Created in early 2003 and updated annually in various publications including The Globe and Mail, the One-Minute Portfolio (OMP) is still delivering the goods with minimal work and volatility. As of the end of 2018, the OMP2 version had gained an average 7.4 per cent annually – turning $100,000 into more than $300,000 with just a “minute” of work in some years and a smooth ride all of the way (its biggest decline was 8.8 per cent, during the crash of 2008).
Two exchange-traded funds (ETFs) make up the OMP. One is the iShares S&P/TSX 60 Index Fund (ticker XIU), which tracks the stocks of 60 large Canadian companies. The other is the iShares Canadian Universe Bond Index Fund (XBB), which tracks investment-grade Canadian bonds. The portfolio’s total annual expense is less than 0.2 per cent.
Simple can be good. In his 2013 letter to Berkshire Hathaway investors, Warren Buffett proposed a similar portfolio. He wrote that after he dies, his wife’s inheritance is to be simply invested in two assets: a low-cost U.S. stock index fund and in U.S. bonds.
About the only work to do for the OMP is to rebalance at the start of some years. This is done by selling units of the ETF that has performed relatively well and buying units of the ETF that trailed – to bring their weights back to 60 per cent for XIU and 40 per cent for XBB, in the case of the OMP1 version.
For the more adventurous, there is the OMP2 version (performance shown in the accompanying chart). Its weights, currently at 60 per cent for XIU and 40 per cent for XBB, can be adjusted according to market conditions, a concept adapted from professor Benjamin Graham’s book The Intelligent Investor.
It goes like this: If stocks are overshooting their long-run tendency of approximately 7-per-cent annual returns, XIU’s weight is reduced, by at least 10 percentage points. This lowers exposure to the growing risk of a market downturn. Conversely, when stocks undershoot that 7-per-cent mark, XIU’s weight is raised by at least 10 percentage points.
In 2018, the OMP1 ended down 4.1 per cent. This was due, in part, to XIU finishing 7.7 per cent lower because of worries over trade wars, rising interest rates and other factors. Providing a partial offset was a 1.3-per-cent gain in XBB. The OMP2 finished down 4.1 per cent, too.
Since inception, the average annual return on OMP1 is 6.9 per cent; for OMP2, it’s 7.4 per cent. Thus, market-sensitive weights have so far provided an average annual return 0.5 of a percentage point better than OMP1.
OMP2 also generated a smoother ride. For example, as mentioned, it slid just 8.8 per cent during the stock-market crash of 2008 thanks to XIU’s weight being adjusted down in 2006 and 2007 to reach 40 per cent by January, 2008. The OMP1 tumbled 16.2 per cent in 2008.
Keeping OMP on track
Rebalancing keeps the portfolio on track. Since XIU fell so much in 2018, units of XBB should be sold and the proceeds moved into XIU in the case of the OMP1.
The OMP2 requires a decision on adjusting its weights, based on market conditions. Let’s take a look, then, to see where XIU is trending – using the average annual change in XIU over the past three years to smooth fluctuations and minimize false signals.
As of the end of 2018, this smoothed version of XIU showed a 6.7-per-cent annual return, just slightly under the 7-per-cent historical average on stocks. This is a rather weak signal to raise XIU’s weight, especially considering the bull market is in its 10th year. So, OMP2 will retain its current weighting pattern of 60 per cent for XIU and 40 per cent for XBB.
What about the balanced ETFs from Vanguard and iShares?
About a year ago, Vanguard Investments Canada Inc. and BlackRock Canada (iShares) launched several exchange-traded funds with balanced portfolios of stock and bonds. The new offerings are globally diversified and rebalanced automatically. They have annual fees that are equivalent or slightly higher than the OMP.
OMP investors have more say in setting the weighting scheme than they would with the Vanguard or BlackRock products. They can further adjust the OMP2 weights according to market conditions, to enhance returns and reduce volatility.
The OMP is also capable of providing higher returns than globally diversified counterparts. The Credit Suisse Global Investment Yearbook 2017 reports that real annual returns in Canada were 5.7 per cent for equities and 2.2 per cent for bonds from 1990 to 2016; for global portfolios, the numbers were 5.1 per cent for equities and 1.8 per cent for bonds.
In sum, the Vanguard and BlackRock products may be preferred by many couch-potato-type investors since the rebalancing is done for them. Investors may prefer the OMP if they like the flexibility to set their own ETF weights and the potential to earn higher returns with less volatility.
Larry MacDonald is an economist, author and investment writer. If you have questions, he can be reached at email@example.com.