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2016: Year In Review


4 years have gone by since this blog has started. Over 150 posts later it’s still going strong. I had the goal of posting every week, though with a full time job, that was a bit more ambitious than I had imagine. Nevertheless, I’d like to thank my readers for visiting and yet again have the opportunity to write another year end review.

2016 started out with a bang for our personal finances in Canada. The TFSA contribution limit got chopped, tax cuts to the middle class were implemented, and parents got a big fat increase in child payments. So how well did the rest of 2016 hold up? Well we have carbon taxes now, mortgage rates have started rising and oh let’s not forget that Donald Trump is going to be the next President of the United States.

Looking back a year ago, in 2015, the TSX got massacred with falling oil prices and the 2015 annual return was a whopping minus 11%. Well fast-forward one year later and the TSX has been the best performer by far with gains of 18.5%. Yes, you read that right! The TSX has been quietly up 18.5% with very little fanfare. Rarely do you see stock markets go up so much and have so little to report. Why? Because news outlets only write about bad news. We’re optimistic here 🙂

Rounding out the other indexes, the S&P 500 has been up nearly 10% itself, most of it coming from the post Trump rally. Cumulatively for the rest of the world equity prices are roughly down 3.5%.

As you can see from the numbers, it’s never consistent. Even stock markets are regional. That’s why this blog continues to preach diversity over concentration. You never know what might go up and what might go down. All we can do is buy everything, re-balance our investment portfolios and hope for the best.

Couch Potato Performance

istock_000010681209xsmall-300x199I’ve always been a big fan of the Canadian Couch Potato model portfolios. They provide low fees, diversification and simplicity that any Canadian can use to build an investment portfolio. Using a balanced portfolio, the returns for 2016:

40% Canadian Bonds (VAB) – -1.7% (+2.7% dividend)
20% Canadian Stocks (VCN) – +19% (+2.34% dividend)
40% ex-Canadian Stocks (VXC) – +2.75% (+ 1.85% dividend)

Total Return with dividends – 6.5%

Including dividends and using the balanced portfolio weights, the Canadian Couch Potato portfolio would have returned a respectable 6.5%. This is right in line with historical expectations and certainly outpaces any inflation.

If you compare this to the result from the previous year, you would see that it’s shockingly similar despite the different gains in each index. How’s that for consistency? It just goes to show that trying to pick the right stock isn’t for everyone when a passive portfolio can do so well with very minimal effort.

Rising Interest Rates

2016 might be remembered as the year that interest rates finally went up in the US after almost a decade at near zero. It took a full 8 years of recovery which shows just how fragile the economy south of the border really was.

The rate hike cratered the Canadian dollar. Will we see $7 cauliflower again? Who knows, but history shows that Canada usually follows in the footsteps of our American neighbour unless Canadians are happy with a sub 70 cent dollar and rapid inflation.

It was always perceived that the American empire was crumbling and that everyone would be out of a job. Anarchy would consume us and we’d all be running around lost and scared. But it was quite the contrary. Unemployment in the US has fallen to 4.6%, wages are starting to rise and housing prices have started to rebound.

What’s good in the US should eventually trickle down to Canada since we’re one of the largest trading partners. Let’s just hope the good times keep rollin’.

Trump’s America

trumpwillwin-notext-1The next year will bring a lot of unknowns since Donald Trump will become president and much of what we know of America’s policies under the leadership of Democrats is undone. Perhaps protectionism will slow down the growth of the world economy and certainly the looming interest rate hikes by the Federal Reserve will have an impact on money supply. These are all headwinds that might slow down the global economy in general.

What we do know is that corporations and businesses will continue to adapt and thrive. Despite all the challenges that companies have faced through the last decade, businesses continue to operate and profit. It makes much more sense to stay the course, be patient and let time be your ally. All these geopolitical events are just tiny blips and bounces along the way. Remember that what really matters in any good investment portfolio is what happens over the period of decades, not weeks or months.

So enjoy what 2016 still has left to offer, as yet another average year in investment returns passes by. I wish everyone a happy New Year and see you in 2017.

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