Since my previous update, the Sleepy Mini Portfolio has gained 5.4 percent. About half of the gains can be attributed to the S&P 500, which is up 9 percent in Canadian dollar terms in the past quarter alone. Long time readers will recall that the Sleepy Mini Portfolio started out with an initial investment of $1,000 in August 2007 and $1,000 was added to the portfolio every quarter ever since. A total of $18,000 has been invested in the portfolio so far and as of March 13, 2012, here’s how it looks:

TDB909 – Canadian Bonds – $3,880 (19.3%)

TDB900 – Canadian Equities – $3,950 (19.6%)

TDB902 – US Equities – $6,238 (31.0%)

TDB911 – International Equities – $6,049 (30.1%)

**Total** – $20,117

**Total Invested** – $18,000

We’ll now add another $1,000 to the portfolio and rebalance it according to our original asset allocation — 20% bonds, 20% Canadian stocks, 30% US stocks and 30% international stocks — using this rebalancing spreadsheet. Here are the results:

## Transactions

TDB909 – TD Canadian Bond Index (e-Series) – Buy units for $343.49.

TDB900 – TD Canadian Index (e-Series) – Buy units for $272.97.

TDB902 – TD US Index (e-Series) – Buy units for $100.00.

TDB911 – TD International Index (e-Series) – Buy units for $283.54.

The TD e-Series Funds have a minimum purchase of $100 and the amount allocated to TD US Index Fund (TDB902) was slightly less than the minimum. Therefore, $100 was allocated to the TD US Index Fund and the amount allocated to the TD International Index (TDB911) reduced by the same amount.

It is interesting to see how the increase in the value of stocks has affected the portfolio’s annualized rate of return. In my previous update, I noted how the portfolio has returned an anemic 2.8% since inception. A mere quarter later, the annualized rate of return of the portfolio is a much healthier 5.3 percent. It goes to show how important it is to be patient when it comes to investing.

How do you calculate annualized rate of return for your portfolio??

@Lynn: I use the XIRR calculator in Excel. Google it and you’ll find tutorials on how to use it. If you are interested, I could write up a post on it as well.

The internal rate of return is highly sensitive to current movements in the value of the portfolio. Suppose your portfolio has been consistently returning an IRR of 10% since inception, then the next day, the value of the portfolio drops 5%. Then the IRR calculated on that day would be close to 5%.

Internal rate of return is a great measure of portfolio performance, in particular since it takes into account the timing of contributions. However, investors should be wary of using it to judge past investment choices. By that metric, a great investment decision yesterday could turn into a poor one today if the investment’s value inexplicably drops today. Don’t forget that there is a lot of “noise” in stock price movements.

@Robillard: Your comment is interesting. I didn’t think IRR would be that volatile for investments held for a long time. I thought the volatility I was seeing with IRR on this portfolio was due to the short time (average holding time is just over 2 years). Thanks for your commet, I learnt something new.

I’ve been using your strategy for index funds over the past 4 years and because of 3-5 buys a year when there is a significant index market drop I’m up 11% on my investment. But I always rebalance using your spreadsheet (on Google docs), so thank you for all the help here!!

@Robiallard

I just sat down with OpenOffice Calc (it does pretty much anything that older versions of Excel do) and played with the XIRR formula. I put in 99 payments of $1000 every thirty days. I found the portfolio value that would give a roughly 10% return and then entered 95% of that value (a drop of 5%).

The rate of return changed from 10.16% to 8.92%.

To go from an IRR of 10% to 5% my pretend portfolio would have to drop in value by 19%.

@John T: Your calculations square with what one would intuitively expect. The investments in regular intervals for 10 years. The average dollar has been in the portfolio for 5 years. A 5% drop would mean the annualized rate of return drops by approx. 1% annually.

@ Robiallard

I played around some more and it seems the longer the period of time the less impact day to day changes in the value of the portfolio have on the IRR.

I did the same exercise but this time I spaced out the $1000 payments every 120 days instead of every 30 days. The IRR on a 5% drop in portfolio value from one day to the next (I actually did a 5% drop on the same day) changes a 10% IRR to a roughly 9.6% IRR. For the IRR to go from 10% to 5% the value of the portfolio would have to drop about 50%.

Thanks for fact-checking my post. The statement I made about a hypothetical situation with a 5% drop in portfolio value dropping the IRR from 10% to 5%, was wrong. I’m rather embarrassed.

My wider point was not far off the mark though. The IRR calculated for a portfolio is sensitive to the current valuation of the portfolio. This is consistent with what CC found when he calculated the IRRs in the prior quarter and in the most recent quarter. He said, “In my previous update, I noted how the portfolio has returned an anemic 2.8% since inception. A mere quarter later, the annualized rate of return of the portfolio is a much healthier 5.3 percent.”

The IRR explicitly tells you what return has been earned on each of the cash flows into the portfolio, based on the current value of the portfolio. A sudden swing in portfolio value can potentially lead one to make very different judgments about the performance of the portfolio.

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I remember in August of 2011, at the height of European debt crisis fear, my XIRR() falls to below 0% for the first time in 2 year. That gave me enough of a perspective to take my house down payment and put it all into my couch potato portfolio. It had turned out to be a good decision so far.

@Slacker: A bunch of us bloggers were talking over beer around Feb. 2009 about how this is a once in a lifetime opportunity to pile into stocks. I wrote about how I was tempted to dial up stock exposure back then. Hindsight being 20/20 and all, it would have been a very profitable move to tactically allocate more to stocks. Good for you that it’s precisely what you did!

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