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It's time for the annual update to the One-Minute RRSP Portfolio. Some readers may recall that this low-maintenance portfolio was set up in early 2003 and updated annually on MoneySense.ca, which is now My Money powered by MoneySense here on Canadian Business Online.
The One-Minute Portfolio is based on two exchange traded funds (ETFs): the iShares S&P/TSX 60 Index Fund and the iShares Canadian Bond Index Fund. The gain to date has been greater than 60% — not a bad return for less than four minutes work over four years.
There is no need to spend time and effort researching stocks, bonds, mutual funds and investment managers. Yet, the underlying strategy of passively tracking market indexes at low cost, will outperform more than three-quarters of professional money managers, according to academic studies.
About the only work required is determining the weights of the equity and bond ETFs. This process starts with the general rule that the proportion of bonds held in a portfolio should align with the age of the investor. Thus, a 50 year old should put approximately 50% of their portfolio into the bond ETF and a 35 year old should put about 35% into bonds.
But when stocks depart from their historical average of 9%, the weights are allowed to be set (or rebalanced) differently than the level prescribed by the age rule. Notably, if equities over the three most recent years have averaged less than their historic return, the weight for the equity ETF is set (or rebalanced) above what it would be under the age rule (and vice versa). In short, the age rule is blended with a mean-reversion rule.
When the One-Minute Portfolio was set up in early 2003 (within a RRSP so rebalancing incurs no taxes and returns compound tax free), the proportions for the equity and bond ETFs were set at 60% and 40%, respectively, in the case of a 50-year-old investor. Back then, the three-year average return on stocks was substantially below the historical average, hence the more aggressive stance.
For 2004, the respective proportions were raised to 70% and 30% since stocks were still below their long-run average. For 2005, the proportions were changed back to the first-year proportions because the return on equities had climbed back close to its historical average.
The manner in which the rebalancing was done was left to the individual investor. They had the choice of either selling the faster rising ETF and plowing the proceeds into the slower rising one, or simply adding an infusion of new money to the slower rising ETF.
For 2006, with equities back to their long-term average, the proportions were reset to 50% and 50%, respectively, for the equity and bond ETFs. The mean-reversion rule suggested it was time to be less aggressive.
For 2007, the weights for the equity ETF are to be lowered to 40% and raised to 60% for the bond ETF. With Canadian equities averaging more than 20% over the past four years, the mean-reversion rule suggests its time to lighten up on stocks.
Those with another half-minute or so to spare each year could consider adding a third asset: cash. One of the best places to hold cash is in a high interest saving account like the one at President's Choice where the interest rate currently is over 4%)
Cash provides greater stability in portfolio returns so that one will sleep better at night. The trade-off, however, could be a lower return on average, the extent depending on the weighting assigned to the cash holding.
Those who want to work even less than a minute a year can reduce the frequency of rebalancing to every second to fourth year. Recent academic studies have shown this frequency yields the same, if not better, result than annual rebalancing.
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