Larry MacDonald


Author and freelance writer

Jan. 22, 2017

Updating the One-Minute Portfolio for 2017

The One-Minute Portfolio is made up of two exchange-traded funds (ETFs): the iShares S&P/TSX 60 Index Fund (XIU) and iShares Canadian Bond Index Fund (XBB). Once set up in an online brokerage account, about the only work to be done is to rebalance the weights for XIU and XBB at the start of each year. As the portfolio’s name suggests, this takes about a “minute.”

Created in 2003, annual updates (see below) are finding that simplicity yields respectable returns. According to the latest of these updates, the average annual compound rate of return for the basic version of the One-Minute Portfolio was 7.8 per cent during the 14-year period from 2003 to 2016. The extended version recorded an average annual compound return of 8.3 per cent.

The basic version of the One-Minute Portfolio, which uses an asset allocation of 60 per cent for XIU and 40 per cent for XBB, jumped 13.4 per cent in 2016. This was because of gains of 21.1 per cent in XIU and 1.4 per cent in XBB. Credit largely goes to a pickup in the global economy.

To rebalance, some units in XIU now need to be sold and the cash used to buy units in XBB until the weighting pattern is returned the target of 60 per cent for XIU and 40 per cent for XBB. This maintains the risk level of the portfolio (however, investors are free to select target asset allocations more in line with their risk preferences).

The extended version of the One-Minute Portfolio uses weights that are sensitive to market trends, an idea adapted from Benjamin Graham’s book, The Intelligent Investor. In general terms, the portfolio rule is: If the three-year moving average of annual returns for XIU rises above the historical average of 7 per cent to 9 per cent for stocks, its weight is reduced. Below that level, it’s raised.

After inception, XIU’s weight was set at 70 per cent because the three-year moving average return for XIU was below historical norms as a result of the bear market of 2002. During the subsequent vigorous bull market, the weight was lowered in stages, to 40 per cent by early 2008.

In early 2009, during the previous financial crisis and bear market, it was hiked sharply to 60 per cent, then to 70 per cent in 2010. The ensuing bull market was muted and it wasn’t until early 2015 that the weight for XIU was lowered to 60 per cent. It remains at this level for 2017.

What’s the impact of market-sensitive weights? They helped produce an additional gain of 0.5 per cent a year compared with the basic version. They also smoothed market fluctuations better: The extended version of the portfolio was down just 9 per cent during the stock-market crash of 2008, versus 16 per cent for the basic version.

The One-Minute Portfolios do not include foreign stocks. There would seem to be little to be gained from the extra costs, currency volatility and execution burden: Canadian stocks have delivered better long-term results than the world average during the past 115 years, according to the Credit Suisse Global Investment Yearbook.

The portfolios also continue to use XBB despite currently low yields because bonds still have a role to play in smoothing portfolio fluctuations. They keep the ups and downs from becoming excessive, promoting adherence to the buy-and-hold approach.

As for interest rates going into an uptrend and causing bond prices to slide, long-term investors and bond ETFs don’t have to sell at lower prices and take a loss. They can hold to maturity and earn the effective yield quoted on the bond when purchased.

What about yields trailing inflation? Long-term investors and bond ETFs roll maturing bonds into new bonds at higher rates, raising average yields on bond portfolios over time. Indeed, from 1900 to 2015, the real (inflation-adjusted) average annual return on Canadian bonds was 2.3 per cent, according to the Credit Suisse Global Investment Yearbook.

Simplicity in investing can earn decent returns – by passively tracking the market and minimizing fees related to trading and professional advice. Lack of complexity also contributes to reducing execution errors. Finally, simplicity makes portfolio management doable for a wider range of Canadians while leaving time for enjoying other things in life.

Note: Annual updates for the One-Minute Portfolios are collected together in an online archive maintained on the author's website. Investment return data, which include reinvested dividends and capital gains, are from the website of ETF provider BlackRock Inc. ETFs similar to XIU and XBB have become available in recent years and may alternatively be used.