Your Complete Guide to Index Investing with Dan Bortolotti

Couch Potato Portfolio Returns for 2018

2019-01-13T08:19:08+00:00January 12th, 2019|Categories: Financial Planning, Indexing Basics|40 Comments

No one can say they weren’t expecting it. After a long and giddy bull market that began in 2009, we finally experienced a calendar year when even balanced portfolios delivered negative returns—something young investors may not have experienced before.

Things actually looked fine until the early fall, but the last four months swiftly erased most of the gains investors enjoyed to that point. December was particularly ugly: it was the worst month for equities since the 2008–09 crisis. But in the end, 2018 was really nothing worse than a minor disappointment, even though many in the financial media painted it as an unmitigated disaster. An aggressive index portfolio of 90% stocks lost less than 4% on the year: hardly a reason to panic.

Let’s review how the major asset classes performed in 2018:

  • It was another surprising year for bonds. The Bank of Canada raised its key interest rate three more times in 2018 (following two increases in 2017) but the FTSE TMX Canada Universe Bond Index was still up 1.36% on the year. Bonds lose value when rates rise, but as we saw last year, there are several key interest rates and they don’t always move in the same direction. While short-term interest rates have climbed significantly, the yields on longer-term bonds haven’t moved as much, so broad-market bond ETFs (which hold all maturities) still eked out a modest gain in 2018.
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  • Following two good years for Canadian equities, domestic stocks had a difficult 2018, with the S&P/TSX Capped Composite Index falling by about 9%. It was the worst calendar year for the index since the financial crisis of 2008, though we saw similar losses in both 2011 and 2013.
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  • Even the slump during the final three months wasn’t enough to push US equities into negative territory for investors who measure their returns in Canadian dollars. The S&P 500 was down about 4.4% in its native currency—its first negative year in a decade—but a soaring US dollar boosted returns into positive territory (3.9%) for Canadians who did not hedge the currency.
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  • International markets also struggled in 2018, although the weak Canadian dollar helped here, too: the MSCI EAFE Index (Western Europe, Japan, Australia) returned –6.4% for the year. And as so often happens, the previous year’s star performer was the next year’s laggard: the MSCI Emerging Markets Index (China, Korea, Taiwan, India, and so on) followed its 28% return in 2017 with a loss of –7.22%.

Here’s how these asset classes came together in the various versions of my model portfolios. Below are the 2018 returns for each individual fund and portfolio. These returns include all distributions (dividends and interest), which are presumed to be reinvested as soon as they are received. The portfolio returns assume you started the year with the target asset allocation and made no trades.

Option 1: Tangerine Investment Funds

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

FundAsset Allocation2018 Return
Tangerine Balanced Income Portfolio30% equities / 70% bonds-0.90%
Tangerine Balanced Portfolio60% equities / 40% bonds-2.20%
Tangerine Balanced Growth Portfolio75% equities / 25% bonds-2.95%

Option 2: TD e-Series Funds

The TD e-Series funds allow you to customize your portfolio with any asset mix. Here are the 2018 returns for the individual mutual funds:

TD e-Series Fund2018 Return
TD Canadian Bond Index – e (TDB909)0.88%
TD Canadian Index – e (TDB900)-9.08%
TD US Index – e (TDB902)3.14%
TD International Index – e (TDB911)-6.51%

And here’s how the returns look for the five different asset allocations in my model portfolios:

Model e-Series PortfolioAsset Allocation2018 Return
Conservative30% equities / 70% bonds-0.59%
Cautious45% equities / 55% bonds-1.35%
Balanced60% equities / 40% bonds-2.11%
Assertive75% equities / 25% bonds-2.90%
Aggressive90% equities / 10% bonds-3.69%

Option 3: ETFs

Finally, here are the 2018 returns for the funds that make up my model ETF portfolios:

Fund2018 Return
BMO Aggregate Bond Index ETF (ZAG)1.24%
Vanguard FTSE Canada All Cap Index ETF (VCN)-9.06%
iShares Core MSCI All Country World ex Canada Index ETF (XAW)-1.74%

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

Model ETF PortfolioAsset Allocation2018 Return
Conservative30% equities / 70% bonds-0.39%
Cautious45% equities / 55% bonds-1.20%
Balanced60% equities / 40% bonds-2.01%
Assertive75% equities / 25% bonds-2.82%
Aggressive90% equities / 10% bonds-3.63%

The subtleties

My three model portfolio options represent a trade-off between cost and convenience: the Tangerine funds have the highest cost (1.07%) but they are far easier to build and manage than the ETF portfolios. Over the long term, assuming investors manage them efficiently, one should expect the ETF portfolios to outperform because of their lower fees. But there are also some differences in the holdings, and these can have a larger (though unpredictable) effect on returns, especially over shorter periods.

Note, for example, that the 2018 return on the Assertive option (25% bonds, 75% stocks) of all three portfolios was almost identical at around –2.9% despite a significant difference in fees.

There are a couple of reasons for this. First, the Tangerine funds hold only large-cap Canadian, US and international developed stocks. The TD e-Series portfolios also use large-cap indexes for the US (S&P 500) and international developed markets (MSCI EAFE). The ETF portfolios, however, track broad-market indexes that also include hundreds of mid-cap and small-cap companies. Small-cap stocks significantly unperformed large in 2018, across all markets, which hurt the performance of the ETF portfolios relative to the other options.

Second, only the ETF portfolios include emerging markets, which make up about 12% of XAW. This gave a big boost to the ETF portfolios in 2017, but in 2018 it dragged them down.

Results may differ

A reminder that you shouldn’t assume your personal rate of return was the same as what’s reported here, even if you have tried to follow the model ETF portfolios closely. If you spent 2018 timing the market by holding cash, or if you couldn’t resist the urge to dabble in cannabis stocks, then your personal rate of return could have been very different indeed. Even incurring too many trading commissions can cause your returns to suffer, especially in a small portfolio.

Even if you were disciplined all year, your money-weighted rate of return may have been affected by large contributions or withdrawals you made during the year. 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 the portfolios are available in PDF format on the Model Portfolios page, now updated for 2018. I have also updated that page to include the Vanguard and iShares asset allocation ETFs launched last year.

 

40 Comments

  1. Kurt January 12, 2019 at 12:10 pm

    Thanks for the update Dan. Financial pundits would have you believe it was catastrophic doom and gloom in the fall, but alas it was a rather mild correction in the market for 2018. Thanks again for another year of insight and direction.

  2. Joel January 12, 2019 at 12:10 pm

    This past year left me with the feeling that I understand nothing about bonds. Can you unpack bonds a bit more? You wrote, for example, that “bonds lose value when rates rise”. But higher interest rates will also slow down the economy and negatively affect equities. So, if one were to expect interest rates to continue to rise in 2019, what would be the ideal allocation assuming my risk profile remains the same?

  3. Thomas January 12, 2019 at 12:15 pm

    I’m still buying and holding VAB/VXC/VCN and I know you’ve said before it’s not worth switching, but one downside is I don’t get to see these nice reports anymore. Do you still think it’s not worth switching? Is there an easy way to figure out the fund/allocation performance like you do here? Thanks for all you do!

  4. Kristi January 12, 2019 at 12:16 pm

    Happy New Year to you and yours! Thank you (as always) for the immense amount of thought and work you put into your blog. I always learn something – and find I don’t worry nearly as much about my money as I used to (before becoming a potato). I do have a rebalancing question, knowing you can’t give individual advice. Normally, I would rebalance my “balanced e-series portfolio” each January. This year, my individual holdings are so close to my 40/20/20 split, is it worth paying the $10 trading fee to rebalance each? Many thanks for any general comments- when you’re only off by 1 or less than 1%, should I just postpone rebalancing and review say in 6 months? With many thanks.

    BMO AGGREGATE BD INDEX ETF – ZAG 39.29%

    ISHARES CORE MSCI ALL CTRY WOR – XAW 41.15%

    VANGUARD FTSE CDA ALL CAP INDE – VCN 19.42%

  5. Ken G January 12, 2019 at 12:17 pm

    Thanks for the analysis and update, I really appreciate it. While I just started a ETF base couch potato portfolio last year and am a bit disappointed with the returns, it was not too bad a year overall and I plan to staying the course.

  6. Canadian Couch Potato January 12, 2019 at 12:21 pm

    @Kristi: Thanks for the kind words! You definitely do not need to rebalance when you are that close to your targets. As a general rule, consider rebalancing when you’re off target by about 5 percentage points either way. You can also rebalance next time you add new money, simply by topping up whatever asset classes are furthest below the target.

  7. Reza January 12, 2019 at 12:25 pm

    Hi Dan,
    Is it possible for you to compare your model portfolios’ returns with their equivalent Vanguard all in one ETF solutions and analyze the difference in the returns.
    Thank you.

  8. Canadian Couch Potato January 12, 2019 at 12:26 pm

    @Thomas: The returns of VAB/VXC/VCN will always be within a few basis points of ZAG/XAW/VCN. And the returns I post here will not be exactly the same as your portfolio anyway. If you are managing your portfolio with discipline (i.e. staying close to your long-term targets) you probably don’t need to worry about calculating your personal rate of return precisely. But if you want to, follow the links at the bottom of the article and check out the calculators on Justin’s site.

  9. Canadian Couch Potato January 12, 2019 at 12:35 pm

    @Reza: The Vanguard funds are less than a year old, so there is no meaningful performance data. For backtested returns, visit the model portfolios and scroll to the bottom for links to Justin’s site.

  10. Barry January 12, 2019 at 12:39 pm

    Perspective: if you’re still in the accumulation phase of investing, then good news is that there have been some sales of late.

  11. Kristi January 12, 2019 at 12:41 pm

    @Dan Thank you – you rock!

  12. Tom January 12, 2019 at 12:47 pm

    Dan, thank you so much for all your hard work on this site – outstanding!! Something I’ve wondered about for a while and that seems to be confirmed with the addition of 2018 to the stats: the 20 year annualized returns for all the model portfolios seem to be almost identical from the “conservative” to “aggressive” allocations. This means that a risk-adjusted view would overwhelmingly be in favour of taking the conservative approach over the long term, correct? Wondering about your thoughts on this. Thanks again.

  13. Canadian Couch Potato January 12, 2019 at 12:51 pm

    @Tom: This has been the case for a few years now, so this blog is still relevant:
    https://canadiancouchpotato.com/2015/04/07/ask-the-spud-do-aggressive-portfolios-pay-off/

  14. Scott January 12, 2019 at 1:37 pm

    As a small business owner I used to get excited each spring when the new phone book came out to see my Yellow Pages advertisement and those of my competitors. As a recent retiree I get that same thrill now in January when your Couch Potato Portfolios Review is published. Thanks for all you do. Seeing the returns in the various model portfolios (conservative up to aggressive) is comforting in an era of doom and gloom financial reporting. Many thanks.

  15. Jayp January 12, 2019 at 6:09 pm

    I don’t understand the 0.88% return on TDB909 (TD Canadian Bond Index – e): it was $11.46 at the start of 2018 and finished the year closing at $11.30. Where is the +0.88% coming from? It’s on TD’s website.

  16. Canadian Couch Potato January 12, 2019 at 10:49 pm

    @Jayp: There was a distribution (interest payment) that would have created a slightly positive total return despite the drop in price.

    https://canadiancouchpotato.com/2017/04/26/bond-basics-2-why-your-etf-isnt-losing-money/

  17. Rahim Khataw January 13, 2019 at 12:41 am

    There were 3 interest rate hikes in Canada in 2018. 4 for USA and 3 for Canada. I called all 7 at the start of 2018 :)
    Typo in your bonds comment in the article where you mention 2 for Canada in 2018.

    I use slightly different ETF products and my results for the 60/40 portfolio was close to yours again this year! Minus 2.07% with no trading fees and minus 2.24% if you include a total of $100 for trading fees. Right in between your -2.14% number for the ETF 60/40 portfolio.

    2017 you had 9% and i had 9.01% including $100 in trading fees.

  18. Canadian Couch Potato January 13, 2019 at 8:20 am

    @Rahin: Thank for the correction: three interest rate hikes in Canada in 2018.

  19. Canadian Couch Potato January 13, 2019 at 8:36 am

    @Scott: Thanks for the comment. I think it speaks to the power of balanced portfolios. Investors who are broadly diversified have a relatively smooth ride in all but the most extreme conditions. I think many people were surprised to see just how modest the losses were for 2018 given the media’s portrayal of a routine bear market (so far anyway!) as a remarkable event.

  20. Dheepak Jeevaraj January 13, 2019 at 8:50 am

    For all the folks who have and maintain their own DIY portfolio, I would like to share a good news that Wealthsimple trade offers 0-fee trading account.

    I had CIBC investor edge prior to this, which had one of the lowest trading fees at $6.95.
    I’ve got access to the Wealthsimple trade app and started my trade.

    The best part I feel is that you don’t even need Norbert’s gambit method to buy US stocks – stove the fee is 0, you just buy US stocks with Canadian dollars. Yes there is a markup of 1.6% on converting CAD to USD but based on your volume it could be much lesser than executing 2 trades to convert CAD to USD via Norbert’s gambit.

    Currently, it’s limited to unregistered account – RRSP and TFSA will be added at a later point in time.

    Just wanted to share this news to the folks following the blog. Save more! :)

  21. David Bourque January 13, 2019 at 2:33 pm

    Thanks Dheepak, can’t wait to see what the competitor will do when it will be available in RRSP and TFSA.

    As for tracking your performance, you can use a tool like sharesight that is free for 10 holding or less (which you should have if you are following the CCP strategy.)

    But in the end, it do not really matter. Looking at performance too often isn’t beneficial and if you follow the strategy, the end results will be close to results posted here anyway. Few basis point aren’t really a big deal.

  22. Oldie January 13, 2019 at 6:18 pm

    I have been studying and learning from this blog since 2012 (with the additional help of back issues), and it has been a wonderfully balanced and complete (enough for the average investor, anyway) education about a non-straightforward and nuanced subject. This year comes with some bad news, but given the above education, we Couch Potatoes have been well prepared for it. So it’s not a complete surprise, and, rather, it is more or less what we have anticipated. About the worst disappointment I can say is that there does not seem to be a whole bunch more that we need to know that you have not already explained. Thank you for doing such a great job over the years!

  23. Alan January 13, 2019 at 6:56 pm

    Probably the most important lesson is that the market growth curve is not a straight line up. Corrections are a normal part of the market cycle and this is why people need to think long term. As well, these are the conditions where courage allows you buy when everyone is fearful.

    In other words, nothing new.

  24. Bruce January 13, 2019 at 9:08 pm

    Thanks for your work on this Dan. It has made my investing easier, less stressful, and increased my returns. When I first saw your blog I thought “what a crazy way to invest”. I started CCP investing in 2011 so going on 8 years now. 2011 was a bad year to invest, worse than 2018. My Global Couch Potato included XIC, XSP, XIN and XBB, when most international ETFs were hedged and MERs were much higher. Over time I migrated to newer ETFs with much more diversification and lower fees.

    With asset allocation ETFs from Vanguard and iShares having MERs around 0.2% is it possible we are now approaching “Peak Potato”?

  25. Canadian Couch Potato January 14, 2019 at 7:38 am

    @Bruce: I love the term “Peak Potato.” :) In terms of products and accessibility, I agree there is very little left to be done. If people want to become index investors, it has never been easier or cheaper. But in terms of getting people to understand that the strategy, we have a very long way to go. The industry and the financial media will do its best to ensure that doesn’t improve.

  26. Tim January 14, 2019 at 11:18 am

    Dan, thanks so much for your ongoing posts.

    Could you elaborate on the formula to calculate the CCP ETF returns? The three underlying funds are ZAG, VCN and XAW, which had 2018 NAV returns of 1.24%, -9.06%, and -1.74% (as posted above and on each fund’s respective web site pages).

    For the balanced portfolio, ZAG is 40%, VCN is 20% and XAW is 40%.

    To calculate the blended return, we have (1.24% * 40%) + (-9.06% * 20%) + (-1.74% * 40%) = -2.01%

    But the figure quoted above for the Balanced portfolio annual return is -2.14%.

    Maybe the MERs are added? But these should already be reflected in the NAV returns.

  27. Canadian Couch Potato January 14, 2019 at 1:55 pm

    @Tim: Thanks for noting this. The model portfolio returns are calculated using monthly data downloaded from Morningstar Direct. They are showing an annual NAV return of –9.70% for VCN, whereas Vanguard’s website is showing –9.06%. My guess is that the Morningstar data are wrong (they probably missed a distribution), because the tracking error seems way too high. This happens from time to time and throws off the calculations by a few basis points. The figures usually get corrected at some point, but I’ll follow up with Vanguard to see if I can verify their numbers.

    [Follow-up note: These numbers have now been corrected.]

  28. Azul January 14, 2019 at 8:55 pm

    Hello Dan!

    Love the work you do here on the Blog! I have the 3 ETF portfolio of XIC ZAG & XAW. I would love more exposure to EM. Can I simply just add an allocation to XEC?

  29. Bruce K January 14, 2019 at 10:32 pm

    HI Dan,
    I appreciate you entertaining my “newbie” question.
    When looking at the Model Portfolio returns (e.g. TD e-Series Funds), are the returns gross or net of the MER fees?
    (e.g. was the final 1-Year Return for 2018 on the TD e-Series Funds – Balanced Portfolio -2.11% or -2.55% owing to the MER fees?)
    Thanks very much in advance for responding.

  30. Canadian Couch Potato January 14, 2019 at 10:35 pm

    @Bruce K: Fund returns (and portfolio returns) are always reported net of fees.

  31. Thomas January 15, 2019 at 9:05 am

    Tangerine Balanced Portfolio 60% equities / 40% bonds -2.20%
    TD – e-series Balanced 60% equities / 40% bonds -2.11%
    ETF Balanced 60% equities / 40% bonds -2.14%
    Mawer Balanced fund 60% equities / 40% bonds -0.30%

  32. Reza January 15, 2019 at 12:51 pm

    Hi Bruce,
    This is rather a general question about coach potato strategy. I have about 12 years to retire. If I choose say model portfolio with 40% bond and 60% of CCP, does it mean I should keep this model and do not increase bond portion as I’m getting closer to retirement? If not, then isn’t changing the portfolio against CCP philiosophy of “invest and don’t touch it”?

  33. Dheepak Jeevaraj January 15, 2019 at 9:38 pm

    Hi Dan,
    Maybe it’s too much to ask, but calculating the returns on a recurring investment – say $100 a month, would give a better picture of how the returns are in the case of a systematic investment, which is the most likely investment scenario for DIY Investors.
    I’ll try to pull it on my own and see if I can post it here

  34. james robert wood January 15, 2019 at 11:39 pm

    Hi Dan, can you advise whether the posted returns for the portfolios are before fees or net of fees?

  35. Oldie January 17, 2019 at 7:11 pm

    “PEAK POTATO”!! Yes, a great catchphrase! From a fiscal and practical viewpoint it truly is, and it is breathtaking the drops in price and the useful innovatory products that have become available over the past 6-7 years So why the lag in further consumer uptake, as you so correctly point out? It’s tricky to pinpoint. Firstly the concept is a little counter-intuitive as we experienced Couch Potatoes will remember when we first started out — how could it be that all the experienced, well researched market plotters out there aren’t more likely to do better (as do the more experienced musicians, baseball players, nuclear physicists.. etc).

    But I think the concept also takes some solid intellectual questioning and answering, and the knowledge and acceptance that your emotional feelings/reptile brain will steer you to a different answer than the one your cold logic will give you. The Couch Potato answer requires some intellectual rigour that will be beyond those looking for a quick answer, a promise of quick profit, that doesn’t ask too many niggling questions. But the situation is akin to the complexity of real life and politics which is tricky to sort out in all its nuances, so much so that too many people succumb to the paranoia that there are conspiracy theories which promise to cut through all the complex issues, and fake news that if we believe it greatly simplifies complex events. I don’t know if I’m overdoing it, but I think the simplicity of the thinking behind the current rise of populist backlashes everywhere is akin to the difficulty of grasping the long-range logic of Couch Potato economics.

  36. tryon January 18, 2019 at 1:40 pm

    are these real returns ? (inflation adjusted?)

    I would appreciate if you could always mention what kind of returns you are talking about !

  37. Canadian Couch Potato January 18, 2019 at 1:50 pm

    @tryon: Fund returns are always reported in nominal terms (i.e. not adjusted for inflation).

  38. Erik January 18, 2019 at 3:35 pm

    Hello Dan,

    As an avid reader of your website, I wanted to thank you again for your efforts with financial education over the past year. I wish you and your family the best in 2019.

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