Tag Archives: investing

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.

Strategies For Coping With A Volatile Market

It’s easy for stock investors to be lulled into a false sense of security when everything is going their way. The past year, however, has brought reality back to the table and is evidence of the fact that stocks don’t always grow unfettered into the sky. Whether the bump in the road that stock investors are experiencing proves transient or longer term in nature, it does serve as a reminder that various risks abound in the global economic marketplace, and that nothing should be taken for granted. Manage Expectations During a Volatile Market While many investors get into the market expecting to make huge sums of money over a relatively short period of time, history would indicate that that is an overly optimistic frame of mind. Backward looking market returns over the past century have collectively averaged in the upper-single-digits per annum. Investors taking a passive index approach who are expecting to double their money every five years, like they may have post financial crisis, may have found the 2015 market as somewhat of a rude awakening. Of course, if you have a portfolio loaded with FANG stocks (Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), and the like), you may have done exponentially better than average near term. Chasing returns, however, rarely ends well. In the late 90s, sell-side stock analysts creatively encouraged investors to buy into weak stories they felt held promise simply because of their relation to the Internet. Some abandoned “old economy” stocks and embraced every “dot com” or technology infrastructure enterprise they could get their hands on. There were survivors, but as we know, many succumbed to their flimsy business models. Further, stock prices became so out of whack in many cases that it has taken more than a decade for survivors to build back capital sacrificed during speculative times. Concentrated portfolios may provide more upside potential, but the counterpoint is that much can be lost and never regained if one becomes too speculative. Today, with the market trading on the high end of an expected valuation spectrum, even more conservative expectations may prove optimistic. Newer investors or those with short-term memories should refer to index performance during the so-called “Lost Decade” from 2000-2010 for evidence on how price can stagnate. Asset Allocation Given recent volatility, investors with overly aggressive equity allocations – either by merit of stock type or sheer amount – may be losing a bit of sleep or feeling a knee jerk reaction to sell. While that may be somewhat normal, it might mean that the portfolio is in need of some housecleaning. Decreasing allocation to equities and increasing it to fixed income, cash, or potentially some other hard asset may be just what the doctor ordered. More balanced allocations help smooth the volatility of a mostly equity portfolio and may help to decrease a knee-jerk reaction to sell assets potentially at the worst of times. While this may decrease your total return potential over the long term, it will promote less personal angst when the market decides to turn against your portfolio. Conventional wisdom says that investors should stick to a plan and ride out the rough times – no matter how severe. The problem is that conventional wisdom is not a guarantee. Each and every dime you expose to equities is a dime that you are putting up as risk capital. Though it may stand to reason that shares of Microsoft will be higher in one decade, Microsoft will not be guaranteeing that fact, nor will the party that you are buying shares from. While it probably isn’t realistic to assume that Microsoft will go out of business in 10 years – rendering its equity worthless, no investor should be willing to bet their life that profits will necessarily be leaps and bounds higher either. In times past, companies like Bethlehem Steel, Eastman Kodak (NYSE: KODK ), and other household names were considered “widows and orphans” stocks, the kinds of investments that were bulletproof, set it and forget it ideas. As we know times change, economic conditions fluctuate, and an organization that can’t compete effectively can end up in the bankruptcy bin. The investment space isn’t as foolproof as it once was. Market volatility is not always easy to get through. Arguably, the financial crisis was the scariest episode of economic history since the market crash of 1929 and the pursuant Great Depression. Though we were able to sidestep a potential catastrophe there, the sheer experience should serve as a reminder that stocks present an economic vulnerability beyond the individual investor’s control. Though the downside potential can be easy to forget amidst a bull run, it should not be forgotten or ignored. Understanding the realities behind fluctuating-value assets, maintaining reasonable expectations with that which you are investing in, and allocating assets in balanced fashion commensurate with life stage and risk tolerance are all free ways to get you sanely through volatility. With today’s economic uncertainties and rapidly moving markets, volatility should not be just anticipated, it should be expected. Original Post

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.