How the Couch Potato Portfolio did in 2015

Quite well in “the year when nothing worked”

  6

by

Online only.

  6

With 2015 now in the books, it’s time to look back on the year that was.

It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January, and then again in July. That spelled another year for higher-than-expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar.

All in all, a diversified portfolio did quite well in the “year when nothing worked.” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details.

The building blocks

Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios:

TD Canadian Bond Index – e (TDB909) 3.07%
TD Canadian Index – e (TDB900) -8.51%
TD US Index – e (TDB902) 20.74%
TD International Index – e (TDB911)

Source: TD Canada Trust
18.90%
Vanguard Canadian Aggregate Bond (VAB) 3.48%
Vanguard FTSE Canada All Cap (VCN) -8.74%
Vanguard FTSE Global All Cap ex Canada (VXC)

Source: Vanguard Canada
17.04%

Now let’s put these blocks together and see how the model portfolios performed. At the beginning of 2015, I expanded the TD e-Series and ETF models to include five different asset mixes, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks). Here are the returns for each version:

TD e-Series funds

Conservative Cautious Balanced Assertive Aggressive
30% equities 45% equities 60% equities 75% equities 90% equities
5.26% 6.36% 7.45% 8.55% 9.65%

Vanguard ETFs

Conservative Cautious Balanced Assertive Aggressive
30% equities 45% equities 60% equities 75% equities 90% equities
4.97% 5.72% 6.46% 7.21% 7.95%

Why the differences?

The first question that leaps out from these numbers is why the TD e-Series portfolios outperformed the ETFs across the board. After all, the e-Series funds carry management fees that are roughly 0.30% higher. There are two main reasons:

Different Canadian equity indexes. Vanguard’s VCN and its TD e-Series counterpart both track the broad Canadian market, hold roughly the same number of stocks, and use a traditional cap-weighted strategy. However, their index benchmarks are different: Vanguard’s ETF tracks the FTSE Canada All Cap Index, while the e-Series fund tracks the S&P/TSX Capped Composite.

The indexes have slightly different rules governing which companies are included and the weight assigned to each. As a result, from year to year their relative performance will vary slightly and randomly. This year the S&P index won out. Over the long term, these differences have tended to even out.

The ETF portfolios include emerging markets. The ETF portfolios get their foreign equity exposure from Vanguard’s VXC, which holds roughly 10% in emerging markets. This asset class was essentially flat in 2015: returns were a little above or below 0%, depending which index you tracked. The TD International Index Fund includes only developed markets, which performed much better on the year.

Again, this is simply a random result that worked in favour of the TD funds this year. Over the long term, adding emerging markets to a diversified portfolio should be expected to boost its expected return, though it may also increase volatility.

Later this week I’ll take a closer look at the 2015 performance of the Tangerine Investment Funds, the simplest of my model portfolio options.

6 comments on “How the Couch Potato Portfolio did in 2015

  1. Thanks Dan. My C.P.P hasn’t let me down yet.

    Reply

  2. This is not rocket science folks. Just hold Mawer Balance Fund and some Mawer Global Small Cap. Been doing this for years. You don’t need a whole mess of ETF’s or TD e funds.

    Reply

    • “a whole mess”? It’s four funds. You can count them on one hand and still have a finger to spare. It’s exactly two more funds than what you’re proposing.

      The TD funds have an MER of about 0.4%. The funds you just quoted are 1% and 2%. These fees are still very low compared to some funds, but I think you can curb your enthusiasm a bit.

      Reply

      • According to Mawer site, the annualized return (after fees) for the Balanced Fund was 10.5%. 2-Yr = 11.3%, 3-Yr = 14.2%, 4-Yr = 14.5%, 5-Yr = 11.3%, 10-Yr 7.9%, and it only dipped 19.9% in that awful 2008. Top quartile for 20 years.

        You need to look past the tiny MER before you advise to curb enthusiasm. This is a winner with low fees and performance over the long term.

        Reply

        • Bringing up MERs confused my point, which is just that these aren’t complicated portfolio.

          My goal wasn’t to compare the performance of these portfolios, which I don’t have the expertise to do. Plus, it will always be easy to go out into the world and find some mutual funds that are beat the index, even over a long period of time. The whole point of indexing is that it isn’t easy to identify these funds ahead of time.

          Reply

  3. I would gladly take these returns after the miserable performance of my own endeavors.

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *