As a buy-and-hold investor, I have not experienced net growth in my 'Couch Potato' portfolio over the past five years. I am not alone. Many investors, hoping to retire at age 65 have had to put their plans on hold because they have not been able to achieve their planned savings and investment objectives. Not only that, but, with great uncertainty in Europe, things could get a whole lot worse before they get better.
Here is a column by the G&M's Rob Carrick on this subject:
By way of example, the iShares S&P/TSX 60 Index Fund (XIU) comprised of the largest 60 companies on the TSX has total returns as follows:
YTD (as of May 31): -2.55%
1 Year: -14.52%
5 Years: -1.52%
Five lost years!! If your target gain had been 8 per cent, you are 9 1/2% under your target!! No wonder that folks are having a hard time retiring on their targeted schedule or, if already retired, living the lifestyle that they had expected and planned for.
It has been a frustrating time for passive investors. I have my registered accounts mostly passive with index funds while my non-registered are in dividend stocks. While I have a couple of stock disappointments, my stock portfolio has been holding it's own, while the index funds have been frustrating. I'm starting to wonder if it may be an idea to inject a little bit of timing into the passive portfolio - for example, if your model portfolio is a 50/50 equity, fixed-income split, after a couple of good years, like when the TSX recently hit the mid 13 level go to about 60% fixed income. And then gradually reverse that allocation in times like these. In fact, I think Berstein mentioned doing something like this.
That all being said, one has to realize that there will be 5 year periods like this and you have to look at an entire balanced passive portfolio, not just one index. You may have to more closely examine the makeup of your passive portfolio. For example, if your portfolio mimicked the FPX balanced, the 5 year annualized returns would be 2.25%.
Last edited by Spidey; 2012-06-15 at 07:13 AM.
xiu is a good example to present because the truth is that this etf has returned decently well over 1, 5 or 10 years to investors who do the right things with it.
i've held XIU since 2001. The total return is not as good as my overall portfolio, but for me this etf is a bond-like defensive holding. In its own way XIU is safer than all but government bonds because it'll never go bankrupt.
xiu's dividend yield right now is 3.19. Over the years yield has been higher but seldom lower. It'll never stop paying dividends unless the world ends.
in addition, i sell otm calls. These bring in another 3-4%, favourably taxed as capital gains. In 12 years, there has never been a day when my xiu holding has not been short a bunch of otm calls.
i don't reinvest the dividends, i take em as cash. The average annual current return in cash with the dividend/option combo is roughly 6-8%, not including notional or paper capital gains because my cost base is around $12.
any retiree wants to complain about that, i don't know what's wrong with em.
another advantage to xiu-plus-options=better-than-bonds is that it's a no-brainer. In a nearby thread folks are fretting about the time cost of DIY management. But the total time i spend on xiu in an entire year, including rolling the options forward, is 30 minutes.