Weekend Reading: Passive Investing Returns Edition

One concept Couch Potato investors need to accept is that their portfolio will move up and down with the market(s). Since the essence of passive investing means tracking a particular index, or set of indices, an investor’s returns must closely mirror those of the index (minus a small fee).

That notion can be downright scary for nervous investors wondering when the next stock market crash will occur. Indeed, one of my biggest fears as a passive investing advocate is that there will be a massive correction at some point and all the investors I’ve helped move to a low cost portfolio of ETFs will blame me for their losses.

But I know that’s not rational and there’s a mountain of academic and empirical evidence to support a passive approach. That, and I sleep better at night knowing I give the best advice based on these three principles:

1. Future returns are unknowable, but the best and most reliable predictor of future returns is cost. The lower the better.
2. Active management, including the idea that market timing can deliver all of the upside while also protecting the downside, sounds better in theory than it works in practice.
3. Asset mix matters. You need to be comfortable with your portfolio mix in good times and bad to avoid panic selling and second-guessing.

That last one is important. If you’re thinking about a passive investing strategy, or have recently started one and are nervous about an inevitable correction, it might be helpful to consider the range of possible returns you’d be willing to accept.

For example, a conservative portfolio of ETFs with 70 percent bonds and 30 percent global stocks had 20-year annualized returns of 5.25 percent. Its lowest 12-month return (March 2008 to February 2009) lost 7.93 percent.

Alternatively, an aggressive portfolio of 90 percent global stocks and 10 percent bonds surprisingly had identical 20-year annualized returns of 5.25 percent. However, the dispersion of those returns was much more volatile. The worst 12-month period saw losses of 31.09 percent.

Finally, a traditional balanced portfolio made up of 60 percent global stocks and 40 percent bonds had 20-year annualized returns of 5.38 percent (the highest of the three portfolios), and saw its worst 12-month period lose 19.62 percent.

Source: Canadian Couch Potato model portfolio returns

We’ve lived through an unprecedented bull market going on now for more than 10 years. It’s perfectly normal to feel like you want a more aggressive 100/0 or 80/20 portfolio. But do you have the temperament to hold that portfolio when faced with a 30 percent drawdown? Or will you completely abandon the strategy, thinking “it’s not working anymore”?

There are many ways to implement a passive investing portfolio. I have direct experience with three of those methods, with the one-ticket solution (VEQT) in my RRSP and TFSA, the TD e-Series funds in my kids’ RESPs, and a robo-advisor solution with my wife’s Wealthsimple RRSP.

All three portfolios have had a turbulent year, suffering big losses in May and August, but otherwise gaining steadily throughout the year and more than making up for the short correction at the end of 2018. Here are my personal rates of return so far this year:

• RRSP – One-ticket ETF (VEQT) – up 13.13 percent
• TFSA – One-ticket ETF (VEQT) – up 14.36 percent
• RESP – TD e-Series funds – up 13.69 percent
• Wife’s RRSP – Wealthsimple 80/20 portfolio – up 10.4 percent

As you can see from both the data on long-term returns, and the individual returns of various portfolios, it doesn’t necessarily matter which passive portfolio you adopt. What matters is your behaviour and how you react when markets (and your portfolio) move up and down.

A passive portfolio won’t protect you from a market crash. As investors, we must accept that occasional losses are inevitable. To cope, we need to design a portfolio with an appropriate asset mix for our risk tolerance and time horizon – and have the patience to stay the course.

This Week’s Recap:

This week I wrote about five retirement planning options to help you reach your retirement goals.

Thanks to Jonathan Chevreau for sharing my thoughts in his latest piece for the Financial Post: How investors can navigate the new world of ETF overload.

And Justin Bender from PWL Capital launched his long-awaited podcast this week and included a question from me about the benefits of U.S. dollar ETFs.

Weekend Reading:

An excellent and informative piece from the How To Save Money blog on the 7 best travel insurance credit cards for people over 65.

Which Canadian rewards program is worth the most? Check out this comprehensive guide from the Credit Card Genius team.

Here’s Rob Carrick on how seniors should prepare for the day when they can no longer look after their retirement investments.

Read this complete guide to your RRSP from the Handful of Thoughts blog.

Nobel Laureate Daniel Kahneman explains why trying to convince other people to change their mind is a waste of time. It turns out, the key isn’t to apply more pressure but rather to understand:

Head over to the Farnam Street blog to listen to the full episode.

The Canadian financial advice industry needs higher standards and higher education requirements. It begs the question: Is it unethical to be incompetent?

The evidence is clear that ETFs give the best returns for investors. Here are seven strategies for maximizing returns from ETFs.

A Wealth of Common Sense blogger Ben Carlson gives a eulogy for the 60/40 balanced portfolio.

Nobody wants to lose money, so it is common to wonder what can be done to avoid the potentially negative stock returns that often come with a recession. Ben Felix explains:

Dale Roberts asks what would it take to reach F.I.R.E., and really retire early?

Finally, My Own Advisor Mark Seed answers an age old question of whether to pay down your mortgage or invest.

Have a great weekend, everyone!