The Couch Potato’s 10-Year Report Card

I’m regularly asked why I don’t provide performance data for my model portfolios. [Note: Long-term performance data are now available on the Model Portfolios page.] It’s a fair question, but unfortunately, compiling that information isn’t as straightforward as it sounds.

First, just one lonely ETF in my model portfolios has a 10-year track record: the iShares DEX Universe Bond Index Fund (XBB), and it had a completely different mandate when it was launched in November 2000. Many of the other ETFs were launched just five or six years ago, and a few are less than two years old. Short-term performance data is worthless for long-term investors.

Second, even if all the individual funds had a 10-year histories, computing returns for entire portfolios is more difficult —or at least more time-consuming — than many people realize. It means hunting down a lot of annual reports and entering the data into a spreadsheet that rebalances the portfolio every year. Even that would be fine for Canadian funds, but New York–listed ETFs report their returns in US dollars, so I would have to convert these into Canadian dollar terms — and for international funds, which hold stocks in several currencies, I don’t have access to those data.

Performance anxiety

Finally, I have to confess I was worried the results wouldn’t be impressive. Not because I harbour secret misgivings about the Couch Potato strategy, but simply because the last decade has been so difficult. Index investors accept what the markets deliver — no more, no less — and over the last decade the markets didn’t give us very much.

By unfortunate coincidence, the growth of the ETF and index fund industry has overlapped with a terrible period for equity markets around the world. The first wave of ETFs was launched just as the dot-com bubble was on the verge of bursting, ushering in a three-year bear market. The second wave began during the four-year bull run of the mid-2000s, only to be met with the worst market meltdown since the Depression.

But enough excuses. I figured it was time to collect the best data I could to see just how well index investors would have done over the last 10 years. So I tracked down the returns of the four TD e-Series funds that make up the original Global Couch Potato, created by MoneySense magazine. The e-Series funds have been around since 2000, so they now have a full decade of performance data.

Some explanatory notes before we get to the results:

  • The strategy calls for the portfolio to be annually rebalanced back to this target allocation. In the tables below, the portfolio starts with $10,000 on January 1, 2001, and is rebalanced annually on January 1 of each subsequent year.
  • The TD e-Series funds tracking US and international equity markets are available in different versions. The “currency neutral” versions hedge all foreign currency to Canadian dollars, while the unhedged versions are exposed to foreign currency risk. There are different opinions about which strategy is best: my Model Portfolios page includes the unhedged versions, while MoneySense has traditionally recommended the currency neutral funds. I have included the results for both.

Global Couch Potato 2001–10 (with currency hedging)

Canadian Canadian US Int’l Portfolio
bonds equities equities equities TOTAL value
2001 7.6% -12.3% -13.4% -18.7% -5.84% $9,416
2002 8.3% -12.3% -22.7% -26.7% -9.02% $8,567
2003 6.0% 26.6% 30.0% 21.7% 18.06% $10,114
2004 6.5% 14.0% 11.1% 11.1% 9.84% $11,109
2005 6.0% 23.3% 3.3% 27.8% 13.28% $12,584
2006 3.6% 16.9% 14.0% 16.6% 10.94% $13,961
2007 3.2% 9.6% 3.1% 3.4% 4.50% $14,589
2008 5.7% -32.9% -39.0% -42.2% -20.54% $11,593
2009 4.6% 34.6% 22.2% 19.5% 17.10% $13,575
2010 6.4% 17.2% 12.6% 4.0% 9.32% $14,840

The annualized 10-year return of the rebalanced portfolio was 4.03%.

Global Couch Potato 2001–10 (no currency hedging)

Canadian Canadian US Int’l Portfolio
bonds equities equities equities TOTAL value
2001 7.6% -12.3% -6.7% -16.7% -4.10% $9,590
2002 8.3% -12.3% -23.2% -17.0% -7.18% $8,901
2003 6.0% 26.6% 4.3% 13.4% 11.26% $9,904
2004 6.5% 14.0% 2.2% 10.9% 8.02% $10,698
2005 6.0% 23.3% 1.7% 10.2% 9.44% $11,708
2006 3.6% 16.9% 14.7% 25.5% 12.86% $13,214
2007 3.2% 9.6% -11.1% -6.0% -0.22% $13,184
2008 5.7% -32.9% -21.7% -27.9% -14.22% $11,310
2009 4.6% 34.6% 6.7% 9.5% 12.00% $12,667
2010 6.4% 17.2% 8.4% 1.7% 8.02% $13,683

The annualized 10-year return of the rebalanced portfolio was 3.19%.

In my next post I’ll analyze these numbers and consider how the Global Couch Potato stacked up against the alternatives. Any predictions?

24 Responses to The Couch Potato’s 10-Year Report Card

  1. Andrew Hallam April 18, 2011 at 7:32 am #

    Dan,

    Those are very impressive returns indeed, especially considering the time period.

    I’m going to guess that the global couch potato beat most Canadian balanced funds.

  2. Echo April 18, 2011 at 9:09 am #

    Don’t be shy Dan, those results are quite impressive considering “the lost decade” that everyone complains about. I’m not sure what alternatives you’ll be reviewing but I’ll guess that a dividend heavy portfolio faired pretty well this decade.

  3. Canadian Couch Potato April 18, 2011 at 9:17 am #

    @Echo: A Canadian dividend-oriented portfolio would have done very well over the last decade. However, a Canadian stock investor should measure his or her return against the S&P/TSX Composite Index, which returned 6.57% over the 10 years. To have beaten that benchmark on a risk-adjusted basis — that is, not by taking a huge gamble on a small number of stocks — would have been a tall order, especially in a taxable account.

    It’s also worth recalling the typical investor’s mindset in 2001. Today everyone loves Canada and dividends, but the exact opposite was true a decade ago. From 1991–2000, the S&P 500 returned almost 20% annually, while international stocks delivered almost 11% (both figures in Canadian dollars). Canadian stocks were dogs by comparison, having returned just over 9% during that period, and our dollar was worth an embarrassing US $0.65 cents.

    Back then, most people wanted growth stocks, and dividend investing was largely considered a stodgy strategy suitable for timid retirees. A Canadian dividend strategy would have been a tough sell in 2001. How things change.

  4. Ian Brennan April 18, 2011 at 11:27 am #

    I believe you are correct in saying the mindset and the expectations of investors today is completely different from a decade ago. Having said that, with the exception of a small trade on Brazil, my money has been on Canada’s commodity story since the technology bubble burst. I do not agree with your statement that beating the TSX would mean taking a huge gamble on a small number of stocks. The benefit of ETF’s is the diversification they offer at a low expense. I have shown on my blog (http://ianbrennan.blogspot.com/2011/01/timing-market.html) how simply holding the Ishares TSX 60 ETF (XIU) and limiting the downside to the 200-day moving average, would have yielded more than a double over that period of time. Not a huge gamble in my books.

  5. Canadian Couch Potato April 18, 2011 at 11:42 am #

    @Ian: Thanks for your comment. Market timing based on technical analysis is not new, and clearly it can be extremely profitable when you get it right. However, I have no confidence in anyone’s ability to succeed with this strategy consistently, especially after accounting for trading costs and taxes.

  6. Sean April 18, 2011 at 12:59 pm #

    It is striking that Canadian bonds did not have a single negative year despite all the turmoil. Also each year the returns were above inflation. You would end up with about $2,200 more (i.e $17, 500) cf the “balanced” portfolio. When countries are in debt, they have to pay up or else!

  7. Canadian Couch Potato April 18, 2011 at 1:21 pm #

    @Sean: The DEX Universe Index includes only investment-grade bonds, so the risk of defaults is extremely low. Therefore, a bond fund tracking this index will only lose value when interest rates rise significantly. We might see that happen this year. If so, it would be the first time since 1999, and only the third time since 1980.

    I appreciate the caution surrounding bonds in this environment, and no one should expect 8%+ bond returns like we have enjoyed since 1990. But they remain an important part of a well diversified portfolio. Keep them short if you must, but keep them.

  8. Scott April 22, 2011 at 2:14 pm #

    Just curious to know if these returns account for trading fees when rebalancing.

  9. Canadian Couch Potato April 22, 2011 at 2:22 pm #

    @Scott: The e-Series mutual funds incur no costs to buy and sell, unless you redeem them within 90 days.

  10. Trevor April 24, 2011 at 9:48 am #

    I’d be curious as to what the returns would be if you added in new money every year? Just doing some “back of the napkin” calculations, I think If you invested an additional 1k each year (annually) you could see your annual yield jump about 1%.

  11. Dale October 10, 2011 at 8:03 am #

    Crazy times. The Couch Potato had no real returns with Currency taken into consideration. It maybe kept pace with inflation.

    I don’t support this, but if one is after returns – simply holding the txs 60 (xiu) would have maybe doubled or tripled (or more) the couch potato returns. 118% total return according to Yahoo Finance chart, plus income of 3-4% per year. Maybe 150-160%% total return? Great returns over and above inflation.

  12. Dale October 10, 2011 at 8:05 am #

    I would add that if you re -invested that income, maybe even saved the money and waited for times when the market was tanking, you could have really juiced those returns.

  13. Dale October 10, 2011 at 8:39 am #

    And the reason for some juiced returns on xiu is that is holds well over 15% of the asset class known as gold (OK gold stocks). Also there is about 20% in energy and agriculture materials. There is some real nice protection against inflation.

    But in a deflationary and or recessionary/depression scenario one would get ‘crushed’.

    If you want to reduce volatility to the max and still get very nice returns. (and protect against inflation, deflation, economic growth and recession)_ you, of course, go Permanent Portfolio.

  14. Jarrett November 19, 2011 at 3:12 pm #

    Do the returns of the Global Couch Potato portfolio include dividends? If not, what do you think the results would be if they were included?

  15. Canadian Couch Potato November 19, 2011 at 3:43 pm #

    @Jarrett: Yes, all of the Couch Potato returns include dividends, interest and all other distributions. This is also true of all published mutual fund or ETF returns,.

  16. Jarrett November 19, 2011 at 7:05 pm #

    Those are good returns. I recently asked someone about what he guessed were the average annual returns for Berkshire Hathaway’s stock portfolio for the past ten years. Up until this point, all I could find online was the rise in stock price or the increase in book value of the company. He said that it was difficult to calculate the exact amount but according to his estimate, from December 31, 2001 to June 30, 2011, the average annual returns including dividends were 5.54%. Those numbers are a bit above the Global Couch Potato portfolio, but if we consider that the results for 2001 were ignored, which was a bad year for Buffett, than the results are only slightly above the Couch Potato. If we ignore the results for 2011 (increase in book value of 3.4%) and we consider that the decline in book value for Berkshire Hathaway was 6.2% in 2001 and that Buffett’s stock portfolio on average is 3.46% below book value, than the average annual return for Buffett from 2001 through 2010 according to my estimate is 4.4%. This could be a bit off and I’m relying on someone else’s work, but if true, than imitating Buffett’s moves on the stock market may not be beneficial when compared to an investment in the Global Couch Potato. This may have to do with Berkshire Hathaway’s large size and its inability to make significant investments in smaller companies. Here are the links to how he calculated the returns:

    http://seekingalpha.com/article/290216-tracking-10-years-of-berkshire-hathaway-s-investment-portfolio-part-1

    http://www.onefamilysblog.com/2011/11/berkshire-hathaway-us-stock-portfolio.html

  17. Amanda February 14, 2012 at 1:19 pm #

    Hey,

    I was just wondering if your return calculations included MERs? I recently started researching ETFs and Indexes so I’m trying to get a true sense of which are best for my situation. I checked out your TD e-series selection and liked the Canadian bonds and International equity. I have some concerns with the US equity and Canadian equity choices though. It seems like XIU and VTI appear to perform a lot better on an annualized equivalent return basis. MERs aside, XIU and VTI appear to have stronger growth. Have you evaluated stacking those two up against the E series to see which has better returns, and if the returns might outweigh some of the commission fees on smaller investments (say $20k)?

    Thanks!
    Amanda

  18. Canadian Couch Potato February 14, 2012 at 1:32 pm #

    @Amanda: Yes, all fund returns are net of MERs, so these are the returns you would have received if you held the fund for the full year. Be aware that XIU and VTI track different indexes from those tracked by the e-Series funds, so the comparison is not completely fair. ETFs should outperform the e-Series funds because of their lower fees, but for small amounts, the commissions will offset this difference:
    http://canadiancouchpotato.com/2010/06/25/should-you-use-index-funds-or-etfs/

  19. Wayne April 23, 2012 at 12:17 am #

    Hi,

    I just read “Millionaire Teacher” and then stumbled on this site. I am very interested about this plan and Hallam’s suggestions. I just have a question: I assume that when I start purchasing index funds I should do so in my tax free saving account? Once I hit the cap I would then transfer my investments to a non-registered account? I am very new to investing and would appreciate any help.

    Thanks,
    Wayne

  20. Canadian Couch Potato April 23, 2012 at 9:40 am #

    @Wayne: Thanks for your comment. Once you run out of contribution room in your TFSA you may want to save additional funds in a non-registered account. But I am not sure why you would want to transfer the original savings out of the TFSA. It can stay there and grow tax-free, and you will get an other $5,000 of contribution room next year.

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