The main idea behind the One-Minute Portfolio is to simplify investing to the point where it takes just a "minute" each year to manage an investment portfolio that outperforms the majority of professional money managers.
What makes it possible is the low-cost, passive investing strategy of indexing a portfolio to movements in the stock and bond markets. This approach not only avoids tasks such as stock picking and market timing, but academic studies also find it produces better returns than most financial advisers and managers using active investment strategies.
Created in 2003, the portfolio consists of two exchange-traded funds (ETFs). The first is the iShares S&P/TSX 60 Index Fund (XIU), which follows stocks. The second is the iShares Canadian Bond Index Fund (XBB), which follows bonds. The annual expense is under 0.15 per cent. ETFs with even lower expenses have since emerged and can be used instead.
About the only real job is to annually rebalance the ETFs back to their target allocation, which for the basic model is 60 per cent for XIU and 40 per cent for XBB. So, if the stock market pushes XIU up to 70 per cent, it would be brought back to 60 per cent by adding new funds to XBB or selling units in XIU and redeploying the cash to XBB.
From 2003 to 2014, the average annual rate of return on the One-Minute Portfolio was 8.2 per cent (total-return basis). The bond component smoothed fluctuations and kept the portfolio from experiencing the sharp downturns that can cause investors to panic and throw in the towel.
It's possible this past performance may have been inflated by the commodity boom. As the latter may now be fading, returns may not be so good going forward. On the other hand, the plunge in the Canadian dollar should stimulate exports. And periods of rising international tensions, when nations tend to ratchet up military spending, are often associated with higher commodity prices.
In any event, historical data on stocks and bonds suggest returns should still be attractive over the long run. Canadian stocks have earned an average 7 to 9 per cent yearly over the long term (defined as 15 years or more); Canadian bonds yield several percentage points less. Thus, the One-Minute Portfolio should deliver about 5 to 7 per cent a year to long-term investors.
There is another version of the One-Minute Portfolio. Annual updates were published over the 2003 to 2014 period on moneysense.ca and canadianbusiness.com. For the full set, check out my website.
The asset allocation is adjusted according to stock-market conditions, as set out by legendary value investor Benjamin Graham in The Intelligent Investor. The rule goes as follows (in general terms): if the annual return on stocks is trending above the historical average, XIU's weight is reduced; if stocks are trending below, XIU's weight is raised.
Under this rebalancing rule, there was a progressive lowering of XIU's weight from 70 per cent to 40 per cent during the vigorous stock-market advance between 2003 and 2007. During the depressed period from 2008 to 2010, it was raised from 40 per cent to 70 per cent. Since 2011, the weight has been kept at 70 per cent due to the extended, but muted, stock-market recovery.
The average annual rate of return was 8.9 per cent over the twelve years to 2014, which is 0.7 percentage points better than the basic version. During the market crash of 2008, it was down only 9 per cent, versus 16 per cent for the basic version.
In 2014, the 12.2-per-cent gain in XIU left its average annual return (calculated over the past three years) above the upper boundary for the historical average. So XIU's weighting for 2015 has been reduced to 60 per cent and XBB's weight has been raised to 40 per cent.
The One-Minute Portfolio avoids foreign diversification. Canadian stocks earn a better long-run return than the global stock market (just fractionally lower than the top performer, the U.S. market) – so why take on the increased execution burden that comes with foreign diversification?