Couch Potato Portfolio 2011 Returns

The 2011 performance results are now in for my model Couch Potato portfolios. Many thanks to Justin Bender at PWL Capital in Toronto for providing these data. Complete performance results are available here, and an updated PDF is posted monthly on my Model Portfolios page.

It was a challenging year: the MSCI World Index, which measures the equity markets in all developed countries, was down 3.2% in 2011, and emerging markets plummeted over 16%. But broad diversification once again proved its mettle in 2011, as a multi-asset-class portfolio did much better:

The Global Couch Potato (ETF version) 0.54%
The Complete Couch Potato 2.36%
The Yield-Hungry Couch Potato 5.11%
The Cheapskate’s Couch Potato -2.24%
The Über-Tuber -2.07%

Breaking it down

While equities were down overall, there was a lot of variation. Europe, Japan and emerging markets got clobbered, and Canada was down about 9%. However, US stocks finished in the black for the year. Currency diversification helped too, as the loonie declined against the US dollar, Japanese yen, and British pound.

iShares S&P/TSX Capped Composite XIC -8.93%
Vanguard Total Stock Market VTI 3.22%
Vanguard MSCI EAFE VEA -10.69%
Vanguard MSCI Emerging Markets VWO -16.93%

Real estate went a long way toward offsetting the negative returns in the overall Canadian equity market:

BMO Equal Weight REITs ZRE 13.85%
iShares S&P/TSX Capped REIT XRE 20.95%

Fixed income once again defied all expectations and delivered outstanding returns, even at the short end:

iShares DEX Universe Bond XBB 9.38%
iShares DEX Real Return Bond XRB 17.87%
Claymore 1-5 Year Government Bond CLF 5.37%
Claymore 1-5 Year Corporate Bond CBO 4.65%

A portfolio for all seasons

There are a couple of lessons we can take from 2011. The first is that a truly diversified portfolio must include asset classes that have little correlation (or even some negative correlation) with stocks. Real estate helps (so does gold, if you’re so inclined), but the best way to get that diversification is through high-quality bonds. They should be part of just about everyone’s portfolio.

The second lesson is that once again most forecasts proved to be dead wrong. Here’s just one example from a major Canadian bank that predicted: “Equity markets should have another good year,” while “we expect 2011 will be increasingly challenging for bondholders in the developed world.”

Of course, the crystal ball gazing is well under way for 2012. My only prediction for the year is that these forecasts will prove just as unreliable as always. Tune them out, build a porfolio for the long-term, and stick to your plan.

38 Responses to Couch Potato Portfolio 2011 Returns

  1. Michel January 10, 2012 at 7:23 am #

    Thanks Dan. It was a difficult year for most investors. I maintain two portfolios, one Couch Potato and a portfolio of very long term good dividend paying stocks (40 stocks and REITS in different sectors) in which I reinvest dividends as they come in. The latter as done much better at 7%. I don’t consider choosing stocks like BCE, EMERA, TRP,ENB, Fortis, a few banks, etc, risky stock picking. My questions are, am I a passive investor? Would you move everything to the Couch Potato portfolios? What do other readers think, also.?

  2. Canadian Couch Potato January 10, 2012 at 8:20 am #

    @Michel: Thanks for the comment. Technically, a portfolio of hand-picked stocks is not passive, but it’s certainly worth making a distinction between long-term disciplined investing (like you’re doing) and active trading. I don’t think it makes much sense for me to discourage people from this type of activity, especially if they find it easier to stay the course with this strategy than they would with an all-passive Couch Potato approach.

    The only comment I would make is that it does make sense for Canadians to diversify outside our own country. We tend to think that energy and Canadian banks will outperform forever, and that can’t be true. Even a simple S&P 500 index fund provides excellent diversification for Canadians.

  3. gil January 10, 2012 at 11:02 am #

    As a comparision to the iShares Portfolios for 2011:

    The Global Couch Potato (ETF version) 0.54%
    The Complete Couch Potato 2.36%
    The Yield-Hungry Couch Potato 5.11%
    The Cheapskate’s Couch Potato -2.24%
    The Über-Tuber -2.07%

    XGC +0.58%
    XCR +2.86%

    XTR +5.88%

    XGR +1.52%

    XAL +2.17%

    Source: Globe & Mail fundlist.

  4. Wes January 10, 2012 at 12:53 pm #

    17% on iShares DEX Real Return Bond?

    Honest question: How does that happen when the majority of the coupons are ~4%?

  5. Canadian Couch Potato January 10, 2012 at 12:56 pm #

    @Wes: Great question. It happens when interest rates fall and the market value of the bonds rise as a result. That’s why the coupon rate is not a reliable indicator of a bond ETF’s expected return.

  6. Dan Hallett January 10, 2012 at 8:07 pm #

    @Wes – As DanB mentioned, XRB (iShares Real Return Bond) did very well thanks to falling rates. But the larger resulting gain was due to the long-term nature of the bonds in XRB. All real return bonds in Canada remain longer-dated bonds. As a result, they will respond sharply to changes in REAL RATES. But when fears of deflation surface (as they did in late 2008) or if real yields rise, watch out. RRBs have seen temporary losses in the past in the -15% to -20% range.

  7. Jon Evan January 10, 2012 at 10:02 pm #

    I’ve not understood the value of XRB in a portfolio as opposed to XBB only. I’m trying to keep things simple. I understand the former asset’s inflationary protective upside but aren’t equities there for that purpose to bring that value to the portfolio? Can you have falling equities with rising inflation? Aren’t straight bonds negatively correlated to equities (but perhaps not perfectly)?

  8. Chris Laffri January 10, 2012 at 10:44 pm #

    Wondering… 5 year GICs achieve comparable returns. ING Direct’s rates were between 3% and 2.3% in 2011. It is futile to time the markets on the long term, as this website demonstrates so well. Is it equally futile to give up boring CDIC insured investements for a mix of volatile bond and stock indexes in the canadian portion of a couch potatoe portfolio? YTM in bond indexes are now lower than 5 year GICs. Doesn’t that sound scary?

    Also, when markets fluctuate so greatly throughout the year, why are investors so blinded by the value of their portfolio on the 31st of december? I assume the couch potatoe portfolios are relatively stable on a monthly basis with their diversification. But cherry pickers seem to treat annual returns of funds like they have some absolute meaning…

    Thanks for writing this awesome blog! Each post provides great insight hard to get elsewhere in simple terms.

  9. Canadian Couch Potato January 10, 2012 at 11:25 pm #

    @Dan H: Thanks for the reminder that RRBs can indeed suffer significant losses when inflation expectations are low or negative. Another thing to be aware of is, unlike nominal bonds, which see new government issues regularly, there are very few RRBs in Canada. All of them are long-dated, and I’m not sure whether the federal government is planning to issue new ones.

    @Jon: RRBs are certainly an optional asset class. I like them as a diversifier in a portfolio: they are really not highly correlated with any other asset class, including nominal bonds. They’re just highly correlated with inflation (or inflation expectations). If you want to keep things simple, ignoring them is fine.

    @Chris: You make a great point about the artificial start-end dates of annual returns. There is nothing magical about a calendar year, of course. It’s good to measure performance every year, but it’s arbitrary to look at January 1 to December 31.

    The yield on a GIC can be expected to be a little higher than that of a government bond with the same maturity. That’s normal, since both have essentially identical risk, and GICs are less liquid (so you get a little compensation). But you’re right that the yield curve is depressingly flat these days.

  10. Dale January 11, 2012 at 7:42 am #

    Thanks for the results Dan and Justin. Happy to get 6% with a pimped out yield hungry portfolio. Actually it’s more granny portfolio I’d guess at over 60% bonds, but with a sprinkling of defensive equities that performed very well. And Crescent Point that returned over 20%. I’ve held that oil and gas trust forever and can’t bear to sell it and move into etf. Hey, when something treats you that well…

    Wondering who else ‘sprinkles’ or adds to their model portfolios and what do they add and why?

  11. Dale January 11, 2012 at 7:46 am #

    Would also add that the FrankenPortfolio that I developed has a beta that seems mathematically impossible. Througout the tumultuous 2011, the Portfolio only ever dropped 2% from the new highs it kept making.

    It’s the uber-Conservative Couch Potato Portfolio. And I had asked Dan if he could table one. What is the the lowest possible level of volatility while still holding the etfs that can make some decent returns long term.

  12. Dale January 11, 2012 at 7:48 am #

    To add in to the xrb, I wouldn’t touch that. You could get lucky for another year. Or that could end in tears very quickly with equity like corrections.

  13. Alan January 11, 2012 at 12:23 pm #

    Hi Dan, any thoughts or commentary on the very different performance between the “Complete” and “Uber”?

  14. Dan Hallett January 11, 2012 at 2:19 pm #

    Real return bonds are suitable as a long-term inflation hedge. I have used them for more than a decade. But because of their longer durations (i.e. longer terms to maturity), I/we usually pair RRBs with an allocation to shorter-term bonds to reduce the interest rate risk. Yes, RRBs are expensive – as are all gov’t bonds – but there is no more precise way to hedge inflation.

  15. Eric January 11, 2012 at 3:15 pm #

    Very good comment from Dan Hallet. I also prefer using RRBs vs regular long term bonds. My actual allocation is 8% to XRB , 13% CLF (short term Gov), 5% CBO (short term Corp) & 5% XHY (H-yield bonds). Now with YTM so low, I’m considering GICs ….

  16. Canadian Couch Potato January 11, 2012 at 7:55 pm #

    @Alan: The main difference is that the Complete has real-return bonds and Canadian REITs (both excellent performers this year), while the Uber has no RRBs and global REITs (which did much worse). This kind of variation is to be expected over short periods.

  17. aln January 12, 2012 at 11:39 am #

    What are options for bond ETF if registered account room is all used up? Seems taxes and inflation will eat most of the returns in a taxable portfolio.

  18. Canadian Couch Potato January 12, 2012 at 11:52 am #

    @aln: Have a look at Claymore’s Advantaged bond ETFs, which are designed for taxable accounts. They’re complicated, but may be worth the effort:
    http://canadiancouchpotato.com/2011/06/20/understanding-claymores-advantaged-etfs/

  19. Andrew January 16, 2012 at 11:04 am #

    Great posts above. Useful discussion. Several comments:
    Michel: I am familiar with similar portfolios. If one has the capital is can be useful to have a passive ETF and an active rules based one.

    It is true – maybe – at least for the past 10 years or so – there is a sweet spot for equity total returns, that when combined with the efficiency of the dividend tax credit in open accounts can mean outperformance over the long haul. I know some would argue this, and I question it myself sometimes despite testing/data mining but it works or has. The sweet spot is mid level portfolio beta (0.6) and a history of dividend growth with reinvested dividends as well as a value approach to accumulation. Modify this using credit informed tactical asset allocation and basic risk management using long term moving averages – basically a rules based approach. Also diversify risk assets using income instruments/stocks such as REITs, High yield energy corporations (former trusts), diversified Preferreds (rate resets, non cumulative, cumulative etc.. in diverse industries that are yield oriented) and even lower correlated alternative equity such as gold/ prec metals and alternative ETFs that hold international REITs, Emerging market Real return bonds etc… and rules based strategies such as managed futures and seasonal rotation. Consider high yield bonds in this type of portfolio. Tactically lower or increase beta based on valuation relative to credit market signals. Credit market rules. Use ETFs for this purpose along with stock positions but also take capital gains strategically. If you want use options to hedge betas at high valuations and use leverage against low valuation high beta, extreme volatility setups. Use value averaging algorithm to enter initial positions over say 3 years. Consider up to 30%-40% of total equity part of portfolio for this type of strategy with sufficient capital. Must have risk controls in place and passive rules based hedging.

    Exploit the optionality of cash.

    Have a second portfolio using a completely passive ETF indexed based portfolio as describe on this site. So many (most?) good financial advisors use this strategy but sell you on active management.

    One of keys to long run returns is to manage costs. You can manage diversified portfolios for less than 0.4% even 0.3% and even way low sub 0.1% if using GICs instead of bonds.

    Also taxes, how much you save and how long, and asset allocation matter the most. Cannot “control” returns except in rare sweet spots such as above. Very technical but can work if you want to put in the time.

  20. Elmer January 19, 2012 at 7:03 pm #

    I am trying to be a passive investor however I can not get over the fact that the market always gives you a chance to get back in at your original purchase price. You may have to wait a while however the opportunity is there. I sell when one of my funds increases 10% and sit in cash or a short term ETF bond until the price returns back to my original purchase price. I got in XIU at 17. Out at 18.70 and back in at 17 (after a while on the sidelines). I missed the peak ($20) and the valley ($16) but I locked in my return. I treat 18.70 as the new base point for measuring the 10 percent increase. I probably won’t trade XIU for another year or two when it hits 20.57. It seems like a reasonable strategy to me. I may miss a fund taking off but I have not seen many of those lately. This is for my registered accounts. Any thoughts?

  21. Dale January 20, 2012 at 7:41 am #

    Elmer you will likely be left holding the bag when it breaks low. Or you’ll be locked out when it breaks up, and out of its trading range.

    You’re also disallowing yourself about half of the gains – – income (when you’re in a sell and wait stage).

    I personally have made money watching stocks or equity etf’s fall, but I add to them with that opportunity, and add to the income. Nothing beats a diversifed portfolio as per the couchpotato models, with income and new monies added along the way.

    It’s very rare to time the markets, and beat the indexes.

  22. Dale January 20, 2012 at 8:07 am #

    A nice article on passive investing vs the pros … Big surprise. Not thinking beats 90% of the professionals who make stock picks and time the market.

    http://seekingalpha.com/article/320836-the-enduring-power-of-passive-asset-allocation

  23. Elmer January 20, 2012 at 2:12 pm #

    Dale,
    Thanks for responding. What do you mean by “holding the bag when it breaks low”? If I never sell I always have the downside risk? My portfolio is made up of 40% percent bonds complimented with various low cost passive funds that give me broad diversification. I am aggressively “rebalancing” the porfolio by selling when a fund is up 10%. This forces me to sell high and buy low so I feel that I am just taking it one step further. (I know I should not sell all of it.) Because it is rare that all of my funds will experience this 10% increase at the same time I am almost always fully invested. I know I am missing out on the income portion while I wait in the wings but I am hoping it won’t be in excess of 10%. I have no science or studies to back me so I might be spinning my wheels chasing additional returns. I only started this strategy in mid 2010 so I have been luck to date. Thanks for the article.

  24. Dale January 20, 2012 at 2:24 pm #

    Hey Elmer, I doubt you’d squeeze much (0r any) more out of it, compared to regular rebalancing which does ask you to sell what has gained. There’s trading costs and the lost income potentially to consider.

    I think these trading ranges don’t last for long. I’ve seen it with Barrick and some others that I’ve owned. Again if xiu and equities breaks up, then what? At what point do you jump back in xiu? You’d have to buy high, or await a major correction.

  25. Bob January 23, 2012 at 6:15 pm #

    Is it possible for you to include the Index Fund (TD e-series) version of the Complete CP in your next summary? I suspect a lot of folks out there are in that one rather than the ETF version.

  26. Canadian Couch Potato January 23, 2012 at 6:30 pm #

    @Bob: For 2011 here are the numbers for the TD e-Series funds:

    Bonds: 9.1%
    Canada: -8.9%
    US: 4.1%
    Int’l: -10.0%
    Total: 0.68%

    Interesting that the e-Series funds outperformed the ETFs by 14 basis points, despite slightly higher fees.

  27. Bob January 24, 2012 at 12:21 pm #

    Fantastic! Thanks so much.

  28. Patrick February 2, 2012 at 2:18 pm #

    Hi Dan,

    When you say high-quality bonds should be part of “just about everyone’s portfolio”, do you mean everyone who is afraid of volatility? I ask because I personally don’t care much about my portfolio’s fluctuations because I don’t plan to retire for at least 20 years, so my objective is the highest expected long-term return, and that excludes bonds. Am I making a mistake?

    Also, good to see your mug on the inside front cover of Moneysense this month. 🙂

  29. Dale February 2, 2012 at 3:59 pm #

    Dan will give you a more knowledgeable response, but from my experience you are better off with some bonds in a 20 year time frame. One example is the permanent portfolio that acutally beat the overall stock market(s) over the last 40 years or more. See the pp articles on this site. Also Larry Swedroe has an interesting portfolio – 30% small cap and 70% 5-10 yr Treasuries that gets nice returns and did not have one bad year throughout the recent carnage.

    Also, you never know when the stock markets will tank. That may happen when you when you need the money. Equity bear markets can last for 15-20 years. We’re into year 12 of a secular bear market. And probably the most valid reason to hold a balanced portfolio is psychology. Most investors can’t handle the 40-50% downtrends that occur, so they bail. Most retail investors buy high and sell low.

  30. Patrick February 2, 2012 at 5:00 pm #

    @Dale: thanks for the answer. Definitely food for thought. I do seem to have the right temperament to handle a 50% downtrend apparently, so maybe I’m ok.

    http://a-loonie-saved.blogspot.com/2008/10/rebalancing-with-vengeance.html

    (I now have more than the 76% stocks I had back then.)

  31. Dale February 2, 2012 at 5:25 pm #

    Hey Patrick, remember the permanent portfolio actually beats the stock markets, with less volatility. And not trying to be sarcastic, but you’d be ok with a 50% decline in your portoflio just as you’re about to need your money. Timing your ‘out’ may not be that easy.

    No one knows what will happen. We could go into a depression for the next 20 years as the developed nations goes bankrupt. Stocks could tank for a generation. Or not. As history teaches us. No one knows nothing.

  32. Canadian Couch Potato February 2, 2012 at 6:34 pm #

    @Patrick: I have met few investors who can manage the volatility of an all-equity portfolio, but if you believe that you can do it, then that’s fine. I would remind you that a basic principle of Modern Portfolio Theory is that you can probably add 10% to 15% bonds and achieve more or less the same rate of return with less volatility.

    @Dale: I would be careful about saying the the Permanent Portfolio “beats the stock markets.” It has beaten (past tense) the stock market over some periods, though it has also trailed significantly over many others. Extreme events in the early 1970s and the 2008–09 crisis made it look very good. Throughout the 1980s and 1990s, however, it looked much less impressive:
    http://canadiancouchpotato.com/2011/09/10/the-permanent-portfolio-v-the-couch-potato/

  33. Dale February 3, 2012 at 10:36 am #

    thanks dan. I read this comparison of risk and return on US high yield – from seekingalpha. How would you evaluate these charts as it pertains to your reco for US high yield. I’m in chb that is mostly B1 and B2. Sounds like it’s too much risk for little or no additional return?

    http://seekingalpha.com/article/338231-the-winning-trade-in-high-yield-corporate-bonds

    It’s an interesting article and comparison. thanks again…

  34. Que March 11, 2012 at 12:59 pm #

    Dan, can you comment on your opinion of iShares Portfolios that gil mentioned on January 10, 2012 at 11:02 am ? Thanks

  35. Canadian Couch Potato March 11, 2012 at 2:48 pm #

    @Que: I’m not a big fan of the iShares Portfolio Builders. This post is out of date, but the overall concerns are the same, namely too much active management:
    http://canadiancouchpotato.com/2010/03/16/under-the-hood-ishares-core-portfolio-builders/

    I think the other ETFs are fine in and of themselves, and may be useful for some investors, but Gil’s comparison is not useful. The ETFs have completely different asset allocations compared with the Couch Potato portfolios, so a one-year comparison simply shows you which asset classes performed best over the last 12 months.

  36. Que October 18, 2012 at 3:00 pm #

    Dan, Why don’t you include a real-return bond ETF in your Yield-Hungry Portfolio?

  37. Canadian Couch Potato October 18, 2012 at 3:03 pm #

    @Que: The Yield-Hungry portfolio is designed for taxable accounts and for people who want current income. RRBs are not tax-efficient and they don’t pay a significant yield these days. They do make an excellent long-term inflation hedge, which is why I include them in the Complete Couch Potato, but they’re probably not a great choice for investors who want tax-efficient cash flow today.

  38. Que October 18, 2012 at 6:56 pm #

    Thanks Dan, that makes sense, although, like most cases in this learning process, your answer has provoked another question.

    You have mentioned in other posts that if you run out of room in your registered accounts, the best choice are Canadian stocks for your taxable account. In your Yield-Hungry Portfolio, you have CDZ, XDV, and XPF for your Canadian stock choices. When choosing your Canadian equity asset, would these be the ideal choices if you were just concerned about taxes, and weren’t looking for income? Or a different combination like CPD instead of XPF, or something else?

    Or is there a better choice to serve the purpose of Canadian Equity in your portfolio that is more tax efficient than XIC (or ZCN), like HXT (or another choice that would cover more of the market like XIC and ZCN do)?

    Thanks again!

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