Blogs & Comment

One-Minute Portfolio update

Since it was created in 2003, the One-Minute Portfolio has seen an average annual gain of 10%.

It’s time for the annual update to the One-Minute Portfolio, the ninth since it was launched in 2003. In 2011, there was a decline of -3.5% in the portfolio on a total return basis (as of Dec. 23). Since inception, the average annual gain has been more than 10%.

The One-Minute Portfolio is composed of two exchange-traded funds (ETFs). One is the iShares S&P/TSX 60 Index Fund (XIU), which tracks large-cap Canadian stocks and currently has a 70% allocation in the model portfolio. The other is the iShares Canadian Bond Index Fund (XBB), which tracks investment-grade Canadian bonds and currently has a 30% allocation.

The smoothing of returns by the bond component was particularly noticeable in 2011. A record gain of 9% in the XBB greatly moderated a -9.1% slide in the XIU.

The One-Minute Portfolio may be described as a member of the family of Lazy Portfolios—with a twist. Rebalancing of the asset allocation takes into account the average annual return on equities over previous years. If this average is below the long-term annual return on stocks (7% to 9%), the weight for XIU is raised at year end, roughly in line with underperformance. If the average annual return on equities exceeds the historical average, the weight for XIU is decreased at year end.

For example, after stocks plunged in 2008, the 40% weight then assigned to XIU in the model portfolio was boosted at year-end to 60%. At the end of 2009, it was moved up to 70%, where it has stayed throughout 2010 and 2011.

For 2012, the same allocation is to be used. The four-year average of stock-market returns (smooths out more the extreme fluctuations of recent years) is somewhat below the historical average for stocks. But the current allocation of 70% to XIU is already on the high side for this level of underperformance, so it is retained. If there had been more of a washout in 2011, the weighting may have been raised to 80%.

In some respects, the portfolio is similar to a balanced Canadian equity mutual fund. Where it differs is in having lower costs and the ability to change the stock-bond allocation according to a rebalancing rule chosen by the investor. For investors using dollar-cost averaging, the TD e-Series of index funds can be used instead of the ETFs.

Consideration has been given in the past to diversifying the One-Minute Portfolio into foreign markets. However, Canadian stocks and bonds have historically enjoyed returns similar to U.S. and global markets over the long run. So this this layer of complexity is not adopted, particularly considering low maintenance a priority for the One-Minute Portfolio. 

There is a lot to worry about in 2012. To mention a few concerns, the European Union is perilously close to breaking up and China is showing signs of slowing down. Canadian stocks could be in for another rough year. But the One-Minute Portfolio requires following a rebalancing rule. It remains focused on the long run, and if history is any guide, should fare reasonably well over such a time frame.