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moneysense.ca, 2/01/09
Asset Class Returns for 2008
As noted in an earlier post, asset class returns were terrible in 2008. Only bonds had a positive year but losses in foreign stocks were somewhat moderated by an 18% drop in the Canadian dollar versus the greenback. Unlike most reports, which reported only the changes in price levels, the numbers published below are total returns and include dividends, distributions and other income. The return calculation for REITs is approximate as I used XRE’s price levels and distributions to arrive at an estimate.
Bonds: 6.41%
REITs: -41.61%
Canadian Stocks: -32.9%
US Stocks (S&P 500): – 22.8% (-36.5% in US Dollars)
Developed Markets (MSCI EAFE Index): -30.4% (-42.75% in US Dollars)
Emerging Markets: -43.72% (-53.10% in US Dollars)
If you are interested in asset class returns for previous years, Norbert Schlenker of Libra Investments maintains a spreadsheet of total returns of various asset classes going back to 1970.
Sources: Bank of Canada, Globe and Mail, PC Bond Analytics, MSCI, Standard & Poors, iShares Canada and iShares US.
moneysense.ca, 2/01/09
Yep, 2008 has been a year where my net worth has taken a pretty severe beating. Speaking about Bonds… Fortunately and unfortunately for me, I had only just started to construct a bond ladder this year. The fortunate side is that I had about 35% of my portfolio in cash while trying to buy fixed income products of varying maturities – at precisely the time when the bottom fell out of the equities market. The unfortunate side of this is that everything that I’ve been buying in fixed income (only GICs & Government of Canada Bonds) has been trading at a disappointingly low yield. The yields on fixed income continues to be incredibly low all across the entire yield curve. Who in their right mind would buy a 20-yr bond and lock in a 3.4% return for that entire duration? It doesn’t make any sense, but that’s what Government of Canada 20-yr bonds seem to be trading at these days. As a result, I’m constructing a GIC ladder instead of a bond ladder – at least in GICs, I can still buy a 4% yield in a5 year duration.
Looking forward, I still don’t see any light at the end of the economic tunnel. So, I think 2009 will be an interesting year where equities are concerned. All I can say is: “Hold on to your hats! It’s going to be a wild ride!”…
Happy New Year Everybody!
How about:
Tears + 58%
Regret + 23%
Confidence – 86%
Faith In Capitalism -70%
Probability of Good Long Term Returns For Money Invested Now +20%
[...] Asset Class Returns for 2008 “Emerging Markets: -43.72% (-53.10% in US Dollars)”. ouch. [...]
Why different % in US $$? Let’s say exchange rate is 2:1. C$100 -> C$50 (or US$50->US25) is a drop of 50%, no matter what currency you do it in.
Is it because the exchange rate changed over the course of the year? Then the different return percents would indicate what would have happened if you invested in C$ and cashed out in US$ (or the other way around).
Or something else?
Canadian Capitalist
Widely read blogs such as Cdn Capitalist perform an investor education function. As such, I know that you are open minded enough to investigate the possibility that your gospel of Index Only equity investing may not be the “best” equity strategy available, especially given the disasterous performance of index strategies last year.
You will recall thatI lead a group of Sept/Oct equity abstainers, who also use a momentumn strategy, switching our equity mutual funds as frequently as the discount brokers allow, without incurring any fees. We buy in late Oct, early Feb, mid May and sit out Sept and Oct in a money market fund. Our 7 year historical return is 13% per year, and yours is probably negligable. Moreover, last year we lost “only” 10%. ( See http://www.octoberstrategy.com).
To properly consider the validity of the index gospel, in relation to a strategy that strikes you as novel, you must consider the studies upon which the index proponents rely, and not just their quick and dirty conclusions, particularly when the proponents have a vested interest in low maitenance buy and hold strategies, which minimize their paperwork and administation costs.
I challenge you to consider whether any of the data really disproves the validity of our strategy. Just because this year’s fund winners will prove to be dogs in 3 years, doesn’t mean that picking winning funds for 100 days won’t work. (It does work). Just because most managers can’t beat their index doesn’t mean that our approach can’t identify the 100 day winners. (We can and typically do).
I look forward to the evidence, amd not merely the conclusions, which I submit should state, at most, “Thus far I haven’t studied an approach that is better than index investing.”
[...] Asset Class Returns for 2008 [...]
To Dale Rathgeber. If I may be so bold as to respond to your post…
I for one must work for a living on a day shift job which is NOT in the financial services industry. As a result, I’m not blessed with the ability to follow the markets every single week, let alone each day or hour of trading. Even if I had the ability to watch the stock market each and every hour, I’m not interested in stampeding in and out of various securities like a hedge fund manager.
As a result, I try to find investments that I’m comfortable with holding over the long term. My ideal situation would be to buy a security today that I can comfortably hold until retirement which for me is 20-some odd years down the road. However, reality kicks in every once in a while and a stock may tank, some rebalancing may be required, a GIC may mature or an acquisition may take place which forces me to liquidate an investment. But generally speaking, I’m a buy & hold investor.
I suspect that the majority of Canadians would be like me, where we cannot watch the market every single day. We would all like to build a portfolio which would be low maintenance and allow us to sleep comfortably at night – whether it may be at home or abroad.
In this regard, CC’s favourite is this “couch potato” approach to having an indexed portfolio. For me, I only index in my employer sponsored self-directed pension fund as I’m forced to choose from a menu of mutual funds. Outside of that account, I am a stock picker and I choose individual stocks, bonds and GICs.
In 2009, it will be quite opposite. Bond yields will fall and stock markets will rise.
Dale: September and October weakness anomaly is also documented in Siegel’s Stocks for the Long Run. As an acceptor of behavior finance and behavior economics, psychology has to be considered into analyzing the stock market.
Unfortunately, I will not be starting my blog anytime soon. Personal issues came up and I realize I have to focus on my academics, GRE, and CFA exams. I will be investing with my TFSA and using some sort of market timing.
Another technique that I find to be very important in timing the market is to use P/E (using earning of 5 past years) of a major index. Statistical analysis shows that when the S&P 500 exceeds P/E of 25, the next 5 years of return for S&P500 is zero or negative.
Again, market timing is suitable for tax free accounts like TSFA and RRSP. Indexing in a normal account is good idea, because there are less tax issues.
Phil S: Actually, Dale is a lawyer. How much MER is charged employer sponsored self-directed pension fund in terms of indexed equities, managed equities, and bonds? I would appreciate it.
EconStudent. Well, the way that my employer’s defined contribution pension program works is that we contribute a certain % of our income to it and the company makes a 50% matching contribution. So, in those terms, it’s a total no-brainer as getting the matching contribution is like a free 50% return right off the bat. The problem is the available choices. The program is managed by Sun Life (am I allowed to say who manages it?) and they have ready made “portfolios” for you to choose from. All of the “portfolios” are funds of funds, with the only other exception is the index funds which I chose… The index funds I chose are segregated funds managed by TD (again, am I allowed to say this?). There was no disclosure in the pension information booklet that I received, but when I tried to look it up on the internet, it looks like the TD seg funds are in the neighbourhood of a highway robbery level of 6% MER. So, in terms of what I have available to choose from, NONE of the options are particularly appealing. If it weren’t for the 50% they give me up front, I wouldn’t be participating in this pension program.
Phil S
There is nothing wrong with a couch potato strategy for those who only have a few minutes, once per year or two. Adherents to the October Strategy must spend 10 -15 minutes 4 times per year. The email newsletter picks the funds for the subscribersand they contact their broker or make the transactions on-line.
Econ Student: Can you direct me to further reading on the P/E phenomenon you described in your last post?
Phil S: Thanks for the info. A company that I used to work at offered Fidelity funds for about 1% MER, better than most retail funds I guess.
Dale: It is the graph on page 113 in Stocks for the Long Run, 4th Edition. According to the book, the historic P/E for S&P 500 is around 15. I read somewhere that the S&P500 high of 1600 had a P/E (average earning of last 5 years) ratio around 25 during Fall 2007.
@EconStudent
What about fundamental indexes instead of a traditional cap weighted index, since they don’t get stuck in the high P/E growth stock run ups?
Jordon: Higher P/E ratio means investor believes higher growth is possible. As a result, technology stocks tend to have higher P/E ratios due to higher growth expected. Utilities have low P/E ratios due to low growth. If one is entering a recession, both technology and utility stocks will go lower due to a decrease in growth and P/E ratio tend to drop despite the fact that utility stocks had a lower P/E ratio to begin with. Holding a basket of low P/E stocks before a correction will probably not save you from the pain.
From observing September to November 2008, I came to conclude to correlation between different equities and different markets are very high. My explanation of this is due to the popularity of indexing which include the institutional level. During this market correction, investors were selling index funds and etfs and those index funds and etfs were selling indiscriminately. Even the best and most resistant stocks fell due to the indiscriminate selling of index funds and etfs.
I hope my answer helps.
Dale: I’ve noted my comments to these questions in the comments section of an earlier post. My primary objection to staying out of the market for September & October is not that it didn’t work in the past. It is why it should work in the future. There hasn’t been a convincing explanation of why it should continue to work. This isn’t merely an academic exercise. There are plenty of examples of outperformance that got arbitraged away once they became widely known.
Even if your October strategy worked, why should investors buy your newsletter to implement it? Why can’t they follow a calendar strategy with low-cost funds? How do you add value by picking mutual funds?
EconStudent: I participate in a Group RRSP at work as well. The MER for the funds is in the range of 0.80%.
Phil: Why don’t you talk to your HR person about the expenses of the selection available with the group RRSP? It is possible that the expenses are much lower because though they may be managed by TD, the funds are probably much cheaper than the ones made available at the retail level. If the expenses turn out to be high, talk to your HR about making low cost funds available.
Cdn Capitalist; Sept/Oct abstinence has worked for decades because; (1) most of the great crashes have happened in Oct (investor psychology/skittishness); and (2) because bad economic news from June until Sept flys under the radar untill after summer vacation. Books have been written about this phenomenon, and Even Siegel, page 311 acknowleges the phenomenon.
Index investors should practise autumn abstinence. Better yet, they would become momentum investors too. Momentum has worked since the proliferation of sector funds because of the cyclical nature of economics; whtever sector or industry has recently been out performing will probably continue to do so for 3 months. Sigel at p302 and esp footnote 14 would support this as long as the holding period was not too long.
@ Dale
Here is a great quote from the Index Fund Advisor’s website that seems relevant to your newsletter. Even though it’s based on the US market I think the same would be true in Canada:
“The landmark and definitive study of time pickers was conducted by John Graham at the University of Utah and Campbell Harvey at Duke University. The professors painstakingly tracked and analyzed over 15,000 predictions by 237 market timing investment newsletters from June, 1980 through December, 1992. By the end of the 12.5 year period, 94.5% of the newsletters had gone out of business, with an average length of operations of about four years! ”
http://www.ifa.com/12steps/step4/
It goes on to show the performance of the newsletters, with none of them beating the index over a 10 year period. So why should someone believe your recommendations are better then all of the other market timing newsletters & strategies out there?
If the strategy has been proven to work for decades wouldn’t another newsletter writer or quantitative fund manager have stumbled upon it too? If the October Strategy could actually add several percent of annualized return surely there are funds or investment firm with a lot more resources and capital then you that would have fully exploit it’s benefits, if any actually existed.
Dale: I notice on your website it says “investors can now pay no commissions or transaction fees… on every good mutual fund in Canada”
Unfortunately, this is not true at all. Most retail mutual funds with the exception of PHNＤ series, RBC D series, TD e series, and Steadyhand funds have very high trailing commission. Most retail equity funds have 2.5% MER and up to half of that, 1.25%, is paid to the dealers (according to a bank’s mutual fund prospectus). In this case, it is the discount brokerages. This trailing commission is hidden in the high MER. The discount brokerage is actually making a lot of money from all these trailing commissions. If the discount broker can get 1% from trailing fees and you have 100,000 dollars account and you hold retail equity funds for most of the year, you are paying a 1000 dollars to the discount brokerage. With a lot of discount brokerages providing 10 dollar trades nowadays, 1000 dollars mean 100 trades a year. I am just analyzing the costs that is involved with your methodology. Most of the costs are hidden then obvious.
To be honest, I am impressed by your results. Keep up the good work for your newsletter readers.
Jordan: I didn’t say that the whole momentum plus autumn abstinence combination has worked for decades — just that autumn abstinence has worked for decades, and momentum has worked since the proliferation of mutual funds into narrow sectors. Moreover we aren’t “market timers” in the usual conotation of that pejorative phrase; we are fully invested all of the time except for Sept and Oct — we don’t jump in and out of the market on whims and prognostications, which is what most criticizers of “market timing” rightly object against, and which is why most market timers fail. rather we are “seasonal investors”.
As for your skepticism about our results, you can have a 2 issue trial subscriptin for $1 plus GST to see how we do. The Securities’ Acts mandate that we must charge something, so we charge $1.
Econ Student: you are right to say that we pay hidden trailers, and I’ll make thatmore clear in our propaganda. We don’t pay front or back end sales commisions, (“loads’”) and that is what we were trying to explain. This language dates back to 2002 when many fund investors still paid “loads”. (Some unsavy investors still do pay loads).
Paying MERs that are higher than ETFs is a “concern” of mine that is only justified by the gains that we have enjoyed by trading 4 times per year, to take advantage of both momentum and seasonality. When other factors are equal, we try to pick funds with low MERs. Sadly, when the babyboomers are well into their retirements and selling thaeir equities, stellar equity gains may well erode, and we may then have to reconsider using a more cost-effective approach, and perhaps ETFs. Then perhaps I will subscribe to your newsletter, if we both still believe in seasonality.
Is it possible to remove the advertising showing up in the comments (i.e. Dale Rathgeber’s newsletter subscription offers). Freedom in posting comments is great, but the shilling of services and products should be removed. I think a discussion on September/October underperformance is of interest, but not in the form of someone who wants to demonstrate this underperformance while advertising their service to address it.
Just my two cents…
@Dale
I think your strategy is market timing, from what I gather of your posts & website you suggest the next hot mutual fund to jump into 3-4 times a year based on its momentum.
If you didn’t then you wouldn’t have a newsletter, and as CC pointed out anyone could just use the sell in October strategy themselves.
I’ve created a portfolio to test the abstain in September/October strategy on the Canadian market by using the iShares ETC XIC. I started in Jan 2002, sold everything at the end of August and rebought XIC at the start of November. Of course this won’t show any of the “momentum” of your market timing calls, I just wanted to see what portion of your over performance is attributed to abstinence .
Amazingly your September strategy worked! by avoid the sharp drop from the last 5 months of this year it managed to outperform the buy and hold index up to now. Of course if you look back at the previous ~5.5 years of results up until July 08 (just before cash became the best asset class ever) the September Strategy portfolio was under performing buy and hold by 20% (not including the capital gains and additional transactional costs the strategy would incur).
Should I test the strategy out on other indexes or does it only work with the funds you suggest in your newsletter?
The Autumn abstinence should “work” with any index; we switch out on Set 4 or 5, and back in on Oct27 or 28 based on Brooke Thackray’s research in “TIME IN : TIME OUT”.
We will have to disagree on whether I am a “market timer” in the worst connotation of that nearly meaningless label.
@ Anjo
+1
we’re now up to 4 cents…
if only we could bank those types of returns
Dale: The September/October abstinence might not work with stock markets listed in the Southern Hemisphere, since their seasonality is opposite of the Northern Hemisphere. Of course the financial centers of the world is still in the Northern Hemisphere right now, but that might change in the future. Just my 2 cent.
Econ Student: you might be right about the reversal of seasonality in the S hemishere, unless they have also had a # of Black Octobers as well. I just don’t know the answer.
[...] that Canadian Capitalist had a post outlining some asset class returns for 2008 as well, and in that post he links to a spreadsheet with calendar returns with more history (back [...]
sell in may and go away works..works for me………
[...] the year. Second, even within stocks, diversification offered a measure of protection. Recall that U.S. equities lost 23.5% compared to the 33.8% loss in Canadian [...]
Being at my very beginnings in the stock market in 2008, I was quite lucky to have been spared by all that happened. Thank God I had about 70% of my assets in cash and bonds; I able to scoop up quality stocks for cheap.
Diversification pays!