Launched in 2003, the One-Minute Portfolio (OMP) was set up to illustrate a simple, low-cost approach to investing that had some departures from conventional diversification and rebalancing practices. What follows is a primer on this strategy and annual performance update.
OMP is made up of just two exchange-traded funds: iShares S&P/TSX 60 Index ETF (XIU) and iShares Core Canadian Universe Bond Index ETF (XBB). With the purchase of these two index ETFs, OMP delivers, “in one minute,” a diversified portfolio of high-quality stocks and bonds. Another plus: The annual management fee is less than 0.16 per cent.
Other index ETFs have since come on stream. For example, if XIU is replaced by the iShares Core S&P/TSX Capped Composite Index ETF (XIC), the annual management expense for OMP is less than 0.07 per cent. Vanguard’s FTSE Canada Index ETF for stocks (VCE) and the Canadian Aggregate Bond Index ETF (VAB) would bring the cost to less than 0.06 per cent.
One fan of simple, low-cost investing is Warren Buffett. He wrote in his 2013 letter to Berkshire Hathaway shareholders that his wife’s inheritance is to be invested in just two assets: a low-cost U.S. stock index fund and U.S. bonds.
In 2020, the stock market plunged in March because of COVID-19, but government stimulus afterward helped OMP recover to notch a total return of 7.3 per cent, as of mid-December. Since inception, the portfolio’s average annual return is 7.8 per cent. Not bad for the work involved.
Long-run returns will vary depending on the base year. But even if OMP had been started in 2007 at the top of the market before the big crash of 2008, it still delivered a respectable average annual return of 5.5 per cent, as of mid-December.
Canadian stocks and bonds have delivered better results than the world average over the past 115 years, according to the Credit Suisse Global Investment Returns Yearbook. Why then take on the extra burden, cost and volatility of currency conversions and other aspects of foreign diversification?
OMP allows ETF weights to be adjusted according to market conditions, a concept adapted from Benjamin Graham’s book The Intelligent Investor.
As applied to OMP, the basic idea is to reduce the relative weight of XIU if the stock market is trending above its historical annual return of 7 per cent to 9 per cent. And vice versa, if the trend is below. More details can be found in past updates (tgam.ca/OMP-update).
By way of illustration, consider the period from 2004 to 2007, when the stock market was quite bullish. The weight for XIU was reduced in stages, from 70 per cent to 40 per cent. In 2008, the stock market crashed, so the move to 40 per cent (60 per cent for XBB) helped keep OMP from triggering any middle-of-the-night awakenings.
In 2020, XIU’s performance was more or less in line with historical returns for the stock market. So, the current target allocation of 60 per cent for XIU and 40 per cent for XBB is retained.
Thanks to the bonds and market-sensitive asset allocation, OMP has so far travelled a smooth path, avoiding the deep plunges that can cause investors to panic, lose sleep and even dump their holdings at the bottom. OMP’s worst drawdown was a decline of 8.8 per cent in 2008, the year the stock market lost more than a third of its value.
Role of bonds
Bond yields are very low these days. If interest rates rise and push down bond prices, XBB may have more negative returns. Nonetheless, the negative returns should be of a small order, given the low volatility of bonds. And since rising rates usually occur when there is higher economic growth (and higher earnings for companies), XIU should be able to more than offset the losses.
On these grounds, bonds are retained. They have an important role to play in smoothing portfolio returns to help investors stay invested.
What about alternative offerings?
All-in-one ETFs and robo-advisers have emerged in recent years to provide balanced portfolios in one ETF or purchase. They do the rebalancing automatically, easing the execution burden. Many investors will prefer this.
However, OMP could still retain some appeal for those investors who prefer the flexibility of managing their own rebalancing. Annual management costs will also be lower since all-in-one ETFs and robo-advisers have somewhat higher fees, owing to the inclusion of extra services such as wrapping several ETFs into one ETF.
Index mutual funds have been around for quite a while. When it comes to minimizing workload, they can’t be beat. They automate not just rebalancing but also adding contributions and reinvesting of dividends at no charge.
Many investors will prefer this convenience. Those concerned about costs perhaps less so. Take one of the cheaper providers, Tangerine Investment Funds. It charges 1.07 per cent annually. This fee will eat up more than 22 per cent of a portfolio over 25 years, according to Michael Wiener, a retired cryptographer and blogger at Michael James on Money.
Moreover, ETF portfolios in online accounts can incorporate much of the same workload minimization by enrolling in the dividend reinvesting and automatic deposit options offered by brokers. Also, a number of brokers don’t change commissions on some ETF transactions.
When using the OMP, some aspects may need to be adapted to personal needs. For example, many investors might prefer different asset allocations: Indeed, seasoned investors seeking higher returns could decide on a 100-per-cent weighting for the equity ETF because they are certain they can stay invested during a market crash. Other investors may decide to rebalance only when portfolio weights have drifted significantly away from target weights. Yet others will be making regular contributions to the portfolio and rebalancing at the same time. And so on.
In short, OMP is not a step-by-step blueprint to follow religiously. Consider it more of a guide from which to take and develop ideas for your own portfolio.
Larry MacDonald can be reached at email@example.com