The One-Minute Portfolio update

It’s time for the 19th annual update

I launched the One-Minute Portfolio (OMP) way back in 2003, to illustrate a low-effort, low-cost approach to investing. It is based on what was then a new-fangled thing called exchange traded funds (ETFs). My, how they have grown since.

At the time, OMP was was quite a departure from orthodoxy, but in a good way: far less work than picking stocks, a lot less costly than mutual funds and better performing than both - as the school of passive investing and Efficient Market Hypothesis told us.

Since 2003, the OMP has been updated annually in various publications, such as Canadian Business and MoneySense – and in recent years, the Globe and Mail. All along, it has shown that a simple, lazy and cheap approach outperforms most investors trying to beat the markets over the long term.

Let’s do the latest annual update here. The Globe editor has been too kind accepting such a antiquity for publication and I better not press my luck any further.

What’s the One-Minute Portfolio?

OMP is made up of just two ETFs: the iShares S&P/TSX 60 Index Fund (XIU) and iShares Canadian Universe Bond Index Fund (XBB). With the purchase of these two ETFs and some yearly rebalancing (see below), OMP delivers in “one minute” a diversified portfolio at an annual management fee less than 0.2 per cent.

Performance to date

Over the 11 months to Nov. 30, XIU’s total return was 27.3% and XBB’s was -4.8%. With XIU’s weigh at 60% and XBB’s at 40%, OMP’s return was 12.5% for the first 11 months of 2021. Also, the average annual compounded rate of return for OMP over the past 19 years edged up to 8.1%, continuing the uptrend from 7.4% reached in 2018 (lowest point since inception).

Not bad for the work and cost.

Rebalancing

OMP adjusts ETF weights according to market conditions, a concept adapted from Benjamin Graham's book, The Intelligent Investor. As applied to OMP, the basic idea is to reduce the relative weight of XIU if the stock market is trending above its historical annual return of 7 per cent to 9 per cent. Vice versa, if the trend is below.

The three-year average of annual changes for XIU has rarely been so much above the historical return for stocks (since 2003). Therefore, the weight for XIU is dropped to 40%, and hiked up to 60% for XBB. The last time OMP switched to this defensive position was in 2007, just before the crash in 2008. Let’s see if the rebalancing rule works out again.

Diversification issues

OMP has no foreign diversification. My rationale has been: since Canadian stocks and bonds have delivered better results than just about every other country in the world over the past 115 years (according to the Credit Suisse Global Investment Yearbook), why then take on the extra burden, costs and currency fluctuations of foreign diversification? Yup, I am also pretty lazy.

There are also a lot of bonds in OMP thanks to XBB. I’ve thought about caving in to dump-bonds narrative fueled by miniscule interest rates - but capitulated to inertia instead. And I need a lot of naps.

Besides, like a good friend, the bonds have always been there to help avoid the plunges that can stoke the fear and panic that leads to dumping portfolios at the market bottom. Because of them, OMP’s worst drawdown was a decline of 8.8 per cent in 2008, the year the stock market lost more than a third of its value.

A bad year for XBB might be a loss of 3 to 5 per cent. That’s a tolerable deduction for some ballast to keep the portfolio boat from rocking too much. And since rising interest rates - which cause the drops in bond prices - usually occur when there is higher economic growth and growing earnings for companies, XIU should be able to more than offset the bond declines.

Alternative offerings

All-in-one ETFs have emerged in recent years to provide balanced portfolios in one ETF. They do the rebalancing automatically, easing the execution burden. Many investors will prefer this. However, the OMP could still retain some appeal for those investors who prefer flexibility when managing their own rebalancing. Annual management costs will also be lower since there is no payment for services like wrapping several ETFs into one ETF.