20.Feb.2017 Passive Portfolio 2016

I haven’t updated in a while; the story gets a little boring after a while. But, as I was asked for advice a few times this year, I think it’s finally time to do another update.

Past editions: 2009, 2010, 2011, 20122013

The last few years have been a little slower: +11% in 2014, +9.6% in 2015 and +6.3% in 2016. The difference is largely due to bonds: 2014 was a boom year and 2016 was a slow year. For me personally, the performance over this period was not a big deal; I bought a house in 2014 and now have a real estate-heavy portfolio.

Performance

Here’s the performance of my portfolio over the past several years, using the latest 2016 country weights. The table below shows the annual returns of each component of the portfolio, giving the “sequence of returns” for each piece.

weight 2007-
2011
annual
average
2012 2013 2014 2015 2016
Equities
   U.S.A. VTI 33.6% -2% 16% 43% 23% 19% 9%
   Europe / Pacific VEA 21.1% -7% 18% 30% 3% 19% -1%
   Emerging VWO 5.3% 0% 19% 2% 9% 0% 9%
   Canada XIC 15.0% 1% 7% 12% 11% -8% 20%
Subtotal 75% -2.3% 15.2% 28.5% 12.4% 11.8% 8.1%
Fixed income
   Mixed bonds XBB/VAB 20% 6% 3% -2% 9% 4% 1%
Subtotal 20% 5.8% 3.0% -1.8% 8.6% 3.6% 1.2%
Cash 5% 0% 0% 0% 0% 0% 0%
Total 100% -0.3% 12.0% 21.1% 11.0% 9.6% 6.3%

Same assumptions as usual:

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

Cumulative returns:

  • From Jan. 2007 to Dec. 2016: 76.9% (5.9% annually over 10 years)
  • From Jan. 2008 to Dec. 2016: 75.0% (6.4% annually over 9 years)
  • From Jan. 2009 to Dec. 2016: 117.9% (10.2% annually over 8 years)
  • From Jan. 2012 to Dec. 2016: 75.4% (11.9% annually over 5 years)

It’s always good to look at the longer term. While the 5-year performance looks quite good at 11.9% growth per year, as soon as the time window includes a major negative event — like the 2008 crash — the 10-year performance shows a more modest 5.9% growth per year: a more realistic expectation for the long run. It’s also interesting to see the benefits of a mix of stocks and bonds: during the first five years, bonds outperformed stocks and delivered a +6% annual return (+30% over 5 years) while stocks lost value. It’s a little hard to remember now, when bonds have ben so underwhelming recently, but great to see a reminder why a mixed stocks/bonds portfolio is worth while.  (As it happens, I started investing in Jan. 2009, just after the crash, so I haven’t actually yet been through a period where bonds seriously paid off.)

Other Notes

  • Currency exchange: I’m earning income in US dollars this year, and no have a sudden interest in better ways to exchange money. I did my first few Norbert’s gambit recently, and was pleased by the results. I’ll be doing that going forward. For those not willing to make the jump, I did also learn that TD Waterhouse offers a significantly better exchange rate (~1%) when swapping US$25,000 in a single transaction; but that’s still a $250 charge while Norbert’s gambit is closer to $20.
  • I’m still curious to know better strategies for managing a portfolio that includes real estate. I feel vastly overexposed to interest rate risk, not to mention the vagaries of the real estate market these days, and it feels to me that bonds may be a bit redundant when holding real estate. Oddly, I haven’t found anything that treats real estate as part of a normal portfolio.

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