24.Jan.2013 Passive portfolio 2012

I have little new to add about my investment portfolio; mostly, this is just an update on the fine, fine results of the past year – a +12% year!

Past editions: 2009, 2010, 2011

I’ve made only a few tweaks to my portfolio targets this year:

  • Switched to a 75/20/5 portfolio split on equities/bonds/cash, from 80/15/5.  I’ve been meaning to do this for a while, but wanted to wait for a good stocks year before doing it.
  • Dropped XRB (real return bonds) from the target portfolio. I’ve been a little baffled by the ETF’s good performance for the past several years; it didn’t make sense to me, and while I’d added XRB to my target portfolio, I hadn’t actually gone through and purchased yet. I finally figured out the reason: XRB holds mostly long duration bonds, with an average duration of 20.4 years. It’s the inflation-protected equivalent of XLB (long bonds, avg. 22.6 years), not the twin of XBB (mixed bonds, avg 9.7 years). That explains the good recent performance – long bond prices have been on a tear as interest rates plummeted and settled at zero. But their future performance doesn’t look good at all; it’s a terrible time to enter an XLB or XRB position. If there was a Canadian real return bond ETF with a shorter duration, I’d consider it, but there isn’t.
  • Adjusted target weights due to Vanguard changes regarding South Korea (a.k.a. jokingly as “Samsung”). Vanguard is in the process of migrating its funds to a different set of target indices, and the new indices classify South Korea as a “developed” economy rather than an “emerging” economy. My target weights for VEA and VWO have to change as a result.
  • Adjusted target weights for shifting national market cap shifts. This raises the US market exposure in particular. I use Vanguard data on the components of their VT fund to decide the appropriate weights for VTI/VEA/VWO; I’m essentially trying to manually match the contents of VT excluding Canada.

Here’s a table comparing last year’s portfolio target with my current target:

Weight
(last year)
Weight
(now)
Equities
   U.S.A. VTI 28.7% 28.7%
   Europe / Pacific VEA 26.4% 24.2%
   Emerging VWO 8.9% 7.1%
   Canada XIC 16.0% 15.0%
Subtotal 80% 75%
Fixed income
   Broad bonds VAB/XBB 11.3% 20.0%
   Real return bonds XRB  3.8%
Subtotal 15% 20%
Cash 5% 5%

Performance

Let’s close with a quick review of the performance of this portfolio over the past several years. The table below shows the annual returns of each component of the portfolio, giving the “sequence of returns” for each piece.

2007 2008 2009 2010 2011 2012
Equities
   U.S.A. VTI -9% -23% 11% 11% 6% 16%
   Europe / Pacific VEA -6% -27% 10% 3% -8% 18%
   Emerging VWO 17% -42% 52% 13% -15% 19%
   Canada XIC 9% -33% 34% 17% -9% 7%
Subtotal -2.2% -27.8% 18.9% 9.9% -3.3% 15.2%
Fixed income
   Mixed bonds XBB/VAB  3% 6% 5% 6% 9% 3%
Subtotal 3.0% 6.1% 5.1% 6.0% 9.1% 3.0%
Cash 0% 0% 0% 0% 0% 0%
Total -1.1% -19.7% 15.2% 8.6% -0.7% 12.0%

Same assumptions as usual:

  • Expressed in Canadian dollar terms (i.e., including all currency shift effects and using no currency hedging)
  • Rebalanced annually

Cumulative returns:

  • From Jan. 2007 to Dec. 2012: 10.7%
  • From Jan. 2008 to Dec. 2012: 11.9%
  • From Jan. 2009 to Dec. 2012: 39.3%
  • From Jan. 2010 to Dec. 2012: 20.9%
  • From Jan. 2011 to Dec. 2012: 11.3%

I started investing in late 2008, so I usually look at the Jan. 2009 – Dec 2012 return – but it’s always good to remember that this gives a very rosy view compared to other starting dates.

Closing Thoughts

Despite all of the European fear and the “fiscal cliff” in the US at year end, it’s been a very good year. This year finally demonstrated the value in a globally balanced portfolio, as Canada’s markets stagnated. And the portfolio’s already up another 3% since Jan. 1st…

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