The 2011 performance results are now in for my model Couch Potato portfolios. Many thanks to Justin Bender at PWL Capital in Toronto for providing these data. Complete performance results are available here, and an updated PDF is posted monthly on my Model Portfolios page.

It was a challenging year: the MSCI World Index, which measures the equity markets in all developed countries, was down 3.2% in 2011, and emerging markets plummeted over 16%. But broad diversification once again proved its mettle in 2011, as a multi-asset-class portfolio did much better:

The Global Couch Potato (ETF version) 0.54%
The Complete Couch Potato 2.36%
The Yield-Hungry Couch Potato 5.11%
The Cheapskate’s Couch Potato -2.24%
The Über-Tuber -2.07%

Breaking it down

While equities were down overall, there was a lot of variation. Europe, Japan and emerging markets got clobbered, and Canada was down about 9%. However, US stocks finished in the black for the year. Currency diversification helped too, as the loonie declined against the US dollar, Japanese yen, and British pound.

iShares S&P/TSX Capped Composite XIC -8.93%
Vanguard Total Stock Market VTI 3.22%
Vanguard MSCI EAFE VEA -10.69%
Vanguard MSCI Emerging Markets VWO -16.93%

Real estate went a long way toward offsetting the negative returns in the overall Canadian equity market:

BMO Equal Weight REITs ZRE 13.85%
iShares S&P/TSX Capped REIT XRE 20.95%

Fixed income once again defied all expectations and delivered outstanding returns, even at the short end:

iShares DEX Universe Bond XBB 9.38%
iShares DEX Real Return Bond XRB 17.87%
Claymore 1-5 Year Government Bond CLF 5.37%
Claymore 1-5 Year Corporate Bond CBO 4.65%

A portfolio for all seasons

There are a couple of lessons we can take from 2011. The first is that a truly diversified portfolio must include asset classes that have little correlation (or even some negative correlation) with stocks. Real estate helps (so does gold, if you’re so inclined), but the best way to get that diversification is through high-quality bonds. They should be part of just about everyone’s portfolio.

The second lesson is that once again most forecasts proved to be dead wrong. Here’s just one example from a major Canadian bank that predicted: “Equity markets should have another good year,” while “we expect 2011 will be increasingly challenging for bondholders in the developed world.”

Of course, the crystal ball gazing is well under way for 2012. My only prediction for the year is that these forecasts will prove just as unreliable as always. Tune them out, build a porfolio for the long-term, and stick to your plan.