Archive for December, 2009

2009: A Retrospective

December 23, 2009

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[As we head into the final week of 2009, the posting schedule will be light around here. So, I’ll take this opportunity to wish you all a Merry Christmas, Happy Holidays and a Happy New Year. Here’s hoping that 2010 will also turn out to be happy, healthy and prosperous for you and your loved ones.]

What a difference a year makes! If the biggest story of 2008 was how quickly markets had tumbled, this year’s biggest story is likely to be how quickly markets have bounced back. As we go to press, the TSX Composite is up 29.3% and the S&P 500* is up 13.6%. The MSCI EAFE Index that tracks other developed markets is up 8.5% but emerging markets turned out to be big winners this year gaining a stunning 45.3%. Bonds also had a positive year posting modest, but positive, gains of 5.2%. If 2008 marked a flight to safely, 2009 then marked a flight back to risky assets. And, it’s not just the stock markets. Home prices also trended up in most cities further boosting the net worth of most Canadian households.

Last year, all that doom and gloom provided a silver lining — significantly cheaper asset prices. So, it only makes sense to note that the strong market recovery of this year is a mixed blessing. Yes, it makes us feel wealthier but investors in their asset allocation years would be wishing that equity markets had stayed low. (And on the other side of the coin, investors who discovered they took on too much risk will be happy to be handed a chance to rebalance their portfolio themselves instead of the market doing it for them). First-time home buyers rushing to take advantage of today’s record-low variable-rates are likely taking on too much debt because home prices are so high.

Tax-Free Savings Accounts were also a big story this year. Though the initial contribution limit of $5,000 was too low to result in any meaningful tax savings for most people, the TFSA will turn out to be a significant savings tool in a short few years time.

* — All index returns are reported in Canadian Dollars and exclude dividends.

Sleepy Portfolio 3Q-2009 Report Card

December 21, 2009

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[Note: I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, which was then invested mostly in individual stocks. The portfolio started off with an initial cash infusion of $100,000 but no new money has been added since. The portfolio has the following asset allocation: 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges.]

Since I took early October off to attend to personal matters, I forgot to provide an update on how the Sleepy Portfolio performed in 3Q of 2009. Not that it matters. The entire point of a Sleepy Portfolio is that it requires minimum investor intervention and the best strategy would be to ignore it as much as possible. But, as I noted in my Q2 update, dividend payments from portfolio components had pushed up cash levels in the portfolio to more than 8% against a target of 5%. The market crash had also pushed up the bond portion to roughly 4.5% over target and left Canadian stocks, US stocks, International stocks and REITs below their targets.

Subsequent to my Q2 2009 Sleepy Portfolio update, I rebalanced the Sleepy Portfolio in early July selling a portion of the holdings in iShares CDN Short Bond ETF (XSB) and buying iShares CDN S&P/TSX Composite ETF (XIC), iShares CDN REIT Sector ETF (XRE), Vanguard Total Market ETF (VTI) and Vanguard Europe Pacific ETF (VEA).

Transactions
XSB: Sell 95 shares at $29.06 (plus $9.99 in commissions).
XIC: Buy 67 shares at $16.31 (plus $9.99 in commissions).
XRE: Buy 175 shares at $9.23 (plus $9.99 in commissions).
VTI: Buy 40 shares at $46.54 (plus $9.99 in commissions).
VEA: Buy 32 shares at $29.24 (plus $9.99 in commissions).

As an aside, one sell and four buys accounted for *all* the trading activity of the Sleepy Portfolio for the entire year. Thus, the trading costs of the portfolio add up to an extra expense of (prepare to be shocked) just 5 basis points (0.05%). Adding the trading costs to the weighted average MER of the portfolio at 22 basis points brings the total expense to less than 30 basis points (0.30%).

Here’s how the portfolio looked at the end of 3Q 2009 (it was up 8% since 2Q 2009):

[Sleepy Portfolio at the end of 3Q 2009]

Sleepy Mini Portfolio Q4-2009 Update

December 21, 2009

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Since our last update, the Sleepy Mini Portfolio, a simple, passive portfolio constructed with low-cost index mutual funds, has made modest gains. As of November 30, 2009, the portfolio has a 2.8% gain over book value:

TDB909 – Canadian Bonds – $1,829.71 (19.8%)
TDB900 – Canadian Equities – $1,904.05 (20.6%)
TDB902 – US Equities – $2,796.20 (30.2%)
TDB911 – International Equities – $2,720.25 (29.4%)
Total – $9,250
Total Invested – $9,000

The Sleepy Mini Portfolio demonstrates the power of sticking to an investing strategy even when markets are crashing around us. And even though the markets have made a tremendous recovery, we should continue to stick to the investing program. In that spirit, we’ll once again add another $1,000 to the portfolio and rebalance it back to the target asset allocation — 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks. The rebalancing spreadsheet shows how to carve up the new money between the four TD e-Series funds.

Transactions:
TDB909 – TD Canadian Bond Index (e-Series) – Buy units for $220.33
TDB900 – TD Canadian Index (e-Series) – Buy units for $145.99.
TDB902 – TD US Index (e-Series) – Buy units for $278.86.
TDB911 – TD International Index (e-Series) – Buy units for $354.81.

Investing that does not fear the few basis points lost to the Harmonized Sales Tax!

Sleepy Mini Portfolio Q4 2009 Update