The Canadian stock market’s strong start to 2019 is a reminder that it’s never a good idea to blow up a portfolio after a particularly good or bad year.
The S&P/TSX Composite Index surged 8.7 per cent on a total return basis in January. Last year’s loss for the index came at 8.8 per cent. The index actually needs to rise 9.7 per cent to offset the 2018 setback – that’s how the math of losing money works. Still, in the span of a month, we’ve mostly backfilled the hole from last year.
So, what has all this drama meant for long-term investors? A fair bit, actually. We’ll use Canada’s oldest and largest exchange-traded fund as a guide. The $9.7-billion iShares S&P/TSX 60 Index ETF has been around in its current form since Sept. 28, 1999. It tracks the S&P/TSX 60 index of big blue-chip stocks in all major market sectors. Owning XIU since its inception is kind of like owning the Canadian stock market for two decades. How would you have done?
XIU’s annualized return since inception of the account was 6.4 per cent if you use Dec. 31 as a year end, and its annualized 10-year and five-year returns were 7.7 and 4.8 per cent, respectively. If we advance the end period for measuring returns by one month to Jan. 31, we get somewhat better numbers. The return since inception was 6.8 per cent, while the 10-year return was 8.9 per cent and the five-year return was 6.4 per cent.
As noted in a recent column, many investors are disappointed about their 2018 returns and wondering if changes need to be made. The one-month turnaround in the Canadian market shows how risky it is to base portfolio decisions on a particularly bad, or good, year.
The ultimate guide for judging a portfolio is your return since inception , and how that result compares with the appropriate set of benchmarks. Your investment firm, whether you have an adviser or are self-directed, should be able to provide returns since inception. Benchmark comparisons are rarer, but more firms are starting to offer them. If your firm doesn’t, ask for it.