This is a century old debate (if not longer) but it never gets old. Why? You can easily debate from either side. Don’t underestimate the impact of this decision though. For most investors, there are two main (and often only) asset classes; stocks and bonds. Sure you can add alternative classes like commodities, REIT’s, private placements, etc. You can also break down both of those into subclasses such as domestic stocks, emerging stocks, etc. Bonds can domestic or foreign, they can be short term, long term, inflation protected, corporate, government, etc. You get the picture right?

It Is Perhaps The Most Important Decision For Your Portfolio

It’s easy to get insanely complicated but hear me out. Asset allocation is by far the biggest factor in determining the performance of a portfolio. No other decision regarding asset allocation is more important than your allocation between stocks and bonds. Why? In theory, here is the breakdown:

Equities – Higher returns, more volatility, perform best in good economic times
Bonds – Lower returns, less volatility, performs best in flat/down markets

I know, I know, some might that dividend stocks for example react in a closer to bonds, etc. But let’s stick to bonds vs equities.

Which Asset Class Is Better?

Of course, there is no right answer to that. It always makes me smile when I see charts about bonds overperforming stocks (or vice-versa) because it always depends on one critical factor; the time period. I could easily pick a period that would show you how bonds outperform stocks or the opposite as you can see here:

It simply depends on the dates that I am using. The fact is that we should all own some stocks and some bonds. The big question is how much of each.

It’s NOT A Life Threatening Decision

One thing I hate to see is so many investors being unable to make a decision. They fear getting it wrong and want to over-analyze the decision. I know it’s difficult to come up with a set allocation… What you have to remember though is that the allocations will likely change every year and perhaps even more often. The critical part is getting started and then seeing how your portfolio reacts to market movements. Then, you can adjust both proportions to better reflect what you are looking for.

Make Your Life Easier

The universal rule is quite simple. If you own 100% of your portfolio in stocks and bonds you would invest so that:

Bond proportion = your age %
Stock proportion = 100% – bond proportion

So a 30 year old would own 30% of bonds and 70% of stocks. Of course, this is a general, well known rule meant to be easy to track and understand. I still think it’s a good starting point. From that point on, you can adjust in the following way:

-Higher tolerance/capacity to take risk => diminish bond % and increase stocks %
-Lower tolerance/capacity to take risk => increase bond % and diminish stocks %

What determines your willingness and capacity to take risk? Basically, an investor that can take risk and is willing to take more risk than the average investor would:

-sleep well at night no matter how the markets reacted
-be earning more than average or own more than the average
-not need aggressive returns to reach the target retirement
-etc

So basically, depending on your profile, you would adjust slightly your proportions. I personally consider myself more willing/capable of taking risks so the %bonds in my portfolio is less than my age. Not by tons, but it is.

I would love to hear what you think about this question and what you personally have been doing?

It has been a few months since there was any change among the stocks that I follow and as much as I would love to say that today’s update marks the addition of Facebook (FB), it’s not quite that exciting. For newer visitors to this blog, the stocks I follow are those that I usually track the news for and eventually make trades on. These technology stocks are not generally used for dividend stocks since most prefer to hoard cash (yes Apple, I am talking mostly about you) but rather for long & short stocks and longer term speculative picks.

If ever you have interest in these names, I highly recommend that you join our tech stocks newsletter, it is a free newsletter sent between 2-4/times per month on average.

Removing Shanda Interactive (SNDA)

Shanda Interactive is an upcoming gaming company in China. While I clearly have strong belief in Chinese internet stocks and have done well with some, it’s so difficult to trade them because of the lack of information. I have found a good source of news recently that might help but I’ve still been reluctant to trade these names recently. When I do, Shanda will not be part of it as the company was acquired by Premium Lead Co Ltd, a private company located in the British Virgin Islands from what I can see…I am removing it from the stocks that I follow.

Adding Yelp (YELP)

This is a much more interesting one. I did learn my lesson a few months ago after trading TripAdvisor (TRIP) and will not trade YELP right away but to me, this seems like a great opportunity. No, not a buying opportunity, but a great name to short. If you do not know YELP, it is a huge review website that helps users find critics and reviews of restaurants, and many other types of businesses. The business model is similar to TRIP actually but is a much broader website (compared to the travel direction of TRIP). I am generally not a big believer in companies that try to be the answer to such a large audience and YELP has been known for questionable practices that would make it very difficult for me to buy the stock.

Yelp IPO

Yelp started trading last week after a $15 IPO but started much higher almost instantly in a similar way to many others

Valuation Is Crazy

While I’ve said that you’d be crazy not to own Apple (AAPL), the opposite could be said about YELP. Why would you own a stock that has growing revenues but also growing losses and that trades at a valuation of $1.2B despite only having $80M in revenues for the year. The company lost over $1 per share in the past year and while there are certainly some scenarios where YELP would be a good buy, I think that LinkedIn (LNKD) which has a very similar profile (strong revenue growth, similar multiple for price to revenues, etc) is a much much stronger company. The main difference between the 2?

LinkedIn is already profitable and has been seeing increases in earnings while YELP is going into the opposite direction, has slower growth.

Oh and did I mention that while Yelp competes with the likes of Google, LinkedIn faces little to no competition? I mean honestly, I’ve had a hard time going long LinkedIn (LNKD) because of the high valuation but when I compare it to Yelp, it looks like an amazing bargain.

Believe me, if things do say close to this, I will end up going long LinkedIn (LNKD) against Yelp (YELP)…

So please, if someone knows a YELP holder, please ask them to explain themselves here? What am I missing? Is there a more obvious short?

P.S: As if things were not bad enough, there continues to be a lot of questions about Yelp’s tactics which will eventually backfire…

I’m a huge fan of ETF’s, they provide an incredibly easy, cheap and diversified exposure to several asset classes that would be much more difficult to obtain. In fact, I personally think that ETF’s should increasingly be considered an essential part of almost any type of retirement portfolio, especially when it comes to fixed income investments but also many other types. It’s a no-brainer really. That being said, I don’t agree with one type of ETF that is quickly gaining popularity; Dividend ETF’s that buy companies according to a set of filters might be a good solution for some as discussed just a couple of weeks ago but I would argue that most dividend investors should stay away. Why?

#1-Save On Fees: Even though ETF’s are very cheap, especially compared with other types of investments such as mutual funds, they do still have a cost. If I take an ETF such as DVY, the Ishares Dow Jones Select Dividend ETF, that expense is 0.40%. That might not look like that much but over the years it does become significant. Take a look at a sample portfolio worth $50,000 that pays a 3% dividend. Let’s imagine that the standard dividend portfolio increases dividends by 3% per year (very reasonable) while the other increases them by 2.6% (as 0.40% goes to the fees from the fund). Take a look at the difference, it is significant over time in my opinion.:

#2-More Transparency-As nice as it is to have someone else do all of the work, the truth is that in most cases you will not know what the ETF that you own holds. That might not matter much for many of you but when events such as the financial crisis occur, you will regret not knowing what the ETF holds and how exposures you are.

#3-Less Flexibility: While building the Ultimate Sustainable Dividend Portfolio, I’ve been able to adjust it according to what I consider to be good diversification, focus on dividend growth to a certain degree, etc. Sure there are ETF’s that focus on specific dividend sectors such as dividend aristocrats or dividend growth, or high yield dividends, but even those will not provide you with the flexibility that you have when you are managing your own portfolio.

There Are Some Exceptions

Like anything else in life, there are exceptions to this rule as some people might be better off holding dividend ETF’s, especially:

-Those with fewer assets (less than 10K?): It’s difficult to have a diversified dividend portfolio (or any other type for that matter) with so little money. You can always start building and accept the reality of being less diversified in the first few months but if you’d prefer not, holding ETF’s while you grow your assets might make a lot of sense.

-Those with no time: No matter how efficient you become, managing a dividend portfolio does require time. If you hold between 5 and 20 companies, you will need to monitor them, make sure that they are still good holds, reinvest your dividends, etc. Like so many other things in life, it’s important to maintain it as much as possible.

-As Investors Grow Older: At some point, all of us will want to spend less time and energy on the markets. For some, that will happen shortly after retiring while others love it so much that they’ll keep going at it for a couple of decades after retiring. In all cases though, it’s probably a good idea at some point to start scaling back on the required decisions and that might be a good time to move to more passive investing.

Last weekend, I spent a decent amount of time discussing the upcoming Facebook IPO, which seems to be on everyone’s mind these days. Everyone has their own opinion about it, which is certainly a great thing. Many think that Facebook is the biggest sign of a bubble while others such as myself think it’s a great bargain . Obviously, the types of discussions that I have when discussing with some friends and co-workers that work in the financial industry are incredibly different from those I can have with friends or family that is farther away.

One discussion that I had regarding Facebook with a few people was regarding the stock’s price when it would IPO. More specifically, I had comments like this:

“Would you buy Facebook if the stock’s price is at $100? Or what price would you be willing to pay?

At first, I thought it might simply be a communications issue so I would answer something like:

“I don’t really care about the price, I do think that at a $100B valuation, it is still a good deal”

I would then get some confused looks and answers regarding how:

“Apple (AAPL) and Google (GOOG) actually deserved their high prices considering all of that success but that there were too many questions regarding Facebook.”

Clearly, I think that these prices cause some confusion so today I thought I would write about this. Let’s use a simple example with smaller numbers. Let me know if you think this all makes sense.

Imagine a company named Facebook that is looking to start sellings its shares. For this example, let’s imagine that it will sell all shares of the company, which it expects to be worth $1000.

Facebook currently makes:

-Annual revenues $38
-Annual profits: $17

Is the price of $1000 too high? Let’s forget about that question for now and simply focus on this. Facebook is hesitating between two structures:

Sell 10 shares
Sell 100 shares

If it decides to sell 10 shares, those will be sold for $100 and each share is basically accumulating $3.80 of revenues and $1.70 of profits.
If it decides to sell 100 shares, those will be sold for $10 and each share is basically accumulating $0.38 of revenues and $0.17 of profits.

As an investor, let’s imagine that I have decided to buy Facebook shares and have $100 to invest. Which do I prefer? Buying 10 shares at $10 each or buying 1 share for $100? It comes out to the same thing!! In both cases, I will be owner of 10% of the company and thus have “rights” to 10% of the profits.

So do I have any preference between a $100 or a $10 price? No, not at all.

Back to my example. When I say that I don’t care about the share price but about the valuation. What I mean is that:

-I do not care if I get 10 shares at $10 each or 1 share at $100 each
-I do however care very much if the company decides to sell its shares at a valuation of $2000. In that case, my $100 would buy me 5% of the company’s profits instead of 10%.

Is this example clear at all? Do you agree?

This is a guest post from BuildYourETFPortfolio.com, a website dedicated to helping investors manage their own retirement and other portfolios by buying and holding ETF’s….

Dividend investing is not only a great way to accumulate money but it’s also something that is fun to do, at least it is for me. I and many others that I know have started building a dividend portfolio and I personally feel like this could go on for a very long time. Why? Because even when I retire, I still expect to be more than capable of spending a few hours every month to look over my portfolio, reinvest any new amounts but also make any necessary changes to my existing positions.

I Won’t Go On Forever Though

As much as I’d like to pretend like I will be dividend investing, playing golf and running half-marathons for the next 50 years, chances are that it will not happen. Someday, I will unfortunately start to lose some mental and physical capability, I might even start to lose interest. Hopefully that won’t be the case but life can change so quickly that I think it’s much more prudent to be prepared.

Have An Alternative Plan

If tomorrow morning, you became unable or unwilling to manage your dividend portfolio, what would happen to it? If you picked some great stocks with an approach focused on dividend growth, chances are that you’d be fine and collecting nice dividends every month. After some time though, you might start having some “dogs” in your portfolio. Those would likely increase over time.

I personally think that building an ETF portfolio is a great alternative for when that time arrives. Why?

-An ETF portfolio is much easier to manage (could spend at most 1 hour per month)
-Fees remain very reasonable
-You remain in control of your finances
-Etc (for a full list of ETF portfolio benefits, visit BuildYourETFPortfolio)

The point is that you can easily build an ETF portfolio that will have great diversification with only 5-10 ETF’s. Those will likely have hundreds of different holdings which will give you solid diversification. We did build quite a few smaple ETF portfolios but once that you might be very interested in would be an “income focused ETF portfolio” that could include:

-Dividend focused ETF’s
-Fixed income ETF’s
-REIT ETF’s
-etf

Depending on where you live (Canada, US or elsewhere), the composition of your portfolio might change slightly but the main point is that you could simply try to stay as close as possible to your target weights by doing a handful of trades every year and would be achieving a return comparable to what you currently have with a dividend portfolio.

Downsides

Of course, I will not stand here and pretend that there are only benefits. If there were, what would be the point of even building a dividend portfolio? The two main ones in my opinion are:

-Costs: Even if ETF’s are much cheaper than other managed alternatives, they still set you back 0.40% or so every year, which compounds and does become significant over time. It’s an incredible bargain when compared with mutual funds for example but still adds up if you compare to a dividend portfolio that does not incur such fees (there are more trading costs though).

-Less Control: While there are many specialized ETF’s, nothing beats the power of buying exactly the stocks that you believe in, and avoiding those that you don’t. Obviously, that is not something you can do with ETF’s and often you might not even know what exactly the ETF holds. I would still argue that in the end, you will be able to find an ETF and/or combo of ETF’s that will make the portfolio representative of what you’re looking for.

Transition

I think one important part about moving from a dividend portfolio to an ETF portfolio is to ideally go through a transition period. You can subscribe to the BuildYourETFPortfolio mailing list to get a step-by-step series of emails that explains how to actually get it done. It’s easier to take time to get familiar with the asset classes, ETF’s, sample ETF portfolios, etc. To start off, I would simply start by reinvesting any income and new contributions into ETF’s and as time goes by and you feel more comfortable, you can transition over more of those assets over. Having a combination of ETF’s and dividend holdings can make a very strong long term portfolio so any investor can start off there.

In the End

I think it’s important for all dividend investors to stat considering adding ETF’s to their holdings sooner than later as they can both add a lot of benefits and become a much easier portfolio to manage, especially as we become older. What are your thoughts on this?

Do you hold any ETF’s?

Do you have any plans regarding the longer term direction of your dividend portfolio? I would love to hear from you.

A few weeks ago, I wrote about the fact that Facebook will be able to help in many ways online as it becomes a more “reliable” ID for each person. I’ve written quite often about how Facebook is the company that I would most like to buy right now if that was possible, even explaining in depth what I think of the $75-100B valuation. A reader asked me why I was writing this, that it could drive others to buy and make it more expensive. It’s flattering that someone thinks I have that much influence but I somehow doubt it. I also sometimes wonder if I’m wrong here, if I’m missing something that would make me back off. So far, nothing. Nothing to convince me that Facebook will not turn out to be the next Google.

Am I Setting Myself Up For A Big Disappointment?

As you all know, in the end, it’s all about valuation. It’s difficult for me to tell you exactly how much I think Facebook should be worth right now as that would take me an incredible amount of time and depends on so many different factors. That being said, I will probably do this exercise at some point. What I can tell you is that the current $100B valuation is a major bargain. However, there is certainly risk that it will come out at a much higher price with tons of hype and millions of small and big investors wanting to get a piece of their favorite social network. That scenario gives me nightmares…

Facebook Right Now

Facebook is bound to become the biggest internet IPO in history, by far. It is expected to raise $10B at a $100B valuation. To give you an idea, that is 6 times more than Google raised in 2004. What explains the valuation? Facebook has over 800 million users and by some reasonable estimates, it will reach 1 billion users by August 2012… By that measure, Facebook’s valuation would imply a value of about $100 per user. I don’t know about you but that does not seem outrageous to me. Far from it.

1 billion users! How many people on earth can actually connect to the internet? 3 billion maybe?

That being said, getting users is hard, getting them to log in every day is that much more difficult. Yet, over 500 million users log into Facebook every day. That is very impressive.

Facebook is expected to have generated a bit over 4 billion in revenues last year, mostly through advertising. How? Facebook is now getting 1 out of 6 display advertising dollars on the web as it moves past Google, Yahoo, Microsoft and others.

We’ve Barely Scratched The Surface

I think that Facebook will be able to keep up the growth in users although that will slow down obviously. What will accelerate though is growth in revenues. As time goes by, thousands of companies around the world are becoming more committed to Facebook, they are putting money into their Facebook pages, into getting users there, etc. At some point, Facebook will start to shift a bit of its focus to making more money and that is when growth will explode in my opinion. Facebook is doing the smart thing right now to focus on users and making a better product. Why?

Facebook Is Taking Control Of The Web

As times goes by, we have seen competitors such as Google become more nervous about Facebook. Why? Because users are spending an increasingly large amount of time in Facebook, doing all kinds of things that Google cannot help with, get involved in or even know about. A few years ago, Google was the dominant player around which the internet revolved. That has started to change as the internet is starting to revolve around Facebook instead. That is priceless!!!

So please Facebook, get this over with, go public at a $100B valuation, let everyone talk about the bubble and how the value is insane… I’ll be working my buy orders:)