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It’s time for the annual rebalancing of the One-Minute Portfolio. This will be the sixth since the portfolio was set up in early 2003.
The One-Minute Portfolio is a member of the Lazy Portfolio species. They don’t require a lot of work, yet the underlying strategy of passively tracking market indexes will outperform more than three-quarters of professional money managers, according to academic studies.
The One-Minute Portfolio consists of just two exchange traded funds (ETFs): the iShares S&P/TSX 60 Index Fund and the iShares Canadian Bond Index Fund. The first tracks large-capitalization Canadian stocks and the second tracks the universe of investment-grade Canadian bonds.
Having just two ETFs keeps things simple, even simpler than other Lazy Portfolios with their multiple ETFs. It takes just a “minute” or so every year to manage. There is no need to spend time researching stocks, bonds, mutual funds, investment managers, etc. The only real work is rebalancing the weights of the two ETFs.
The portfolio has no foreign diversification because it is assumed i) the owner is going to retire in Canada and ii) there are enough investment opportunities within Canada. It also keeps things simple by having no exposure to foreign currency fluctuations.
These two ETFs provide enough diversification to keep volatility from becoming too extreme. Indeed, during the bear market of 2008, the portfolio declined a lot less than other Lazy Portfolios did.
As can be seen from the scorecard kept by CBS MarketWatch columnist Paul Farrell, a group of eight U.S.-based Lazy Portfolios declined by approximately 20%-40% in 2008. The One-Minute Portfolio went down by less than 10%.
The average annual returns of the U.S. Lazy Portfolios over the past five years range from nil to 3% while the One-Minute Portfolio averaged over 8% a year. This performance for the One-Minute Portfolio is largely a reflection of the large weight for the bond ETF in 2008 — and how weights are adjusted each year.
If the annual average return on equities over the three most recent years is less than the historical annual average for equities, the relative weight for the equity ETF is set higher than what it would be under the age rule for an investor who is 50 years of age. Vice versa, if the three-year average of stocks is above the historical norm.
At the rebalancing last year, the proportions were left at the previous year’s setting of 60% for the bond ETF and 40% for the equity ETF. With the stock market down so much this year, the weighting pattern is flipped over to 40% for the bond ETF and 60% for the equity ETF.
When the One-Minute Portfolio was set up in early 2003, the proportions for the equity and bond ETFs were set at 60% and 40%, respectively. Back then, the three-year average return on stocks was notably below the historical average.
In 2004, equities were raised to 70% and bonds lowered to 30% because equities were still below their long-run average. From 2005 to 2007, equities were successively lowered until they reached 40% and bonds increased to 60% — because equities were surging above their historical rate of return.
During rebalancing exercise in early 2008, a change to 70% bonds and 30% equities was contemplated since stocks had remained strong. But, the weighting pattern was kept unchanged. A more rigorous approach to changing asset allocations is under consideration — one that leaves less room for the human factor.
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