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Couch Potato Portfolio Returns For 2015

With 2015 now in the books, it’s time to look back on the year that was. It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January , and then again in July . That spelled another year for higher than expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar. All in all, a diversified portfolio did quite well in the ” year when nothing worked .” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details. The building blocks Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios : Now let’s put these blocks together and see how the model portfolios performed. At the beginning of 2015 , I expanded the TD e-Series and ETF models to include five different asset mixes, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks). Here are the returns for each version: TD e-Series funds Conservative Cautious Balanced Assertive Aggressive 30% equities 45% equities 60% equities 75% equities 90% equities 5.26% 6.36% 7.45% 8.55% 9.65% Vanguard ETFs Conservative Cautious Balanced Assertive Aggressive 30% equities 45% equities 60% equities 75% equities 90% equities 4.97% 5.72% 6.46% 7.21% 7.95% Why the differences? The first question that leaps out from these numbers is why the TD e-Series portfolios outperformed the ETFs across the board. After all, the e-Series funds carry management fees that are roughly 0.30% higher. There are two main reasons: Different Canadian equity indexes. Vanguard’s VCN and its TD e-Series counterpart both track the broad Canadian market, hold roughly the same number of stocks, and use a traditional cap-weighted strategy. However, their index benchmarks are different: Vanguard’s ETF tracks the FTSE Canada All Cap Index , while the e-Series fund tracks the S&P/TSX Capped Composite . The indexes have slightly different rules governing which companies are included and the weight assigned to each. As a result, from year to year, their relative performance will vary slightly and randomly. This year, the S&P index won out. Over the long term, these differences have tended to even out . The ETF portfolios include emerging markets. The ETF portfolios get their foreign equity exposure from Vanguard’s VXC , which holds roughly 10% in emerging markets. This asset class was essentially flat in 2015: returns were a little above or below 0%, depending which index you tracked. The TD International Index Fund includes only developed markets, which performed much better on the year. Again, this is simply a random result that worked in favour of the TD funds this year. Over the long term, adding emerging markets to a diversified portfolio should be expected to boost its expected return, though it may also increase volatility. Later this week, I’ll take a closer look at the 2015 performance of the Tangerine Investment Funds , the simplest of my model portfolio options.

The Bear Market Playbook

As many markets enter bear market territory around the globe, investors are inevitably getting skittish. Bear markets are a regular part of the financial markets, but that doesn’t make them easy to handle. Here are some keys to handling a bear market: 1. Don’t lose your perspective. In the last 45 years, a globally allocated 60/40 stock/bond portfolio has never had a negative rolling 5-year return. Of course, it’s not easy to maintain a 5-year time horizon, but if you have less than a 5-year time horizon, you probably shouldn’t be owning stocks and bonds in the first place. Resisting recency bias is the greatest struggle for most investors. And unfortunately, most people never overcome it…. I’ve witnessed this for decades with clients. The financial markets are a revolving door of investor after investor dying one funeral at a time, thanks to excessive short-termism. You don’t have to be irrationally long term, but focusing on the short term is just as irrational. Of course, if you don’t have a proper allocation in the first place, then you need to ensure that your risk profile is aligned with your asset allocation . 2. Turn off the news. Most of the financial media isn’t there to help you. They’re there to get your attention so they can earn a profit selling ad placements. Unfortunately, there is no emotion more powerful than fear. This is why financial TV ratings surge during bear markets. You tune in, get scared out of your wits, churn up a bunch of taxes and fees in your account, sell into panics, rinse wash repeat. I turned off financial TV almost a decade ago. It was one of the best financial decisions I ever made. 3. Stop looking at your account. Fidelity once found that investors who don’t log in to their accounts perform better than investors who log in regularly. The best thing most investors could do is lose their password to their account about once every five years. Logging in and incessantly focusing on your portfolio is just about the best way to ensure that you become a victim of recency bias. If you have a reasonable plan in place, you just need to let time do the heavy lifting for you. 4. Focus on something else. Get your mind off the short-term swings in the market. There is nothing you can do to control the markets. Excessive activity is the illusion of control during the course of creating inefficient portfolio frictions. Get your mind off your portfolio by focusing on hobbies or work. Sitting around worrying about your portfolio isn’t going to help you or your portfolio.

Asset Allocation: ‘Scenic Route’ For Fed Should Lend Support To Risk Assets

As we move into 2016, investors are anticipating a period of sustained interest rate increases by the Federal Reserve – not an aggressive climb as sometimes seen in the past, but a mild, steady stroll to modest heights. Meanwhile, Europe and Japan remain on level policy ground, as they look to quantitative easing to maintain recovery and avert further contraction, respectively. Potential turbulence in the form of slowing Chinese growth could make the journey a bit uncomfortable, given that country’s central role in global economic health. Putting all this together, the Neuberger Berman Asset Allocation Committee believes that still-friendly monetary conditions and gradual economic improvement should lend support to risk assets and underscore our preference for stocks over bonds in the coming year. Global Equities: Leaning into Europe We are positive on global equities, particularly in Europe, where stocks stand to benefit from continued quantitative easing and a weaker euro. While we had an overweight view on U.S. stocks just a few months ago in light of reasonable valuations and potential for earnings improvement in 2016, that positioning has moved to neutral given the sharp price recovery in October. However, we see opportunity in master limited partnerships, which, despite near-term concerns around energy prices and the sustainability of distributions, still appear to offer attractive valuations and yields. We are relatively cautious on Japan’s market. Although stocks are benefiting from the weak yen and reallocation of pension fund assets, the country faces slow or negative growth and is vulnerable to a slower Chinese economy. Elsewhere, we have a neutral view of emerging markets, where China volatility, commodity weakness and dollar strength are creating economic headwinds, while corporate profitability remains under pressure. In our view, selectivity from a country and company perspective remains paramount. Fixed Income: Appeal of Spreads We are underweight global fixed income for the coming year given our low return outlook for the large, developed-country sovereign bond markets in light of a trend toward higher rates in the U.S. and easy policy in Europe and Japan. In the U.S., we believe the Fed’s rate normalization will be a dovish process relative to past tightening cycles. A meaningful spike in long-term rates appears unlikely to us, but investors should be prepared for periods of heightened volatility. We maintain a preference for credit based on our outlook for modest economic growth and current attractive spread levels. In particular, we see appeal in high yield, where spreads remain at wide levels due to commodity-related weakness. In our view, credit quality among issues in the rest of the high yield universe remains quite good. Credit fundamentals in emerging markets debt remain relatively strong, in large part due to higher reserve levels and much-improved policymaking over the last two decades. Recent troubles, however, have exacerbated weak growth stemming from soft domestic demand in the major emerging markets. We are neutral on a one-year horizon, but are more constructive further out, as we believe the developed market recovery should lend support to emerging markets’ growth and credit fundamentals. Alternatives: Directional Hedge Funds Could Benefit from Volatility Within alternatives, we now have a slightly overweight stance on directional hedge funds, as increased volatility is creating more opportunities for astute traders and active managers to add value. Within this group, distressed managers have suffered in 2015 from exposure to Puerto Rico, Greece and the energy sector, but we believe there are ample opportunities over a 12-month time horizon. We have a modest overweight view on lower-volatility hedge funds and believe that they continue to play an important role in asset allocations, particularly in an environment of higher volatility and likely rising rates in the U.S. Our view on private equity continues to be neutral in light of its long cycle of growth and more elevated valuations. Elsewhere, we are neutral on commodities – an improvement from six months ago – believing that these markets have come under so much pressure that they are not likely to deteriorate much further. China growth concerns may lend support to precious metal prices, while the drought in many parts of the U.S. should help soft and agriculture commodities. We believe oil is likely to be range-bound, but we anticipate better supply/demand dynamics on the margin. For the broader commodity complex, the potential for higher interest rates and the resulting stress on certain commodity producers may lead to production cuts and more balance across markets. Uncertain Journey We believe elevated uncertainty is likely to accompany investors for much of 2016, whether around future monetary policy, geopolitical events, the price of oil or the extent of slowing growth in China. We will continue to monitor developments as we seek to provide guideposts for the current challenging environment. Market Views Based on 1-Year Outlook for Each Asset Class Regional Focus Fixed Income, Equities and Currency * The currency forecasts are not against the U.S. dollar, but stated against the other major currencies. As such, the forecasts should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency forecasts are shorter-term in nature, with a duration of 1-3 months. Regional equity and fixed income views reflect a 1-year outlook. The Committee members are polled on the asset classes listed above, and these discretionary views are representative of an Asset Allocation Committee consensus. As of fourth-quarter 2015. Views expressed herein are generally those of the Neuberger Berman Asset Allocation Committee and do not reflect the views of the firm as a whole. Neuberger Berman advisors and portfolio managers may make recommendations or take positions contrary to the views expressed. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. About the Asset Allocation Committee Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The committee covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience. 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Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Diversification does not guarantee profit or protect against loss in declining markets. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. All information as of the date indicated. Firm data, including employee and assets under management figures, reflect collective data for the various affiliated investment advisers that are subsidiaries of Neuberger Berman Group LLC (the “firm”). Firm history includes the history of all firm subsidiaries, including predecessor entities. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. 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