Stock markets were a little bit like the Indy 500 last year. In the world's most famous auto race, a long day of racing with speeds topping 360 km/h left the finishers exactly where they started. The S&P 500 ended 2011 a mere 0.4 points lower than it began, but investors went on a fast ride in between.
Other asset classes didn't fare so well: global developed market equities (MSCI EAFE) lost more than 10 per cent; emerging market equities (MSCI EM) were down even more at -16.58 per cent (both adjusted to Canadian dollars). And as usual, we had some winners too: the DEX Real Return Bond Index was up 18.35 per cent.
As investors look back on their overall portfolios for 2011 and longer, it might come as a bit of a surprise that the tried and true advice of putting together a simple, diversified portfolio worked fairly well. Unfortunately, we know that many investors question sticking to a plan, and usually they do so at precisely the wrong times exacerbating the negative effects.
The CanadianCapitalist.com blogger Ram Balakrishnan recently put out his Sleepy Portfolio Report Card. This is a moderately aggressive portfolio with a 75 per cent allocation to equities and 25 per cent to fixed income (each with multiple sub asset classes) yet it was down a paltry 1.16 per cent for the calendar year after expenses.
Mr. Balakrishnan has been providing regular updates on this portfolio since 2005. An initial investment of $100,000 has since grown to $131.198.60, an annualized return of 3.96 per cent. While a 100 per cent allocation to the TSX would, in theory, have provided a larger gain over the same period, the ride was much wilder.
|
Year |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
|
Sleepy Portfolio |
+12.9% |
+14.7% |
+0.2% |
-19.9% |
+16.8% |
+9.56% |
-1.16% |
|
TSX Composite |
+24.1% |
+17.3% |
+9.8% |
-33.0% |
+35.1% |
+17.6% |
-8.89% |
Note that the above table is comparing a 75 per cent equity, 25 per cent fixed income portfolio with fees against a 100 per cent equity index without fees.
With $100,000 invested in portfolios that had these sequence of returns would have had a calendar year loss in 2008 of $25,812 for the Sleepy Portfolio but a much greater loss of roughly $52,746 in the TSX tracking portfolio. Losing 25 per cent of your initial investment in 12 months is no walk in the park, but losing more than 50 per cent is downright nerve racking. The point is that by diversifying across asset classes, tempering volatility with fixed income, and rebalancing with discipline you are more likely to come up with a portfolio that you can stick with in bad times.
And that's the take home message. Constantly changing your strategy is rarely a winning formula in the long run.
Every time the markets hit a nasty spell some people keep saying "this time it's different." Paradoxically, it seems that will only be true when everyone stops saying "this time it's different." The higher potential reward for equities comes from holding them through the bad times and taking part in their recovery.
Preet Banerjee, BSc, FMA, DMS, FCSI is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com . You can also follow him on twitter at @PreetBanerjee
Preet Banerjee