Bless

      2. Tesla FSD is a calculated risk … might be worth putting down a 100 thousand on it Friday before the next major update coming maybe next week from your funds … then hold it for 5ish years or more … Mr 1500 has made lots on his Index Funds/Tech Stocks/ real estate combo strategy …

  5. Congrats guys on 2M! As JL Collins said in a recent interview, it is stunning how much your portfolio can grow once it hits a large amount. For example, now that you have 2M, if the market rises by just 1% in a day, you’ve just made 20k. Incredible!

    My portfolio has grown 11% YTD, and part of that is due to a weaker CA$. I am heavily invested in the total US stock market, but I hold Canada-domiciled funds (i.e., VUN, VFV). The CA$ has dropped from 75 cents to 73 cents since the start of the year, so even though VTI is up 8.75% YTD and VOO is up 9.38%, the Canadian versions of those funds (VUN and VFV) are up 11.22% and 12.07% respectively.

    If you hold broad-based US ETFs (or the Canadian version of US ETFs as I do), if the CA$ drops, then the value of those funds in Canadian dollars will actually increase because they are based on the USD currency rate that you locked in when you bought. It is looking like the Bank of Canada may have no choice but to begin cutting rates earlier than the US, which could lead to a weaker CA$. If this turns out to be true, Canadian investors may be poised to due well by holding ETFs that track the US market.

    1. That’s a really good point. The Bank of Canada is somewhat constrained in how much they can diverge from US rates, but I also agree that there’s going to be a drop in the CAD/USD exchange rate when that happens. You are well positioned to take advantage of this, so enjoy the ride !

  6. Sorry if you all have answered this before, but is there a particular app you use to see the return on your portfolio. I used to use Mint and now Empower, but since I moved to Australia and have assets there too I’m struggling to have a real world analysis on what my money is actually doing (or not doing) in some accounts.

  7. Hey, is this a narrative from the Faculty Lounge? “…the baby’s decided now would be a good time to take off his poopy diaper, stick his foot in it, and then try to eat his own foot.”

    For some reason, this sentence made me think of some of my grad school faculty! 🙂

    Dan V
    Taipei, Taiwan

  8. Wife and I are around the same portfolio size as you (2.1M CAD). But we dont have income from a book or a popular blog post. Do you think you could have retired without those sources of income?

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