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.
  • 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.
  • 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.
  • 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.