I recently wrote on the investment lessons that we can learn from one simple performance chart. The chart details the returns history for the 5 Tangerine Portfolios. The chart is so ‘telling’ because it gives us a look at the returns for various mixes of stocks and bonds and the time period moves through the most severe market correction of our lifetime, the financial crisis. As you may know, or remember, the stock markets of the developed world dropped in the area of 45% and more through 2008, bottoming in February of 2009.
Here’s that chart. Keep in mind that there are various start dates for the 5 portfolios. The Balanced Portfolios that offer a mix of Canadian, US and International stocks plus Canadian bonds were launched in January of 2008. The period is to end of September 2018.
Now it’s worth a read or recap of that original post as I did go into the year-end tax trap for those who hold funds in a taxable environment. Investors can pay tax on income that they did not receive. On the tax trap and year-end tax planning I then penned this article for Boomer and Echo, here’s The Year End Tax Trap. That article also offers some year-end tax planning tips and checklists courtesy of fee-for-service financial planner Jason Heath and from James Gauthier, the Chief Investment Officer of Justwealth.
Help yourself out on the tax front, have a read, or two.
What that chart is trying to tell us.
The most telling columns might be the returns for the 5 year period, the 10 year period, and from inception. The top row is the Balanced Income Portfolio that has 70% bonds and 30% stocks. The middle row is the Balanced Portfolio that has 60% stocks and 40% bonds. The bottom row is the Balanced Growth Portfolio that offers 75% stocks and 25% bonds. Typically we are rewarded with greater returns over longer periods when we accept more risk (more stocks). That is the risk/return proposition at play.
More stocks = more growth.
More bonds = more stability / lesser returns.
That risk return proposition has certainly played out. The 10 year period shows us that for taking on additional risk the investor was rewarded with an additional –
1.5% annual from Balanced Income to Balanced Portfolio
An additional 1% annual moving from Balanced to Balanced Growth
If one then moved from Balanced Growth to the all-stock Equity Growth Portfolio we would then add an additional 1.5% annual, for the 5 year period. When the portfolios were launched the expectation was that (if market history repeats) one might earn an additional 1% annual for each step up the risk ladder moving through market cycles. The actual performance has not been that far off of that projection. The outperformance is greater when we view a shorter period – a mostly uninterrupted bull market run.
That said if we move to the inception column (returns from January of 2008) we see that the returns are quite similar. Once again, that time period will now include more of the stock market correction of 2008-2009. Stock market corrections can be the great equalizer; they can bring a more risky stock heavy portfolio down to size.
A stock heavy portfolio will fall much more than a Balanced Income model. It will then have a much steeper hill to climb to make back those paper ‘losses’. Given that most unfortunate start date for the Tangerine Balanced Portfolios, it was the most conservative Balanced Income model that was ‘in the lead’ for many, many years. In the lead meant its negative returns were not as bad as the other portfolios.
I chronicled that event on Seeking Alpha with this article The Stocks Finally Catch Those Bonds, 6.5 Years Later. From that article we can see that in June of 2014, it was still a virtual tie from inception date, the more aggressive portfolios were just jumping into the lead. Investment themes or truths can take many years or decades to play out. Patience and consistency is always a key to successful investing.
At the same time, the 2014 chart will once again demonstrate the risk/return proposition is on display. For 1, 3 and 5 year periods the more aggressive portfolios were delivering greater returns. Greater risk = greater returns.
Of course, most investors who are building wealth for retirement or other long-term goals will not simply deposit a lump sum and walk away; they will often add monies on a regular schedule. An investor who began with an original investment in January of 2008 and then added monies on a regular schedule (automatic investment plan) would have been rewarded with much greater returns by way of the more aggressive portfolios. They would have benefited from those higher returns delivered in those 1 year, 3 year and 5 year periods. Investors will get a blended, personal weight of return. Adding monies on a regular schedule through those down markets is beneficial, as your monies are allowing you to buy more units as they go sale. You are lowering your average cost per unit.
Longer time periods increase the odds of you getting your expected returns; adding monies on a regular schedule will further increase the chances that you will get your ‘expected’ or projected returns. Always keep in mind that there are never any guarantees with respect to investing, and past performance does not guarantee future returns.
A lesson is also offered by that Tangerine Dividend Portfolio. You can click that link to have a read of my review of that Juicy Dividend Portfolio. In that article I show how the big-dividend-paying indices that make up that portfolio (again Canada, US, International) have all beat the broad market indices. So you’d expect that portfolio to outperform the other models right? Well that may or may not happened. But again for that past performance potential to repeat, patience will be required. Again an investment theme might take many, many years to play out.
Patience and consistency are two of the most important characteristics when it comes to successful investing. We cannot react to short term performance or short term noise and guesswork. Get a plan, stick to it like Gorilla glue.
And perhaps one of the greatest lessons or observations from that chart is that the returns are quite good, more than solid. Credit goes to the lower fee structure. The Tangerine Portfolios all have an MER of 1.07% compared to typical Canadian actively-managed funds at 2.2% and more. Given that fees are more than important investors might also consider the other Canadian Robo Advisors that will typically be in the all-in annual fee range of .35%-70%. The self-directed investor can create an ETF Portfolio in the fee range of .07% to .20%. There are also a few actively managed mutual fund providers with sensible fees/approach and advice – see Mawer and Steadyhand. Vanguard has the one-ticket solutions.
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