It was inevitable that after 6 strong years on the stock market that gains would finally take a breather. We have to remember that markets on average grow only about 7-8% a year and the previous 6 prior to 2015 were exceptional double digital gainers.
In 2015, the S&P TSX lost almost 11% for the year due mainly on the weakness in the price of oil. Despite the fact that oil, Canada’s main commodity export, lost almost 40% the TSX index only fell 11%. There is a reason why it’s important to stay diversified and this is a prime example of what diversification will do for you. The TSX index loss only 11% while oil fell 40%. Diversification can be mitigate risk and losses by investing in a variety of companies rather than focusing on one sector. Why would you want to put all your eggs in one basket?
Despite the loss on the S&P TSX, this doesn’t mean a wholly diversified portfolio lost money. In fact, depending on how diversified your investment portfolio really was, 2015 was another good year for investment returns.
The Global Economy
Canadians get a hometown bias when it comes to economic news. That’s because our large media outlets focus only on what’s happening within our borders. If you were to keep track of international news you would have learned that many other countries had really great years.
Despite the fact that Europe has received the most negative news from North American journalists, the markets from an investment standpoint, have been stellar. The German DAX was up over 10% for 2015. The French exchange was also up 8.5%.
Over on the other side of the world, the Japanese Nikkei was up over 9% and despite the summer stock market crash in China, the index was still over 9% higher as well.
As citizens in Canada, we might feel negative about our economy because of our reliance on oil and how far it has fallen over the past year, but in the grand scheme of things, the Canadian economy only represents about 1.5% of the world’s economic output according to the IMF. Overall, in other parts of the world, the economy has done quite well.
This further enforces the argument on how we, as investors, have to stay diversified in order to gain the benefits of a world economy. It’s not just about Canada. There are other places in the world that are growing and prosperous.
Passive Portfolio Performance
I’m a big fan of the Canadian Couch Potato portfolios because it’s a sound, long term investment strategy that is meant to build and create wealth. What makes the portfolios so good is that it is so simple, yet provides all the diversification that a do-it-yourself, financially-illiterate commoner needs to achieve financial independence.
The Couch Potato portfolio only uses 3 ETFs to achieve the global diversification needed to expose one’s portfolio to the global economy. Once you buy the funds, you’re done! It’s that simple and that’s why it’s called a passive investment strategy.
Most people would think that you would need to be smart, have an MBA and take 40 hours a week researching companies and economies to achieve professional level performance in your investment portfolios, but that’s not true. Take a look at how a simple Couch Potato portfolio performed:
40% (VAB) Vanguard Bond Index – +1.61% (2.79% dividend)
20% (VCN) FTSE Canada All Cap Index – -10.78% (2.66% dividend)
40% (VXC) All World Index – +13.47% (1.83% dividend)
Had you invested in a portfolio described above, your collective gain for the year would 6.26%. Yes, that was a gain! A quite good one at that. If you were to review your own portfolio of mutual funds, or stocks, can you actually say that you had better performance? Did that pricey financial adviser beat the market for you? Probably not.
If you’ve stuck your money in GICs or an interest savings account, you probably missed out on another good year. Just how many good years are you going to miss out until you hit the bad one? That’s why it’s important to stay persistent and stay invested. Don’t worry about timing the market and waiting for the “big crash”.
This is why a passive index is so powerful and simple. It represents the market. You’re not trying to beat the market like so many other people out there. The market represents human progress and it’s still returning positive growth because quite frankly the world is growing and getting better.
Looking Forward In 2016
2016 will probably be another trying year for Canadians as oil prices continue to languish. Consumer household debt is also at an all time high in Canada which will also put a damper on Canada to get out of its economic funk. It will take time and patience for Canada to restore itself back to its full potential.
That’s why it’s even more important to stay diversified. If you haven’t already, look at adding equities abroad to expose yourself to the growing world market. Over the next half of the decade, the IMF has projected the Canadian economy to contribute a mere 1.1% of growth to the world economy as a whole. This leaves 98.9% growth coming from other countries in the world. Wouldn’t it make sense to be a part of that?
Stay vigilant and be patient. These are the keys to success when investing for the long run. In my next post, I’ll go over some of the key chores you should be doing to prep yourself for 2016. Enjoy the New Year!