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2014 – Year In Review


I started the year in 2014 writing about sustainability and how it wasn’t possible for the S&P 500 to continue it’s torrid pace of growth, but I was definitely wrong on that account. It’s impossible to know what the market will do, and I’ve mentioned time and time again that no one has a crystal ball that can predict what can happen in the future. The best approach has always been to stay invested with a balanced portfolio.

The biggest story for most people during 2014 wasn’t the continued strength shown by the stock market, nor was it the growing home prices in Canada. This was all old news and continued on from trends set in 2013. The biggest difference that most people noticed this year was the collapse of oil prices. Down almost 50% and still dropping, oil prices have now fallen to a close of only $54.00 a barrel on US futures. This has lead to a correction for the price of gasoline at the pumps, which has been a revelation for consumers. It has put money back into the pocket of individuals, and although it’s not much, psychologically people are feeling richer.

The Markets

The big drop in oil prices has led to a disparity between the performance of the the S&P 500 and the S&P TSX.

S&P 500

Canada has become quite reliant on the oil and gas industry to supply much of its growth over the past decade. It’s no surprise that the S&P TSX has underperformed its American counterpart as oil prices started to drop off during the latter half of the year. Despite the headwinds that the Canadian stock market faces, it still finished up 7.64%. The S&P 500 had another outstanding year with returns of 12.39%. Both returns don’t include the generous 2+% dividends that are also given.

Was this the year that you jumped into the markets and secured these gains? It’s never too late to start thinking about building a diversified portfolio. Investing in the markets for the long run is not as scary as people think.

Currency Gains

A strong American dollar generally makes Canadians uneasy because the general public only ever care about the cheap prices for goods that can be bought over the border. A lower Canadian dollar, however, in the eyes of an investor is not necessarily a bad thing. Why’s that?

CAD USD Exchange Rate

A drop of almost 8.5% in the value of the Canadian dollar versus the US dollar meant that investments put into the US markets gained even more. Converting investments back to Canadian dollars after the already 12.39% rise in the S&P 500 meant that investments in the US markets would have reached close to 20%. This is yet another year where investments in the American market proved to be outstanding for Canadian investors.

Keeping Diversified

The above points prove that investing only in Canadian assets is not a prudent strategy. 2014 showed how a large disparity can happen when all your eggs are put into one basket. I’m a big fan of the Canadian Couch Potato and its model portfolios on the site. If one were to model the Complete Couch Potato portfolio as their own, one would get a very outstanding return for 2014.

20% Canadian Equity – Vanguard FTSE Index (VCN) – up 8.58%
15% US Equity – Vanguard Total Stock Market (VTI) – up 11.49% (USD)
15% International Equity – Vanguard Total International (VXUS) – down 6.06% (USD)
10% Real Estate – BMO REITs (ZRE) – up 3.8%
10% Real Return Bonds – iShares Real Return Bonds (XRB) – up 11.22%
30% Canadian Bonds – Vanguard Canadian Bonds (VAB) – up 5.44%

Someone holding this portfolio would have had a gain of approximately 8.5% in Canadian dollars before any dividends were added. This is certainly a very good return and one that a standard GIC at the bank would never be able to achieve.

You may wonder why someone would buy international equities if it performed so poorly. Remember that it’s impossible to guess what might perform well. What did well this year might not do so well the next, so owning everything takes the guess work away.

Who would have thought that real return bonds, one of the most boring investments, would do so well in 2014? No one would guess that, but having it in your portfolio helps minimizes risks of inflation. Having investments that have negative correlation to each other helps stabilize the growth curve of your investments. Learn to diversify and enjoy the stability that it provides.

Staying On Track For 2015

Now that 2014 is done, it’s time to look forward to 2015. On January 1st, it’s the day you should remember to top up your TFSAs. Remember that contribution room is $5500 for every citizen in Canada over the age of 18. Take advantage of the TFSA as soon as possible so that gains can be sheltered from taxes.

Remember to rebalance your portfolio. I’ve written many articles in the past of why one should rebalance and how to rebalance your portfolio. With the varying degrees of performance that we’ve experienced in 2014, it’s important to make sure your own investment portfolio matches your own personal risk tolerance. Continue to rebalance and diversify to keep your investments successful.

Enjoy the New Year and I hope 2015 will be just as successful as 2014 was for everyone!

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