2008 marked the first down year for the Sleepy Portfolio since its inception in 2005. The low-cost diversified portfolio constructed using a handful of ETFs was down 20% during the year. Bonds and cash now make up almost 33% of the portfolio, 8% more than the target, suggesting that it is time to rebalance the portfolio back to the original targets.

[Sleepy Portfolio Performance in 2008]

Our portfolio performance largely mirrored the Sleepy’s — down 22.5% for the year. Here are the returns for the Sleepy Portfolio for previous years:

2005: 12.9%
2006: 14.7%
2007: 0.2%
2008: -19.9%

Any bets on how 2009 will turn out to be?

This article has 30 comments

  1. Are you going to rebalance the bonds right now or what is your plan for ’09?

    What do you think of William Bernstein’s Advise in The Four Pillars of Investing to decrease the bond allocation by 5% after a major decline of 25% or more?

  2. If you were serious about folling the sleepy portfolio you should rebalance soon.

    For 2009 I do expect a flat to lower bond market and a flat to higher stock market. The biggest problem for a bond/stock portfolio is stagflation, where there is a recession which pushes stock prices down in addition to inflation, which pushes bond prices down as interest rates are increased.

  3. Dividend Growth: in thoes cases the dividends and bond payments would be re-invested at a lower unit price. It’s a fairly small effect but it’s still good for long-term growth. At the beginning additional contributions would probably have a bigger effect when your whole portfolio gets cheaper.

  4. About the only bet I am willing to make is to bet that whatever call I make on market direction in 2009 will be wrong. That’s how it goes for short term market predictions for me…wrong or lucky.

    (By the way, for those of you suffering from a funny bone bear market, I am joking here.)


  5. Canadian Capitalist

    Jordan: I’m not changing the asset allocation policy though I think stocks are a much better value than bonds here.

    DGI: I’m going to rebalance this week. Real-return bonds, REITs and commodities should (theoretically) do well in times of inflation. But, the overall portfolio is likely to suffer in such periods.

    SP: Good point. Re-invested portfolio income should help anytime there is a market downturn but I think DGI’s point is that a portfolio with mostly equities and bonds isn’t likely to do well in times of stagflation.

    Temple: I think that’s how it is for most market prognostications who live by the maxim: “make many forecasts and make them often. A few are bound to be right!”.

  6. CC: does the 22.5% decrease for the year include the purchases you’ve made throughout the year? What about reinvested dividends?

    • Canadian Capitalist

      Brian: The reason our returns are slightly worse than the Sleepy is because the IRR of purchases made during the year (both using new money and reinvested dividends) dragged down the portfolio returns. When we reach the point where annual additions are a small part of the portfolio, the returns will be very similar to the Sleepy’s.

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  8. CC: I’ve been ‘observing’ your portfolio for some time and have mimicked it to some extent with my wife’s holdings.

    Maybe you have outlined this in the past but I’ve forgotten. Have you ever considered or will you in the future tweaking your allocations (for example based on some of DGI’s reasons).

  9. Jordan: Here is my chance to respond to your statement regarding to William Bernstein’s Advise in The Four Pillars of Investing to decrease the bond allocation by 5% after a major decline of 25% or more. Oops run on sentence.

    The markets have fallen about 50% give or take. For your aggressive portfolio allocation and using Bernstein’s advice, you need to increase your equity allocation from 80% to 90% during rebalancing or initial allocation in your case. That is extremely aggressive and leaves very little room for safety.

    For a more traditional portfolio of 60% equity/ 40% bonds, using bernstein advice would be increasing equity allocation from 60% to 70% during rebalancing. As a result, there is a lot of room for safety.

  10. @ CC

    I can see now why you don’t want to adjust the sleepy portfolio, it’s more important to have a consistent long term portfolio for which to measure the success of your own returns against.

    @ EconStudent

    Thanks for the feedback, I was actually only thinking of adjusting the allocation to 15% bonds, I wouldn’t feel safe going any lower.

    What specifically do you think is risky, would it be a scenario where there is another massive drop this year? Because at this point I’m still at 50% cash and plan to try spreading out the remaining purchase/timing risk through the year.

    Berstein recently said in an interview on the podcast “NPR’s Planet Money” that he’s pretty confident that the equity risk premium for stocks is going to be much higher over the next 15 years because everyone else is so frightened.

  11. Berstein = William Bernstein, sorry.

  12. The TSX index has recovered somewhat nicely since the final day of tax loss selling (Dec 24th). Unfortunately, I still think this rally can be a head-fake because the bad economic news continues to pour onto the news on a daily basis. People are still getting laid off work left and right – ultimately, that can’t be good for stock markets if these unemployed have to pull cash out of their investments to pay their bills and such.

    Heck, I could be completely wrong and the entire world’s economy could turn on a dime all of a sudden. The stock market may not have a direct correlation with the economy, which is another thesis that someone can have against my outlook as well. But when it comes down to throwing down my hard earned cash on a big bet, I’m not willing to bet my on an sustained rally at this point in time.

    That said, bonds are WAY overbought right now. 20-yr Government of Canada bonds trading at a 4.5% yield? Who in their right mind would want to lock in that low of a yield for 20 years?!

  13. Phil: I believe the stock market is generally thought to be ahead of the real economy. It started going down before all the job cuts, and it could start going back up before they’re done. After all if companies reduce their costs successfully doesn’t that increase their future prospects? (the other questions is how many large companies are actually managing this challenge effectively, which remains to be seen)

    Less jobs can mean less spending though, which hurts profitability in some industries.

  14. Jordan: You are very lucky that most of your assets were not in equities when the market correction occurred. I am biting my tongue and rebalanced, because I cannot afford to loose out on a potential rebound. My understanding of systematic risk seems to be limited, but I am doing more research and reading nowadays and it seems to help.

    No one knows what will happen in 2009, but from what I read, people are projecting that there will be a huge rebound in the first half and depending on the economic data, there might be another 50% correction in the second half.

    Are you comfortable with understanding and managing systematic risk if you are using index funds and fundamental index funds? ETFs are mutual funds, but I read authors suggesting that ETFs are a whole different animal. Anyways, jumping to 85% equity weighting right now may not be a good idea if the answer is no.

    I think starting at 50%/50% will be the best bet. I know that when I started investing, my initial asset allocation was 25%/75%.

    By the way, nothing to be sorry about. Peter Bernstein is a famous economist, investor, and author, but in the diy financial blogging world, Bernstein usually refers to William Bernstein due to the popularity of The Four Pillars of Investing.

  15. Hi everyone, I have to weigh in again, because the bond-talk is getting out of hand! (Not really, I am just being dramatic.)

    Specifically, I see a lot of highly conservative asset allocation suggestions, with respect to bonds. I just can’t get my head around knowingly banishing such a large part of an investment portfolio to chronically weak returns. I wasted years with an overly conservative asset allocation in bonds, and while a good part of my money languished in bonds, barely matching inflation, my smaller allocation to stock investments powered forward.

    My point is that for a long term investor, bonds are nothing more than a drag on returns. Historically, bond performance barely keeps up with inflation and isn’t particularly tax efficient (if you are buying bonds directly outside of an RRSP). That is not where I want to have any of my money. It becomes “lazy” money, so to speak. Buying bonds is tantamount to trying not to lose too badly, rather than trying to win.

    Just my $0.02…at 2% interest.


  16. Temple: I have no problem with an aggressive allocation, but one has to be aware of the risks involved and potential ways of managing those risks. Index funds and etf are tools not a magic solution to high equity returns. If there is a strong rebound, selling equity is probably a good idea.

    Jordan: Continued from last post. I recalled you said previously that you will be buying a house in Vancouver in a few years. The money that you want to buy a house needs to be in safe place, which is not the stock market. 0 inflation or even deflation are likely scenarios in the next two years and I know one of the major bank offer a 4.00% 2 year GIC. 4.00% real return annually with zero credit risk (first 100,000 is insured by Government of Canada) is not bad.

    Historically speaking, there were times where stock dividend yields were higher than bond yields for extended period of time (Four Pillars of Investing mentioned this). If that becomes the case in future, then there might a large room for further correction in the global stock market.

  17. Hi EconStudent,

    I think the risk of mediocre returns is far more dangerous than the short term risk of stock price fluctuation. There is nothing particularly aggressive about a 100% stock portfolio. Stocks, over the long term, offer the most consistent and reliable returns of any asset class. I would argue that bonds more risky than stocks over the long term, due to their paltry returns. The one point you and I agree on is that bonds are useful for parking short term money earmarked for something else in the near future, but that is their total use to investors. The same goes for gold, which is another asset class with little to recommend it.

    Also, why would you think selling equity is a good idea if there is a strong rebound? Personally, if there is a strong rebound, I will continue to buy stocks. That said, if the markets continue to decline, I will also continue to buy stocks. My point is that general statements on market direction and when to buy and sell are fraught with difficulty and inaccuracy. Timing the market is unlikely to be successful over the long term, as is trying to predict the effect of inflationary or deflationary pressures. The most successful investors are those largely in stocks over a long time horizon. Why deviate from a winning formula?

    For the record, I don’t invest in ETFs or index funds, but I think they are a great choice for many people. I don’t understand what you mean when you say they are not a magic solution to high equity returns. Rather, I think index funds and index ETFs are the perfect solution for high equity returns for most people. Low fees, high tax efficiency and simplicity, coupled with the superior returns of stocks: sounds like a winning combination to me.

    Thanks for reading my comment!


  18. Temple:

    Nikkei peaked around 38,000 and it is around 9000 right now after 20 years. You are thinking about a bull market and in a bull market, stocks beat everything out there. We are in a bear market of a long duration.

    Risk increases when equity prices increases. As a result, only by selling stocks when stocks go up decrease the amount of risk in one’s portfolio. (This is the idea behind rebalancing) Again you are thinking about a bull market, when anytime especially corrections is a good time to buy.

    Index funds and etf are magic solutions to high equity returns in a bull market.

    I personally want the bull market to return, but the global economy is going through major changes and no one knows how bad things might turn out. Manulife is a big insurance company, but it took very desperate measures recently. The global economy is still ok at this point.

    S&P 500 might rebound to let say 1100 and another correction of 50% will get it to 550. You must able to absorb such shocks. S&P 500 is probably a very good buy at 550 due to the fact the risks involved is lower than at 1100. I think it is really hard to explain the idea of risk verbally, since none of my favorite books: random walk down wall street, stocks for the long run, or four pillars of investing do it very well.

  19. For anyone who claims stocks are good long term investments, have a look at the S&P500 10 year chart. 10 years, zero return.

  20. Aloha E, your argument that stocks are a bad investment is disingenuous. Your statement is that 10 years of flat returns in the S&P500 index prove that stocks are poor investments. However, you are arbitrarily picking a period of flat returns, which are not uncommon in stock markets, and deriving a false conclusion regarding the long term performance of stocks. You and I both know that longer term stock returns are almost always positive, and that any one of us could arbitrarily choose similar 10 year periods that have positive returns. Also, you make the similarly flawed assumption that a person would have invested a single lump sum in the market 10 years ago and left it at that. I doubt very much that is applies to most investors.



  21. Hi EconStudent,

    Your parallels to the Nikkei aren’t really relevant to the US and Canadian markets. Valuations in the Nikkei and Japanese real estate markets were far higher at the peak than those seen recently in Canadian and US markets. Also, the demographics in Japan during the last 20 years have not been favourable to the economy. I don’t see many parallels between Japan and here, except on a very superficial level. An interesting point to note is that despite the long period of poor returns in the Japanese stock market, the longer term (albiet, very long term) gains in that market are still positive.

    Also, like I mentioned above when responding to Aloha E, you can arbitrarily choose periods of poor stock market performance, but when you do that, you make two flawed assumptions. First, that a person invested at whatever peak you have arbitrarily chosen in whatever stock market you have arbitrarily chosen, and second, that the same person added no additional funds or derived any dividends during that period. Both assumptions are likely incorrect.

    Finally, you say that we are in a “bear market of long duration”, and forecast some prices for the S&P. Forgive me, but I am skeptical that you have such powerful predictive powers. You may be right, but I doubt you are doing anything but guessing. I am going to stick with 100+ years of data that confirms stocks are the superior investment over the long term. Also, you are incorrect in that you think I am myopic in assessing stocks only from a bull market perspective. I’ve been investing in stocks for about 12 years, maybe a bit more, and bonds for about 20 years. I know where my returns are coming from, and it sure isn’t bonds. I understand risk managment, and my point is that choosing bonds is far more risky than choosing stocks. Bond returns over the long term are, at best, barely positive when adjusted for inflation. This is almost never the case for stocks, which are invariably the superior asset class in the long term.

    My point is that the real risk is giving in to risk aversion, and playing not to fail, rather than playing to win.



  22. Canadian Capitalist

    Temple: I agree with your comments about bonds. Bonds really do reduce portfolio returns. For example, with a 20% allocation to bonds and assuming expected returns of 3% from bonds and 8% from equities, a 20% allocation to bonds reduces expected returns by 1% (20% of the 5% difference in expected returns) assuming no rebalancing.

    However, rebalancing will have a positive effect, so the actual shortfall will be less than 1%, say 0.5% or so. The key question for long-term investors is: do you want to give up a little bit of return for lesser risk in the form of lower volatility. My guess is that for most people the answer would be yes. The reasons could vary from keeping some money for a rainy day to not comfortable with the huge fluctuations that come with being 100% in stocks.

    At this point in time, stocks have much better expected returns than bonds but this is not always so. Someone with 20% in bonds in 2007 would have been thankful that they are able to rebalance into stocks (I personally was able to do this). If the typical difference in expected returns between stocks and bonds is 2%, a 20% allocation reduces expected returns by 0.4%, a lot of which can be made up by disciplined rebalancing.

    Bottomline: A small allocation to bonds may hurt returns somewhat but the benefits in the form of reduction in volatility of the overall portfolio makes it worthwhile for most investors.

    It seems like a throwaway remark but I disagree with your comment about gold. It is far too volatile to serve the function of parking money earmarked for a specific purpose.

  23. Hi CC, you are right, my remark about gold wasn’t clear. I actually meant that gold is an asset class with terrible long term returns, and really doesn’t belong in a rationally designed portfolio. I definitely would not park short term money in gold. Thanks for clearing that up. That was a work-related error, caused by trying to type too quickly at work, but while also trying to hide my slacking off from my boss. Proofreading suffers, unfortunately.


  24. Temple:

    I was not predicting prices, but just using numbers to illustrate what might potentially happen.

    I agree with you that most people do not buy all their shares at one time. However, Jordan was tempted to increase his equity allocation to 85% in very short period time and I was pointing out that this might not be a good idea.

    One event that I am concerned about is that long term equity yields will go higher than long term bond yields. This has happened in past bear markets. If this happens, it is a great time to buy equities. The process might be a lot more painful if you enter the bear markets with 100% in equities.

    I am young and I will buy during the bear market and accumulate shares. Again, I do not expect it be to an easy ride. William Bernstein says a bear market is good for young people.

    Boomers are the wealthiest segment of North American society. They are ready to sell their assets for retirement. Who will be the buyers? No one is sure at this point.

    I agree with you that the panic of 2008 doesn’t look like Nikkei’s bubble or a bubble at all. Again I adhere to behavior finance to says the stock market is efficient yet irrational.

  25. If stock yields continue to go up that’s good for re-investing, although it might take a while for the increased yield to compensate for the lower price.

    I’ve been wondering about the best bond allocation as I start to build an investment portfolio. I want a high stock allocation, but it makes sense that rebalancing with some more stable component can increase returns (especially in down years when bond prices may go up). Then again if the bond allocation is small the rebalancing won’t have much of an effect.

    Stocks for the Long Run suggests that diversification by sector may be more effective than diversification by country in the future. Maybe utility companies could be a good substitute for bonds since they should be more stable.

  26. Silicon Prairie:

    Canadian treasury bond is very expensive right now. Corporate bond might depreciate further. No one knows. Best bet might be 2 or 3 year GICs. Sounds ridiculous.

    I recommend 50%/50% to start off. Slowly work toward 80% equity allocation if that is your goal.

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