Returns in 2009

In 2009, our theoretical portfolio would have achieved a positive return of 15.1% for a DIY Canadian investor. Why?
 
2009 was Canada’s year, both in terms of stock market returns and the performance of the Canadian dollar. Equity markets in Canada were boosted by an increase of 78% in the price of oil and by a 27.6% increase in the price of gold (in $ U.S.), and the Canadian bond market, despite interest rates beginning and ending the year very low, nevertheless contributed positively to a portfolio invested in the overall Canadian bond market (in comparison, U.S. government treasuries lost 3.5%). Outside Canada, the returns to Canadian investors from the very positive results of stock exchanges in developed countries (U.S. and EAFE) were significantly undermined by the rising Canadian dollar against the euro and U.S. dollar. Returns from equities in emerging countries also suffered from the rising Canadian dollar, but those markets posted such strong results that the returns were still spectacular, even for a Canadian investor.
 
The portfolio was penalized by the 50% weighting in bonds, but don’t forget that in 2008 the same portfolio greatly benefited from that weighting. And the geographical distribution of the equity section of the stock portfolio (75% outside of Canada) hurt returns in part because of the strong Canadian dollar, but again remember that the weak Canadian dollar helped returns to Canadian investors in 2008.

For the last three 3 years this hypothetical portfolio has produced the following results: 0.0% in 2007, (12.28) % in 2008, and 15.1% in 2009. These returns, which we consider respectable considering how difficult markets have been for the last 3 years, show the benefits of diversification.
 
Other comments on our calculations:

• some of our figures and calculations may be imprecise, but the trends and overall message remain the same.
• the theoretical portfolio contains no management fees; in reality investments in equity index funds require payment of modest management fees, and equities and bonds involve transaction costs. For the major ETFs, see our commentary Portfolio Management 5 - ETFs for your portfolio . The trick is to minimize costs; see Costs of investing on our site.
• An investor should rebalance his portfolio regularly to ensure that the distribution of investments among the various asset classes continues to be appropriate. The beginning of the year could be that time. For more, see Portfolio-rebalancing on our site.

Conclusion

So what are the lessons from the past year? 2009 was an exceptional year in equity markets, but you cannot assume that 2010 will produce similar results. Use the beginning of a new year as an opportunity to review the returns of your own portfolio and its composition.
 
In our second commentary on the year 2009 we'll look more generally at the year’s highlights for a DIY investor.