In 2010 the Globe & Mail offered a simple Canadian stock portfolio idea. It was also called the Canadian Essentials Portfolio. The portfolio concept was courtesy of political science professor Mike Henderson who singled out the companies for the essential roles they play in the Canadian economy. He identified the companies in the year 2000 and it formed the core of the retirement investments for he and his wife. The cumulative 10-year total return on these stocks to 2010 was 305%, greatly outpacing the 72% for the S&P/TSX composite index. In a recent article, the Globe detailed how Kate, a 71 year old retiree in Guelph used the Essentials Portfolio to take her TFSA to over $250,000.
For those who have a Globe subscription here’s the Essentials article from 2010, and the Essentials update in 2018.
The 2018 update reported that the annualized return since the beginning of 2000 for the Canadian Essentials Portfolio was 13.1%, including dividends, while the S&P/TSX Composite Index made 7.6%.
The blazingly simple portfolio
Once again, the idea was to hold companies that are essential to the Canadian economy. These companies are not going away and they are in everyday use. In fact, it’s the same concept as the Canadian Wide Moat portfolio that I’ve offered on this blog .
The Essentials Portfolio is concentrated in 3 sectors, while the Canadian Wide Moat approach offers 4 sectors by including the very important grocers. The returns would have been helped greatly in the last two decades by adding grocers.
Here’s the ‘Essential’ holdings from 2000 …
Canadian National Railway (CN-T), Canadian Pacific Railway (CNR-T), Enbridge (ENB-T), TransCanada Pipelines, now TC Energy, (TRP-T), Royal Bank of Canada (RBC-T), TD Bank (TD-T), Bank of Nova Scotia (BNS-T), Canadian Utilities (CU-T), Fortis (FTS-T) and Emera (EMA-T).
It’s railways, financials and utilities. It’s a case of boring and staple blue chips beating the crap out of the broader market. That should be of no surprise.
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In Canadian stock portfolios on Cut The Crap Investing I offered this chart from Norm Rothery.
We see that the low volatility approach is a bit better. And there is a lot of boring essentials blue chip in the Canadian low volatility index. The essentials, wide moats, low volatility and high dividend styles are all mostly concentrated in the same sectors.
In the high-dividend space check out the Beat The TSX Portfolio. It too has a long history of incredible performance, but with much greater volatility at times.
Back to Kate and her TFSA
Kate has maxed out her TFSA space and made the life-changing move of dumping her high fee mutual funds in favour of the Essentials stock portfolio approach.
Canadians should dump their high-fee mutual funds.
From the Globe & Mail post …
By early 2020, Kate had a substantial CEP in place. Her TFSA is now worth $247,000 as of mid-June, with most of the growth coming after January, 2020. Kate’s TFSA is not one of the million-dollar-plus TFSAs that the Trouncers series has often profiled, but after adjusting for the constraints of maintaining a relatively smooth ride and an undemanding workload, she sees her TFSA hitting a home run in terms of her own needs.
In the post, how to use your TFSA I noted that a maxed-out growth-oriented global ETF portfolio strategy would have delivered about $225,000 to the end of 2024. Given the gains in 2025 and the additional $7,000 contribution space, we can call it a draw. The ETF global ETF model would also be in the $245,000 range.
More risk for the same returns
For Kate’s experience, she took on much more risk for the same returns as a global ETF portfolio. She’s concentrated in a few stocks (concentration risk). All of her TFSA rests largely on the success of Canada (geographic and political risk). She’s mostly concentrated in one currency – the Loonie.
As we’ve seen recently, President Trump has suggested he might ruin Canada economically if we don’t cooperate on trade terms. He could ruin Canada in the near term. He might. That demonstrates that the risk is present. Risk to Canada could show up in other ways, it’s doesn’t have to be a Donald Trump.
Net, net, just because Kate’s strategy worked very well, doesn’t mean that it’s a good idea. It’s not. 100% concentration in Canadian equities in any account carries incredible risks.
Just because something worked doesn’t mean it’s a good idea. If a driver claims that he drove without car insurance for 30 years, it’s a good idea because he never had an accident? He saved a lof of money; it was a good strategy? Of course not. It’s the same false argument for extreme portfolio concentration risk.
If Kate had invested in the Canadian Essentials and a sensible U.S. stock portfolio, her returns would be much greater.
What is the cost of your Canadian home bias?
Our best performers over the last 15 years are U.S. stocks and ETFs.
Canadian stock portfolio weights
Of course, it’s a personal decision. Do you want a 20% , 30%, 40%, 50% Canadian weight? Many experts will suggest that 30% Canadian is optimal within a global portfolio. And again, I like the idea of the Essentials, Wide Moat, or Low Volatility approach. The long term outperformance is meaningful and likely to repeat IMHO. But we need to pay attention to geographic allocation.
But of course – past performance doesn’t guarantee future returns.
Norm Rothery tracks the Canadian low volatilty stock model for the Globe and at Stingy Investor. The current holdings are …
Algoma Central, Alta Gas, Atco Ltd, Scotiabank, CIBC, Canadian Utilities, Emera, Enbridge, Fortis, Hydro One, Intact Financial, MCAN Mortgage, Metro, National Bank, Royal Bank of Canada, Waste Connections, PowerCorp, Quebecor, Rogers Sugar, Sienna Senior Living.
Other recent holdings are George Weston, Great West Life, Keyera Corp, Loblaw, Pembina, Sun Life and TMX Group. Personally, I would continue to hold stocks that come and go within the low volatility portfolio; I would simply consider and new holdings that are added to the list.
As you can see the low volatility portfolio is dominated by financials, utilities (including pipelines and telco) and grocers.
Inflation protection
Contrary to how the Essentials portfolio was billed, it is not inflation friendly. That was demonstrated in 2021 and 2022 when we had the COVID-inspired inflation spike that led to a rising rate environment.
The Essentials was down 1.9% in 2021 and up only 2.5% in 2022 as inflation surged, delivering a negative real return.
Cut The Crap Investing readers were prepared (at least armed with the knowledge), holding gold in a balanced portfolio. I also put Canadian oil and gas stocks on the table in late 2020. Fantastic returns were on the way in 2021 and 2022. Oil and gas is the most reliable inflation-fighting sector. Here’s XEG-T.
I have long put the Purpose PRA-T ETF on the table as a one-stop, well-diversifed inflation fighting asset. Here’s PRA over the last 5 years, averaging 15% annual.
The inflation paradox
Inflation fighters would have greatly helped portfolios over the last 5 years of course. But certainly unexpected and high inflation is rare.
And ironically, it is the avoidance of these cyclical sectors such as oil and gas and materials that has led to the success of the Essentials and Wide Moat Portfolios since the 1980’s, as we have mostly been in a low inflation, disinflationary environment. It’s possible the inflation fighters will be a drag on performance if we return to low inflation / disinflationary times.
An accumulator might stick to the Essentials / Wide Moat ‘stuff’. I think it’s a good idea for retirees and those in the retirement risk zone to hold some dedicated inflation protection.
As always the above is not advice. Think of it as information for consideration as you build your portfolio. 🙂
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My wife and I take a similar TFSA approach. She is 66 and I’m 72. Hers is at $261,000 and mine at $313,000 as of this morning. The key is patience and compounding by reinvesting the dividends. Presently they are throwing off a combined $34,369 “income” which we don’t need … yet.
The best gift the Harper government ever gave us.
Thanks for sharing Barry. You are your wife are certainly above the benchmark. Congratulations. That is a massive pot of tax free money and potential income that has the potential to grow much more. If you don’t mind sharing, how are the TFSAs funded, assuming you are both retired.
Great TFSA ‘story’.
Dale
We have a substantial 6 digit cash reserve earning 2.70% at BNS ( purchased DYN6004 in our trading account. No commission, no fees. Anyone can buy the F series for any amount. scroll down the following link https://ads.scotiabank.com/investment-savings-account) . We usually end up with surplus savings from our yearly non registered income. Failing that we might sell something as in general we’re reducing income from that side with a view of eventually getting the bulk of our income from our TFSAs … if we live that long. Then we can collect full OAS (I started at 70 … wife is also deferring) without the clawback. Right now my OAS residue after the clawback covers all taxes. (dividend tax credit in BC is one of the best in Canada. That’s funny since the NDP – the cutely named “dippers” by some – have been in power since 2017 and the DTC is better here than in the Red and Blue provinces east of Manitoba. Don’t ask me why!) That was the plan and it’s working well. Both of us are in good health – we’ve inherited great genes.
Thanks Barry, I always appreciate you input and sharing. It’s wonderful to read of a very successful retirement as well.
Dale
I agree with Barry. Best gift ever.! The $100,000 capital gains exemption from decades ago was a close second.
I have been investing since I was 10. Nearly 80 now, I look back and realize that, although I followed a similar investment theme, the main reason for my success was the state of the economy over those years.
I .don’t believe that young people entering the market these days will enjoy the same environment.
These days, I look at valuations and recall the phrase “irrational exuberance “, frequently mentioned during the tech corporations valuations at the end of the last century.
My philosophy is:
Be patient.. Invest when the numbers make sense. If they don’t, wait.
Be disciplined. Invest monthly. Start with $50 or so, and increase every few months until you reach a level which pinches, then step back to the previous amount.
Get paid to hold. Dividend stocks. DRIP
Hold only a few positions. Best blue chips, and ETFs. 10 works for me.
Try not to listen to the noise.
Read, read, read.
Enjoy the journey.
Hi Janet, thanks for stopping buy and thanks for sharing your wonderful investment story. Wealth creation can be and should be dead simple. Create a generous savings rate and invest on a regular schedule. The studies will say ignore everything and investing on a regular schedule.
I agree on the U.S. market and valuations. I like a value slant in the mix of U.S. stocks. I’ve contributed to stocks at reasonable valuations and added XDU-T about a year and a half ago. That received some new monies today in fact.
Is your TFSA all Canadian, or a mix of CAD, U.S. and perhaps international?
Dale
Great if TFSA min was incr but prob lucky in Cda to have them. Partner and I hold some higher growth in them and want to switch out some holdings (prev bad advice). We missed Apr drop due to health issues. A post on Cdn blue chip div funds would be good. Obv a trade off in yield and returns.
Hi Jo, take a look at the BMO Low Volatility ETF – ZLB. That’s hard to beat and the out performance might continue, but not guaranteed of course. That said, U.S. and international diversification is important. You might throw that in the mix of ETFs.
Given that, you might consider a growth asset allocation ETF if you want to keep it simple, and more hands off.
Dale
Dale or anyone reading this incl Janet or Barry. Do you hold a cash ‘bucket’? Some say 1-3 yrs expenses in case of extended bear market (very respected names warning.) If yes do you also have 1-3 mths expenses in an MMF or HISA etc like one Barry linked? CBIL is newer. As a side I try to mentor younger women (20- 30s) on managing $ and current monetary systems and hope they’ll do the same. Learn and choose better. We’re in their hands going fwd so in our best interests. Lol! PS Janet is prob a brilliant teacher.
Hi Jo, a cash bucket is a popular notion and from my contact with retirees it’s a common approach. That said, it is often mental accounting, as it’s part of a balanced portfolio. But is if helps reduce risk and stres, that’s fine.
Keep in mind that a retiree should run a retirement cash flow calculator and stick to the plan. The calculator will show you how much to take from each account, when to take CPP and OAS etc. So, we’d manage the risk in each account. That is, we want to do what is necessary to maintain our prescribed spend rates for the RRSP / RRIF / Taxable and TFSA (if that is in use for creating retirement income).
Net,net it might not be wise to have a large cash bucket in taxable (creating lots of taxes) to manage the risk in the RRSP / RRIF.
To manage the RRSP, within the RRSP / RRIF we use cash, bonds, gold and defensive equities.
Dale