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The financial markets in 2011: how did your portfolio do?
Page 1 of 2The beginning of a new year is the ideal time for all of us to
critically review the performance and composition of our portfolio. In
this commentary on the year 2011, we look at how the various financial
markets behaved, and the performance that would have been produced by a
portfolio created following some admittedly arbitrary criteria but which
are nevertheless based on the philosophy of our site. We hope it will
encourage you to look at the returns and composition of your own
portfolio, and consider what changes might be appropriate.
First, a recap: 2007 to 2010 financial markets
Many of the factors at work in 2011 are the same ones that affected prior years. So let’s start with a recap of those years.
We performed the same exercise for the years 2010, 2009, 2008 and 2007, and it
is interesting to note how the same factors influenced results in those
years, but not always in the same direction; see for example The financial markets in 2010: how did your portfolio do?
- The equity markets, while performing positively but modestly in
2007, were directly affected by rising oil prices with the resulting
dramatic increase in the Canadian dollar against the U.S. dollar and to a
lesser extent against the euro.
- In 2008, just the opposite: the equity markets plunged, and the
price of oil plummeted, causing a sharp fall in the Canadian dollar
against the USD and against the euro; this sharp drop cushioned equity
losses for Canadian investors.
- In 2009 the price of oil rebounded sharply (without threatening the
historic highs of 2008), the Canadian bond market remained relatively
stable, the housing market hit its low in May and ended up for the year
in Canada, the Canadian dollar rose against almost all currencies, and
global equity markets, after hitting rock bottom in March 2009, made a
- In 2010,
the price of oil rebounded sharply towards year-end ( without
threatening the historic highs of 2008), the Canadian bond and
residential real estate markets remained strong, the Canadian dollar,
propelled by the comparatively better economic performance of the
Canadian economy and by rising oil prices rose against almost all
currencies, and the canadian and most other equity markets for a second
year experienced strong numbers.
2011 financial markets
the price of oil and of gold were up 10%, the Canadian bond and
residential real estate markets remained strong, the Canadian dollar did
not benefit remaining essentially flat against the US dollar and Euro,
and the canadian and most other equity markets had negative total
returns, while the US equity market total; return was marginally
When the dust had settled here are the numbers for the year 2011:
Reference index recommended by our site
Returns in 2010
DEX Universe Bond Index
2.1% (in $USA) (2.1% in CDN $)
Equity- other developed countries
-12.1% (in $USA) (-12.0% in CDN $)
Equity- emerging markets
-18.4% (in $USA) (-18.3% in CDN $)
NB- For the returns of the various markets for the past 10 years, and
for more information on the major indexes, see Investment Returns and
on our site. Before discussing the figures for 2011, we want to
draw the attention of our readers to a free and very useful Canadian
source where you can find centralized financial data of historical data
since 1982: it is the site of Libra Investment Management (see on their website under Links-Research. Libra describes itself as a fee-only
adviser who draws its compensation solely from its clients, an approach
favored by our site; see the section Independent Adviser
on our site.
Sources: Bank of Canada
US$- Bank of Canada
Euro; Standard & Poors
500; Standard & Poors TSX Composite; MSCI.com/products/indices/country_and_regional/dm/performance.html
EAFE & EM; PC Bond Analytics
PDF doc.2079. Gold was up 10.1% (US$) and oil (WTI- US$) was up 10.0%; source The Capital Spectator . For other discussions of 20112, see Bloomberg (2nd also here ), Capital Spectator , Abnormal Returns , Ritholtz (2nd also here ), OldProf.Typepad , and CanadianCapitalist
(also 2nd here ).
Structure of our model portfolio
Given the above results of the various markets, what was a realistic performance in 2011 for a Canadian investor?
First, our site does not believe that the average investor can regularly
and in the long-term, beat the market; for more, see the sections Our Philosophy and Beat the Market?
on our site. Under this approach, for investments in stocks, exchange
traded funds or index mutual funds are ideal; see on our site Index Funds (ETF’s and index mutual funds)
. With these products, you will realize long-term returns approximating
the returns they track (less management fees, which are typically modest
for these products). For investments in debt securities, to minimize
costs and portfolio volatility, we recommend avoiding if possible bond
funds and to invest in individual debt securities using the bond ladder
method; we consider provincial bonds as the ideal product for this
approach. See Building a ladder
on our site.
But what percentage of your portfolio should be invested in the various
markets? This issue is by far the most important factor in determining
the performance of your portfolio; we discuss it in detail in the
following sections of our site; Asset Allocation
and Geographic diversification
. For the purpose of our annual reviews we assume that our hypothetical portfolio is composed of the following:
- The portfolio is divided 50-50 between stocks and bonds (a division which we recognize to be conservative)
- bonds are limited to the Canadian market (non-Canadian readers: beware);
- the equity portion is invested 25% in Canada (which is a heavy
weighting given the small size of the Canadian equity market in global
- the balance of the equity portion is invested equally between the
U.S. market and other foreign markets, which roughly corresponds to
their respective weights in global markets; and
- investments in those foreign non-USA markets are divided equally between developed and emerging countries.
NB: It goes without saying that such a portfolio will probably not
be appropriate for you as an investor, but it nevertheless gives you a
starting point when analyzing your own portfolio. Calculating returns is not the easy exercise it might appear at first glance; see CanadianCouchPotato
or as a PDF
doc.1967 or on our site Investment Return Measurement
Returns in 2011 of our model portfolio
In 2011, our model portfolio would have achieved a positive return of 1.4% for a DIY Canadian investor. Why?
In 2011, the portfolio was saved by the 50% weighting in bonds, which offset poor equity returns in Canada and most places outside Canada; the Canadian dollar had little impact. In comparison, in 2010 the portfolio was penalized by the same 50% weighting in bonds and by the
dollar impact on foreign equities.
For the previous 4 years this hypothetical portfolio had produced the
following results: 0.0% in 2007, (12.28) % in 2008, 15.1% in 2009 and 8.6% in 2010. For those interested, The Capital Spectator
doc.1968 has presented not only annual returns for various markets in
2010, but also for the past decade. The big picture is a very modest, annual return of 2.4% over the past 5 years for our model portfolio- not a very encoraging result, but a correct reflection of poor markets over that period.
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.
Last Updated ( Saturday, 28 April 2012 )
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