Why a Core and Explore Portfolio Makes Sense for Most Investors

The largest 5 stocks are driving most of the profit growth for the S&P5 (not a typo) this year. The remainder of the S&P500 is showing EPS declines on average with energy being the biggest drag. This should not be a surprise to investors.

Building a long-term portfolio that will be resilient in most markets is not just about dividends or yield, but needs to include multiple assets classes and increasingly alternative types of returns. We can look to what Canada Pension Plan Investment Board (CPPIB) is increasingly doing this for all Canadians as a guideline for what you should consider! For example, DIY dividend focused investors will tend to have a concentration in Canada (for CRA tax benefits), dividends, and speculative stocks (think SPACs, mining and marijuana to name just a few) and have much less in growth areas like technology and consumers. Canada has very little of either and a lot more speculative companies, which compounds the challenge for stable returns.

Structuring your portfolio to always capture a core market cap exposure while exploring for what you need to meet your longer-term needs/goals is something many investors should consider. This way, a significant portion of your portfolio will always track market returns. Core holdings include main indexes like the S&P 500, S&P TSX, MSCI EAFE (International developed markets x-US), MSCI Emerging Markets. There are a few ways to get this low-cost exposure with one ETF (ZEQT, VEQT, XEQT) in Canada.

If you are a taxable investor (non-registered) you might want to get that core exposure with Horizon’s total return ETFs. For yield-based investors, covered call strategies offer some tax efficiencies from foreign exposures too. By creating a core and explore portfolio that suits your personal needs, it won’t matter that dividend stocks globally are down this year as we see in CYH (iShares Global Monthly Dividend). You won’t need to care if only 5 stocks are doing all the lifting to markets and your portfolio is loaded up on dividend payers having a bad year. CPPIB builds their portfolio for all Canadians to be resilient and targets a 7% or more return in the long run with lower risk. Perhaps you should too!

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