Background: I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, the bulk of which was invested in individual stocks at that time. The portfolio started off with an initial cash infusion of $100,000 but no new money has been added since. This is a real world portfolio: every transaction is made at the bid price, commissions are paid and foreign exchange conversions are done at retail rates. The portfolio has a target allocation of 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. The cash portion is invested in a high-interest savings account that is available through many discount brokers.

The third quarter was a bad one for the stock markets: the TSX Composite fell 12.6 percent, the S&P 500 fell 14.3 percent, EAFE markets fell 19.60 percent in US dollar terms and Emerging markets fell 23.2 percent in US dollars. The Canadian dollar lost quite a bit of its value against the US dollar as well losing 8.7 percent. Since half the value of the Sleepy Portfolio is denominated in US dollars (note that though VEA and VWO are denominated in US dollars, Canadian investors are exposed to currency risk between the CAD and the basket of currencies that the ETF holdings are denominated in — Pound, Yen, Euro etc., not the CAD-USD exchange rate) , the loss in value of the Canadian dollar helped cushion the steep drop in stock values. As of October 1, 2011, the Sleepy Portfolio is valued at $125,766, a loss of 7.7 percent in the third quarter of 2011. Bonds held up quite nicely: both XSB (short-term Canadian bonds) and XRB (real-return bonds) posted modest gains. Canadian REITs were a surprise. XRE, the REIT ETF, was down slightly.

Here’s how the portfolio looked as of October 1, 2011:

[Sleepy Portfolio Snapshot as of October 1, 2011]

The only activities in the portfolio during the quarter were distributions from the component ETFs, which totalled $606. If EAFE markets continue to slide down even more, we’ll be selling a bit of cash, bonds and REITs and buying VEA.

This article has 10 comments

  1. @CC: This quarter has been a good reminder of the value of diversification. Bonds, real estate and foreign currencies went a long way in cushioning the blow.

    One clarification: You say that “half the value of the Sleepy Portfolio is denominated in US dollars,” but this is not quite true. VEA and VWO are traded in US dollars but they are denominated in their native currencies, so a rising US dollar would not have affected a Canadian investor in these funds. If we got a boost here it was because of a rising euro, yen, Swiss franc, yuan, etc.

  2. @Canadian Couch Potato: Since I reported VEA and VWO index returns in USD terms, the loss in value of CAD against the USD helped in cushioning the drops in US dollar terms for the Canadian investor. You are right of course that VEA and VWO are *not* influenced by the CAD/USD fluctuations but by the fluctuation of the CAD against the basket of currencies those assets are denominated in. I explained it in an old post and I’ll clarify this better in this one:

  3. Thanks for the update CC! Bonds seem to be helping you in this climate.

  4. @CC: For the record, I know that you knew that — I think you taught it to me. 🙂 Just wanted to make sure your readers remembered, as this is so often misunderstood. Your posts on this subject are worth another link!

  5. CC. Why did you bother to put “cash” in an investment portfolio? Is this for some kind of pedantic reference exercise? I consider high interest savings accounts as a savings vehicle – a place for dividends to accumulate over months before there’s enough to cash accumulated to buy another stock. I don’t consider it an investment in and of itself.

  6. Just wondering if you would look at HXT??very low MER and the dividends are payed back to the fund.Is this not better than XIC???
    I’m a big fan of horizion funds with low mer’s and the tax treatment.
    any thoughts??

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  8. Chad, some people do not like funds like HXT because they are swap-based. That means there is additional counterparty risk over the more straightforward alternatives. I suspect this risk is overblown, but it is something you need to consider when comparing the funds.

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