Your Complete Guide to Index Investing with Dan Bortolotti

The Second Coming of the Perfect Portfolio

2017-12-02T21:12:27+00:00August 9th, 2012|Categories: Book reviews, Indexing Basics, Research|Tags: |122 Comments

The anticipation has been palpable, I know, but the waiting is over. The second edition of The MoneySense Guide to the Perfect Portfolio is now available.

The first edition of my handbook for do-it-yourself index investors, published last October, sold out quickly as Couch Potatoes stampeded to their local newsstands to demand a copy. The revised second edition should now be available across Canada on magazine newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. It’s also available online, and if you order 51 copies or more, you get a hefty discount. Order 99 and you save even more. [Update: Perfect Portfolio is now available in Apple iPad, Kobo. and Kindle editions.]

While the second edition is very similar to the first, there have been a surprising number of developments since last fall. Vanguard arrived in Canada, Claymore was bought by BlackRock, and three brokerages now offer commission-free ETFs. The guide has been updated accordingly.

Now with improved performance!

I have long wanted to compile more complete historical performance data for my model portfolios, but the problem has always been that the ETFs have very short track records. In his excellent book The Smartest Portfolio You’ll Ever Own, Dan Solin gets around this idea by using a combination of real fund returns and index data. To account for costs, Solin subtracted each ETF’s management expense ratio from the index returns when doing his calculations. Since most well-run ETFs have low tracking errors, this is an imperfect but reasonable proxy, and I decided to do the same for the new edition of my own book.

Well, to be honest, I asked Justin Bender, CFA and portfolio manager at PWL Capital, to use his large brain and larger database to do the actual work in exchange for a pint of beer. It was a huge undertaking, but I think it will provide index investors with a reasonable idea of how the strategy performed over the last 15 years (from 1997 through 2011). The results and the description of how we compiled the data are available here, as well as on the Model Portfolios page. I will update the numbers annually—at least as long as Justin is still talking to me. Here’s a summary of the results (all figures are annualized percentages):

Global Complete
Couch Potato Couch Potato Über-Tuber
3 years 7.43 11.55 9.52
5 years 1.12 3.26 1.89
10 years 3.87 6.29 5.54
15 years 5.20 6.98 6.17
Standard deviation 8.02 8.21 7.92
Worst 12 months -19.02 -20.07 -19.89
Worst 36 months -6.68 -4.53 -4.91

Finally, I have made some changes to the Über-Tuber, my model portfolio with a tilt to value and small-cap stocks. Long-time readers will know this portfolio has evolved a few times over the years as I have struggled to keep it simple and inexpensive while still getting access to the value and small-cap premiums. With Justin’s help once again (that’s two pints I owe him now), we’ve come up with a version that it is 10 basis points cheaper. The main change was getting rid of the fundamental-weighted ETFs for the US and international exposure, and replacing these with cheaper value and small-cap funds from Vanguard and iShares. Another change is incorporating two BMO bond ETFs that approximate the maturities targeted by Dimensional Fund Advisors in their fixed income funds. The new version now appears on the Model Portfolios page.

I have three copies of the book holding up the short leg of my desk, and I’m giving them away to faithful readers. Enter the contest by using the nifty widget below. I need your email in order in to contact you if you win, but as always, I never share this information with third parties.

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