Created at the beginning of 2003, the One-Minute Portfolio continues to generate annual returns above 8 per cent without a lot of effort or volatility in returns.
Annual updates for the past 15 years show that the One-Minute Portfolio has earned an average annual return (dividends, interest and capital gains) of 8.2 per cent after management fees. If $100,000 had been invested at inception, it would have grown to more than $325,000 by 2017.
The portfolio is composed of two exchange-traded funds: the iShares S&P/TSX 60 Index Fund (XIU-T) and iShares Canadian Bond Index Fund (XBB-T). The XIU tracks 60 established Canadian companies; the XBB tracks investment-grade Canadian bonds.
In 2017, the One-Minute Portfolio gained 6.7 per cent due to an advance of 9.6 per cent in XIU (currently weighted at 60 per cent in the portfolio) and 2.3 per cent in XBB (40 per cent). Give credit to the modest, but ongoing expansion in the global economy.
Once set up in an online brokerage account, about the only work that needs to be done is to rebalance, that is, to restore the weights for XIU and XBB to their target allocation at the start of each year. As the portfolio's name suggests, this takes about a "minute."
The target allocation may also be adjusted with respect to stock-market trends. This idea is adapted from Benjamin Graham's book, The Intelligent Investor.
The idea goes as follows: If stocks are on a tear and overshooting their long-run tendency of approximately 7-per-cent annual returns, the risk of a downturn rises – so XIU's weight is reduced to lower exposure to this risk. If stocks are undershooting, the weight is raised.
What was the impact of this rule? XIU's weight at the beginning was set at 70 per cent because its average annual return over the previous three years was far below the long-run average for stocks due to the 2002 bear market.
The ensuing bull market was vigorous and XIU's weight was adjusted down in stages, to 40 per cent by early 2008. A year later, in the midst of a severe bear market, the weight was hiked sharply to 60 per cent, then to 70 per cent in 2010.
The bull market that followed was muted and it wasn't until early 2015 that the weight was lowered to 60 per cent. It has stayed at that level up to 2017.
For 2018, the weight for XIU remains at 60 per cent. This is because the average annual return for XIU over the three prior years is still below the historical norm.
What's the impact of market-sensitive weights? Over the past 15 years, there is an additional gain of 0.4 per cent a year compared to the One-Minute Portfolio calculated with a constant asset allocation of 60 per cent for XIU and 40 per cent for XBB.
Also, market fluctuations were smoothed better: The portfolio with variable weights fell just 9 per cent in 2008 during the stock-market crash, versus a 16-per-cent drop for the portfolio using constant weights.
The best time to start a One-Minute Portfolio is during, or just after, a bear market – as was the case for 2003. If the portfolio is recalculated from base years after 2003, the average annual return in 2017 ranges from 5.2 per cent to 9.9 per cent. The average of these returns is nearly 7 per cent, still respectable for a balanced portfolio.
The One-Minute Portfolio is earning decent returns by passively tracking the market and minimizing annual and transaction fees. Lack of complexity also means fewer of the execution errors that can torpedo returns.
Larry MacDonald is a financial writer and author. Questions about the One-Minute Portfolio can be directed to email@example.com.