The One-Minute Portfolio consists of two exchange-traded funds: the iShares S&P/TSX 60 Index Fund and the iShares Canadian Bond Index Fund.Getty Images/iStockphoto
This is the 13th-annual update for One-Minute Portfolio. Based on the low-cost, passive-investing approach, the portfolio simplifies investing to the point where it takes a "minute" each year to run. How has it performed, and what needs to be done at this time to keep it on track?
The One-Minute Portfolio consists of two exchange-traded funds (ETFs): the iShares S&P/TSX 60 Index Fund (XIU) and the iShares Canadian Bond Index Fund (XBB). The basic version assigns an asset allocation of 60 per cent to XIU and 40 per cent to XBB. Once set up through an online broker, the only work to be done is to rebalance back to these weights around this time of year.
From early 2003 to the end of 2015, the average annual return (capital gains plus dividends) for the basic One-Minute Portfolio was 7.4 per cent. This was a decline from an 8.3-per-cent average annual return for the period from 2003 to 2014. The slippage was due to a 3.5-per-cent drop in the portfolio during 2015, which resulted from a decrease in XIU (due to the waning commodity boom), moderated by an increase in XBB (deflationary conditions supported bond prices).
The performance of the basic portfolio is still somewhat above the 5-per-cent to 7-per-cent returns expected for balanced stock-bond portfolios, based on the historical record. This excess is likely a reflection of the commodity boom of the past dozen years and extended appreciation in bond prices attributable to disinflationary tendencies since 2003.
It's possible that reversion to the historical mean may continue in 2016. Then again, it may not. Short-term fluctuations are hard to predict.
Even if reversion does occur, an average gain of 5 per cent to 7 per cent a year is still acceptable. Schemes to outperform the markets often fail over the long run. Indeed, they tend to underperform due to higher costs plus execution errors caused by complexity and emotions getting the better of investors.
There is another version of the One-Minute Portfolio: It adjusts the asset allocation annually according to market conditions, as set out by Benjamin Graham in The Intelligent Investor.
The general rule goes as follows: If the (smoothed) annual return on stocks is above its historical average, XIU's weight is reduced; if it is below, XIU's weight is raised.
XIU's weight was lowered from 70 per cent to 40 per cent during the vigorous stock-market advance between 2003 and 2007. After the crash of 2008, the weight was hiked to 70 per cent, where it stayed until 2014 – due to an anemic recovery. A reduction to 60 per cent was put in place for 2015 because stocks were pulling ahead of their long-term average. For 2016, XIU will stay at 60 per cent; stocks didn't fall enough in 2015 to trigger an increase in the percentage.
The average annual rate of return on this non-basic version of the portfolio was 8 per cent from 2003 to 2015. Up to 2014, the long-term average had been 8.9 per cent. The slippage can be explained by the factors mentioned in connection with the basic portfolio.
The non-basic version requires a bit more work than the basic version. However, it is earning an extra 0.6 per cent a year while smoothing market fluctuations better. Of note, it was down only 9 per cent during the market troubles of 2008, versus 16 per cent for the basic version.
The One-Minute Portfolio eschews foreign diversification. Canadian stocks and bonds earn a better long-run return than world markets, according to the Credit Suisse Global Investment Yearbook. So it did not seem necessary to take on the increased execution burden that comes with foreign diversification (e.g., Norbert's gambit to avoid the high cost of currency conversions).
At times, this will require putting up with periods of underperformance relative to global markets. But over the long term, these periods should be offset by periods of overperformance and provide superior returns to global markets.
Note that newer ETFs equivalent to XIU and XBB offer even lower fees and may be better to use. XIU and XBB have been retained in the One-Minute Portfolio to maintain continuity in comparisons with earlier periods.
Past updates for the portfolio were published on moneysense.ca and canadianbusiness.com. As the older updates on these sites may no longer be available, an archive is maintained. It offers additional detail on matters discussed here.
Larry MacDonald is an economist, author and financial writer.