Having just posted our annual Beating the TSX update, I’m receiving lots of good questions about how to put the Beating the TSX method into action. I hope this updated post helps clarify the most common concerns.
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I love woodworking. Yes, that’s really my workbench up there. My father-in-law introduced me to this hobby soon after I got married – it was a rough introduction. One day, before I had my own tools, I brought a piece of wood over to his place to cut.
“The table saw is downstairs. Help yourself. Just make sure you keep the piece tight to the fence.”
“Okay. Thanks.” I had never used a table saw. But I went downstairs anyway, not really understanding what his instructions meant but fairly confident I could figure it out once I got in front of the machine.
The big motor spun the carbide-tipped blade with ferocious speed. About halfway through the first cut I shifted the piece a fraction of an inch to the left – BANG! The piece of wood was ripped out of my hands, the metal teeth grabbed the fibers and hurled it through the air into my chest.
The bruise lasted for weeks, but I was otherwise unharmed – a close call.
When you’re unfamiliar with a tool, every little step is important. When you have experience, there are things you do automatically -essential steps in the process that a beginner might not think about.
Beating the TSX is like the table saw – a simple, powerful tool. This one is used to build an investment portfolio. Used well, it can achieve excellent results. Used improperly, your financial health might be in jeopardy.
Those of us who have been using Beating the TSX for a while (over ten years, in my case) can attest to the fact that, in addition to generating excellent returns, it is both simple and versatile. But, as with any tool, it helps to see how it’s wielded by more experienced hands. I wish I had watched my father-in-law use the table saw before I went at it.
In hopes that it will help you on your investing journey, here is how I actually use the BTSX strategy.
How often do I buy BTSX stocks?
I buy stocks once a year.
I like investing, but find market volatility exhausting and meaningless. Once a year I use the BTSX list to buy big, blue-chip dividend payers that I will hold for the next twelve months. I try to do it at the beginning of January, but I’m not strict about that. In between, I try hard to ignore what the market is doing.
What do I do with the dividends? It is now easier than ever to enroll in dividend reinvestment plans (DRIPs), even if you use an online discount brokerage. With QTrade, you just go to “Service Center”, scroll down to “Dividend Reinvestment”, and select the stocks you would like to DRIP. Easy. I do this with the stocks I am confident will be long-term holdings, which is most of them.
Other funds that arrive in my account, either through contributions or dividends is used to buy index funds. This way, I can avoid paying attention to stock prices and enjoy the benefits of more time in the market. Some of this money accumulates as cash, but I have found that holding cash is a psychological hurdle to investing.
The idea of holding cash is that if there is a downturn big enough to draw my attention to the markets, I will consider using the accumulated cash to buy more of the BTSX stocks while they are on sale. I also have a secured line of credit that I may use to invest if stock prices really crash. This is leverage, it’s risky, and I haven’t done it yet, but I have set up the option.
I do not buy or sell based on month-to-month changes in the portfolio.
At the end of the year, do I sell companies that are no longer on the list?
In an average year, only three or four of the BTSX holdings will drop off the list to be replaced by three new companies with higher yields. Holding on to the ones that remain on the list decreases our transaction costs. But what about the ones that were nudged off? Do I always sell the stocks that no longer appear in the portfolio? Not at all.
I will hold on to good companies that still pay good dividends. Generally, they have fallen off this list because of increases in their stock price, rather than a decrease in their dividend. I am still a happy owner of large stakes in Fortis (FTS), Bank of Montreal (BMO) and SunLife Insurance (SLF), for example – and may be an owner for life.
If, on the other hand, a stock drops off because they cut their dividend and new issues have come to light that will negatively impact long-term performance (I don’t care about short-term issues), I’ve learned it’s best to cut them loose during my annual review. Other veteran BTSXers (like Ross Grant, the previous CMS author of the series) will sell these companies as soon as they cut their dividend. There is no wrong answer here, but there are behavioural risks involved in watching stocks too closely.
Do I buy every stock on the list?
When I started using the Beating the TSX strategy, I bought every stock on the list in equal parts. This can be a very sound strategy, as long as you understand the risks involved (mainly under-diversification), and is the method that is used to calculate our excellent long-term performance.
More recently, I have become more selective. For the most part, I still buy every stock, but I buy less of stocks that have inconsistent dividend histories or highly concerning fundamentals.
In past years certain stocks have appeared on the list with very worrisome fundamentals indeed: short, inconsistent dividend histories and declining earnings in troubled markets. These are the stocks that tend to cut their dividends and experience the biggest price drops. I bought them and regretted it (ABX and IMG come to mind). I wouldn’t buy them now.
I’m not saying these calls will improve my performance, but they do let me sleep better at night – and sleeping well with your investment plan is probably the biggest factor in it’s success.
Do I buy non-BTSX stocks?
Beating the TSX makes up a portion of the Canadian part of my portfolio. There are two reasons I buy other Canadian stocks.
First, BTSX stocks tend to be concentrated in telecoms, utilities, energy, and financials. It makes sense to gain exposure to dividend-paying stocks in other sectors. Examples from my portfolio include MG in industrials, NTR in materials, and CTC-A in consumer discretionary.
The second reason I buy non-BTSX stocks is to add some dividend growth stocks to the dividend yield stocks that BTSX selects. There is plenty of evidence for both approaches and I prefer to have exposure to both. The good news is that the same stocks that provide sector diversification can also be dividend growth stocks.
What about international exposure?
For a long time, I was vastly under-diversified internationally. There are good arguments for this, especially as a dividend investor due to the favourable tax treatment that eligible Canadian dividends receive. Furthermore, BTSX stocks have done very well. But that may not continue, and there is good evidence to show that international diversification improves risk-adjusted returns.
I achieve international exposure with ETFs, in particular, XAW, which is the iShares Core MSCI All Country World ex Canada ETF. I also think that the emerging markets are great long-term investments while currently being undervalued, so I hold some additional XEM, iShares MSCI Emerging Markets Index ETF.
I hope this article is helpful in illustrating how I use the BTSX strategy in real life. As David Stanley, the original author of the series is fond of saying: “BTSX is all about constructing a long-term buy-and-hold portfolio of Canadian blue-chip stocks that have been acquired at a reasonable price.” It is one tool in your investing toolbox – a very powerful and effective one if used well, but certainly not the only one most investors will need.
If you’ve been using BTSX for a while, we would love to hear how it integrates with your larger investment plan. If you are just starting out, how do you anticipate using BTSX? Just post in the comments!
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