Couch Potato Portfolio Returns for 2017

They contained no marijuana stocks and no bitcoin, but the Couch Potato portfolios put up another good year in 2017. Once again, investors were rewarded for simply following a disciplined, low cost, broadly diversified strategy and ignoring the blather of market forecasters. Before we get to the portfolio performance, here’s an overview of how the major asset classes fared in 2017:

  • What a strange year for bonds. How many more reminders do we need that guessing on interest rates is as futile as trying to time the equity markets? The Bank of Canada raised rates not once, but twice during the summer, and for the 12 months ending September 30, the FTSE TMX Canada Universe Bond Index was down 3%, the biggest 12-month decline in two decades. But for the full calendar year, the index was up 2.5%, which is almost exactly the current yield to maturity on broad-based funds such as the BMO Aggregate Bond Index ETF (ZAG). Had you just tuned out the noise and held on to your bond fund for the whole year you would have enjoyed a respectable return—again.
  • Canadian equities followed up their banner 2016 with another solid performance: the S&P/TSX Capped Composite Index returned 9.1% in 2017.
  • President Trump’s first full year as POTUS seemed to stoke the already red-hot US market, which climbed more than 21% in its local currency. The strengthening loonie reduced that return for Canadians, but US equities still returned over 13% in CAD terms during 2017.
  • International developed markets (Western Europe, Japan, Australia) rebounded from a poor showing the previous year to deliver over 18% in 2017, despite a Canadian dollar that rose against most foreign currencies. But the big winner for the year was emerging markets (primarily China, Korea, Taiwan, India, and so on), which soared by about 28%.

Now let’s put these pieces together to see how the three versions of my model portfolios performed in 2017. A reminder that these returns include all dividends and interest, which are assumed to be reinvested as soon as they are received. (This is the way all mutual fund and ETFs calculate and publish their returns.)

Option 1: Tangerine Investment Funds

Option 1 is the Tangerine Investment Funds, which offer a one-fund index portfolio with three choices ranging from the conservative Balanced Income Portfolio to the more assertive Balanced Growth Portfolio:

Tangerine Balanced Income Portfolio
Tangerine Balanced Portfolio
Tangerine Balanced Growth Portfolio
30% equities 60% equities 75% equities
4.6% 7.8% 9.5%

Option 2: TD e-Series Funds

Option 2 is the TD e-Series funds, which allow you to customize your portfolio with any asset mix. Here are the 2017 returns for the individual mutual funds:

TD Canadian Bond Index – e (TDB909)  1.99%
TD Canadian Index – e (TDB900)  8.74%
TD US Index – e (TDB902)  13.30%
TD International Index – e (TDB911)  16.65%

And here’s how the returns look for the five different asset mixes in my model portfolios, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks):

Conservative Cautious Balanced Assertive Aggressive
30% equities 45% equities 60% equities 75% equities 90% equities
 5.3%  6.9%  8.5%  10.2%  11.8%

Option 3: ETFs

Finally, Option 3 is a simple portfolio of three ETFs, which posted the following returns in 2017:

BMO Aggregate Bond Index ETF (ZAG) 2.29%
Vanguard FTSE Canada All Cap Index ETF (VCN) 8.46%
iShares Core MSCI All Country World ex Canada Index ETF (XAW) 15.88%

Put these funds together and the portfolio returns look like this:

Conservative Cautious Balanced Assertive Aggressive
30% equities 45% equities 60% equities 75% equities 90% equities
 5.6%  7.3%  9.0%  10.6%  12.3%

Understanding the differences

When comparing the returns of the three model portfolio options, investors often believe the only difference is fees. Certainly one would expect the ETF portfolios (with an average fee of just 0.14%) to deliver higher returns than the comparable Tangerine funds (with a fee of 1.07%). But there’s more to it than just costs: some of the differences are random and short-lived and should be ignored by long-term investors.

  • The Tangerine funds hold only large-cap Canadian, US and international developed stocks. The TD e-Series portfolios include a broad-market Canadian equity fund, but they too hold only large-caps for the US and international developed markets. Meanwhile, the ETF portfolios track broader indexes that also include hundreds of additional mid-cap and small-cap stocks. During some years this will make a significant difference. In 2017, large caps generally outperformed small, which gave a modest boost to the Tangerine and e-Series portfolios.
  • The Vanguard FTSE Canada All Cap Index ETF (VCN) tracks an index of Canadian equities that is slightly different from the one tied to the TD Canadian Index – e (TDB900). In 2017, the S&P index outperformed the FTSE version by 0.54%. (Last year the FTSE index outperformed, and over the long term these differences have evened out.)
  • The ETF portfolios are the only ones that include emerging markets (this asset class makes up about 12% of XAW). Because emerging markets had such a big year in 2017, the ETF portfolios enjoyed an edge over the other two options.

Finally, if you followed Option 2 or 3 of the model portfolios, don’t assume your personal rate of return was the same as what’s reported here. That would only be true if you held the funds in the same proportion as the models on January 1 and didn’t make any trades during the year. The Tangerine funds may be more expensive than the other options, but they impose a valuable discipline on investors inclined to tinker: anyone holding one of these funds for the whole 12 months enjoyed the full return published above.

Note also that these are time-weighted returns, and if you made significant contributions or withdrawals during the year, your money-weighted rate of return could be quite different. See this post for more about how these methodologies differ, and for links to calculators created by my colleague, Justin Bender.

Longer-term rates of return for all of the portfolios are available in PDF format on the Model Portfolios page.


68 Responses to Couch Potato Portfolio Returns for 2017

  1. Dave E January 31, 2018 at 6:53 pm #

    Firstly, Dan thanks for sharing your insight and knowledge. It’s meant a lot on my investing journey.

    Any idea why ZAG (BMO’s bond ETF) is listed as Low risk on BMO’s site and Above Average on TD Direct Investing’s site?

  2. Greg January 31, 2018 at 7:21 pm #

    Hi there, I have a simple question but I couldn’t find the answer – hopefully someone can direct me to it. First off thanks for all the great resources – love the model portfolio (priceless info). I’m just wondering why you recommend such high Canadian exposure? Intuitively I would think that Canada is a very small part of the global economy so it shouldn’t represent 20-30-40% of your portfolio. In my own portfolio it’s a very small % but I’m sure there is a good reason why you recommend otherwise. Thanks.

  3. Canadian Couch Potato January 31, 2018 at 9:28 pm #

    @Dave E: Thanks for the comment. I can’t explain TD’s rating. Assuming risk is defined as some combination of volatility and risk of a large drawdown I can’t imagine how ZAG ranks “Above Average,” even among fixed income funds, let alone a universe that includes equity ETFs. A broad-based bond index is, by definition, average in the fixed income universe.

  4. Edward February 1, 2018 at 5:27 am #

    Hi Dan. Have you seen the new “one-ticket” index ETFs from Vanguard (TSX: VCNS, VBAL, & VGRO? They look to me to be somewhat like the ETF equivalent of Tangerine’s mutual funds; slightly more expensive than your current ETF model portfolio, but potentially much easier to maintain. Curious what you think!

  5. Craig G February 1, 2018 at 1:51 pm #

    I think those new Vanguard funds Edward is mentioning (VCNS,VBAL,VGRO) look wonderful. The MER is just a little higher than the 3-fund CCP portfolio and no rebalancing/trades required.

    I guess my only concern is a little tax inefficiency for portfolios spread between RRSP, TFSA and non-registered account.

    Dan/Justin Bender – any idea what the drag on returns would be with just investing VBAL in all accounts (RRSP/TFSA/non-registered) vs trying to optimize funds within the 3 groups, i.e. US/Developed/Emerging in RRSP, bonds in TFSA, Canadian in non-registered? Obviously it depends on the size of the portfolio and size of RRSP…

    I suspect it’s probably not massive but for now, unless I get to a place where I’ve maxed my RRSP/TFSA and mostly sitting in non-registered, I’ll keep them separate for now but I expect I’ll be getting to a place where VGRO is my new go-to fund.

  6. Carlos February 1, 2018 at 1:51 pm #

    Hi Edward, thanks for drawing attention to those one-ticket index ETFs! These seem like the Canadian equivalent of the Vanguard Lifestrategy funds:
    I’m aslo interested in hearing the Couch Potato’s take on these funds as a full alternative to his model portfolios.
    Meanwhile, here is an interesting article from another UK financial blog I follow about the Lifestratey funds:

  7. gmurad February 4, 2018 at 12:11 pm #

    Hi, I would love to hear an assessment of the new Vanguard 1 stop shop ETFs. Specifically how they compare with “Option 3: ETFs”.

    I guess some questions are regarding tax implications of having the same ETF on all RRSP, TFSA, non-registered accounts. How would performance compare and so on.


  8. Mat February 6, 2018 at 12:47 pm #

    Hi Dan, love the blog keep up the good work. I follow your aggressive 3 ETF portfolio using my RRSP. I’m considering opening up a TFSA with the same 3 ETF portfolio. Does it make sense to have the exact same allocation in each (60 xaw/30 vcn/10 zag)? I’m struggling to understand witholding taxes and how to structure these two accounts. Any help appreciated

    Thanks Mat

  9. Jay February 10, 2018 at 11:17 am #

    Hi Dan,

    On March 10, 2017 I decided to invest my cash for the first time and I went with the Assertive portfolio since I’m still relatively young. I invested about $140,000. I haven’t touched it since then and can see that my returns including dividends were $4972.42. This represents less then 4%.

    Now I have another $85,000 saved up to invest again. I already put $25,000 in the cryptocurrency market, which returned me over $4,000 in a few days. The remaining $60,000 I am supposed to invest in my couch potato assertive portfolio, I even already transferred the money to my accounts.

    My struggle right now is this: the economy seems to be overdue for a big drop. The risk of a 30%(could be more or less) drop in the CCP portfolio seems much higher then the upside, which was a modest return of less then 4% for me in the last 11 months period.

    I still haven’t encountered a way of thinking about this situation that makes sense to me. The typical “If you are far away from retirement is doesn’t matter” argument doesn’t really make it much better. I like considering both the long term future but also the immediate future when investing.

    Do you have any pointers on how I should frame my thinking around this problem?

  10. Oldie February 11, 2018 at 9:48 pm #

    @Jay: I’m a slightly experienced sort-of-beginner CCP investor. Just when I think I’ve learned all I need to know, I stumble upon yet another insight that I had not appreciated earlier. Often these insights are psychological (rather than purely mathematical/financial) in nature Just to let you know where I’m coming from, as I offer my unasked advice.

    I think you’ll find everything you’ll need to know just trawling through all the various posts in this site back through time, but focussing on the later ones, where Dan’s theoretical knowledge was tempered by seeing how real live investors actually behave and think in real life, and thus leading to a trend towards simpler and more likely-to-be followed investment strategies.

    But your greatest asset would be time, firstly for the magic of compounding to average itself out over longer periods of fluctuation, and secondly for the maturity that comes with time to let the intrinsic truth of the Couch Potato principle truly sink in until it becomes part of you.

    The first rule or principle I have distilled for myself out of Couch Potato Wisdom is that you can’t predict the future. If there was only one rule allowed, this would be it. Sure, you can make a prediction, and when it eventually came true, you could always say “See?” and re-frame your prior prediction in a way that makes it prescient. But you can’t actually predict the future precisely enough to make money on it (apart from the general rule of thumb that observes that over a hundred year duration, Canadian, US and world equity indices have trended towards 9%+ compounding nominal return). Nobel Prizes have been earned analysing the results of experts and common investors alike, to confirm this nugget of truth. If you want to avail yourself of the benefits of Couch Potato Wisdom (the only rational, sensible way of investing) you really have to swallow this one.

    So, returning to you, violation number one — your speculation in the cryptocurrency market. I’m not necessarily impressed with your by-chance profit as evidence of a good decision. Why not go to the casino? I hear a highly reliable source emphatic that lower numbers on the roulette table are really hot for the next few days! You can’t be a true rational Couch Potato and keep on doing that. Sorry to be harsh, but just sayin’. Looking after your hard earned money is a serious undertaking, not for impetuous or half-baked ideas.

    If the equities are “poised for a drop” (this is a prediction for the future, no?) and you are paralysed with indecision, you have not done your emotional homework. So, work out an asset allocation ratio that you can live with forever, or at least for this phase of your life, work on it sincerely, to see if you can live with all economic outcomes acting on your portfolio, and once you’ve decided on the right mix, invest all your cash in that ratio. Now. If you truly have a great lump in your throat doing this, you might consider Dollar Cost Averaging by making purchases in instalments, but consider the possibility that this fear may be based on the fact that you have not truly accepted all the possible economic consequences of your choice of asset allocation (see the recent CCP post on this).

    There have been tons of economic predictions made in the public opinion arena during the past 5 year period that I have been trying to educate myself on this site. They all have been very plausible, tugging at the worst of our gut fears. Some have been sort of right. Others have been sort of wrong. With the benefit of hindsight I now see that all have been worthless as predictors of what best to do and when, except for the edict that one had to make an asset allocation that considered all possible outcomes, including the one under scrutiny. I’m starting to repeat myself, so I’ll end here. CCP investing is very simple. It’s not necessarily easy, especially at first.

  11. Jay February 11, 2018 at 10:53 pm #

    @Oldie Thank you for sharing your wisdom. This helped me frame my thinking better. I miscalculated my CCP returns. They were more like 9% and not 4% as I stated previously, much better than I thought.

  12. Oldie February 14, 2018 at 5:07 pm #

    @Jay: I do this too, that is, constantly looking at short-term returns and obsessing over them, such as is the topic of this blog entry. Dan, who is wiser and smarter than all of us stacked together, arguably may still have committed an indiscretion (understandable though it would be) providing this breakdown of data in that it feeds an undesirable habit — the constant checking of short-term results, and worse, thinking that these results are of significance for the long term — that for a true Couch Potato is unhelpful (OK, maybe “not necessarily helpful”) to good practice.

    So you gained 9%, not 4% over the course of 2017. Great. What if you had lost 15%? Would the jubilation of the first or the despair of the second be of any true informative value in the long term scale of things? The fundamental truth of CP investing is to be sure you’re invested into an acceptable asset allocation mix. Then tune out the noise, and hang in there for 15 or more years. I know what I should do, but my reptile brainstem still leads me to tune into juicy articles like this. I hope I’m disciplined enough not to fall off the bandwagon. I just have to remember that the magic definitely is there, but it doesn’t look spectacular, until you consider the long-term perspective.

  13. zwzlife February 15, 2018 at 9:19 am #

    Management fee on Vanguard Canadian Aggregate Bond Index ETF (VAB) reduced from 0.12% to 0.08%

  14. Oldie February 15, 2018 at 10:20 pm #

    @zwzlife: At long last! I was wondering how long I was going to wait for this to happen before I gave up and sold all my VAB to buy ZAG. Vanguard obviously figured out that there were thousands of Canadian investors in this same mind set.

  15. Link February 21, 2018 at 10:06 am #

    Any comments or thoughts on the following?

  16. Oldie February 21, 2018 at 2:56 pm #

    @Link: Any time some smart financial guru tries to show me what the future will bring (and thus assist me in making more money, or not losing money, etc.), I try to remind myself that I’m a couch potato investor, and that means giving up the seductive notion that I (or anyone else, actually) can accurately and precisely predict the future. If I’m successful, it really helps in tuning out the noise, and trusting in my carefully considered pre-determined asset allocation. This single, simple central concept is becoming my number one go-to couch potato memory aid for comfort in volatile or calm times alike.

  17. Oldie February 21, 2018 at 7:45 pm #

    (BTW, it turns out that most, if not almost all the financial news, when viewed from the CCP perspective, is only noise).

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