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2014 MoneyGeek Portfolios In Review

January 5th, 2015

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

2014 was both a great year and a poor year for MoneyGeeks portfolios.

For those of you who are new, we offer several model portfolios through our paid subscriptions. These model portfolios come in two flavours - regular and premium. Regular portfolios primarily consist of Exchange Traded Funds (ETFs), while premium portfolios consist of individual stocks. Because ETFs contain hundreds of individual stocks, regular portfolios are less risky than premium portfolios. To learn more about ETFs, please read our free book.

In this article, Ill summarize how MoneyGeeks portfolios did in 2014 in comparison to our competitors.

Performance Of Our Competitors

First, lets examine the performance of our competitors. These performances will give us some context with which we can judge how well MoneyGeeks portfolios have done.

Below, you can see the performances of some of the banks, as well as the popular Canadian Couch Potato portfolios.

Portfolio

Returns

RBC Select Aggressive Growth

+11.3%

RBC Select Growth

+10.5%

RBC Select Balanced

+9.9%

TD Comfort Aggressive Growth

+9.8%

TD Comfort Growth

+9.3%

TD Comfort Balanced Growth

+8.8%

CIBC Managed Aggressive Growth

+7.8%

CIBC Managed Growth

+7.7%

CIBC Managed Balanced

+6.6%

Global Couch Potato

+10.5%

Complete Couch Potato

+10.8%

As you can see, most of our competitors had another up year in 2014. They owe this primarily to the rising stock market. For the full year, Canadian stocks had a 7.4% return, including dividends, while U.S. stocks had a 20.9% return, adjusted to Canadian dollars. Canadian bonds also had a good year. For example, XBB.TO, which is the most popular Canadian bond ETF, had close to an 8% return in 2014.

Regular Portfolio Performance

Below, you can see the performance of the regular model portfolios in the year 2014. Note that Standard Deviation indicates the magnitude of ups and downs the portfolio experienced throughout the year. The higher the magnitude, the higher the standard deviation. Therefore, higher standard deviations indicate higher risk.

Portfolio

Returns

Standard Deviation

Regular Portfolio 5 (Riskiest)

+18.1%

8.3%

Regular Portfolio 4

+15.3%

6.8%

Regular Portfolio 3

+12.6%

5.3%

Regular Portfolio 2

+9.9%

3.8%

Regular Portfolio 1 (Safest)

+7.2%

2.4%

*Please note that none of these results have been audited.

In 2014, regular portfolios, quite simply, had an amazing year. Regular Portfolio 5 is, roughly, as safe as or safer than the banks most aggressive portfolios. Yet the portfolio outperformed the banks most aggressive portfolios by a 6.8-10.3%.

In fact, the Regular Portfolio 5 did better than even the overall stock market. A portfolio that split 50/50 between Canadian and U.S. stocks (and no bonds) would have generated a return of around 14%. Regular Portfolios 4 and 5 beat that benchmark, even though the portfolio contained a fair amount of bonds that sacrificed performance in favour of more safety.

I attribute the success of the regular portfolios this year to the three following factors.

  1. Even though the regular portfolios primarily consist of ETFs, they each contain one stock. This one stock outperformed the U.S. stock market in 2014.

  2. I deliberately chose to include a U.S. stock ETF that subscribed to the value investing philosophy. This ETF again outperformed the overall U.S. stock market, as it has in most years.

  3. In March, I decided to temporarily eliminate Canadian stocks from regular portfolios, and increased the portion of U.S. stocks in the portfolios. Since the end of March, Canadian stocks have returned a measly 3% while U.S. stocks did much better.

Going forward, I believe that MoneyGeeks portfolios will continue to beat our competitors portfolios. Let me explain why.

The mutual funds offered by Canadian banks charge around 2.5% per year, while the average ETF in the Regular Portfolios charges about a tenth of that. The fees charged by the funds have a direct impact on their performances, which means the mutual funds will have to overcome a large handicap to beat a portfolio full of ETFs such as ours.

Also, research has shown that value investing works. Stocks chosen using a value investing strategy has outperformed the overall stock market in the past, and I expect that will continue into the future. I believe that by carefully choosing ETFs using value investing principles, our Regular Portfolios will continue to outperform the Canadian Couch Potato portfolios.

Premium Portfolio Performance

While the regular portfolios had a great year, I cant say the same about the premium portfolios. Below, you can see the performance of the premium portfolios for the year 2014.

Portfolio

Returns

Standard Deviation

Premium Portfolio 3 (Riskiest)

-10.0%

19.6%

Premium Portfolio 2

+2.5%

15.4%

Premium Portfolio 1 (Safest)

+13.3%

12.8%

*Please note that none of these results have been audited.

Not only did the premium portfolios underperform regular portfolios, but one portfolio - Premium Portfolio 3 - even lost money in 2014. The reason for this drastic underperformance can be summed up in one word: oil.

Before oil prices started crashing in September, premium portfolios had been performing very well. From Jan 1 2014 to Aug 31 2014, premium portfolios 3, 2 and 1 had returned 17.2%, 18.8% and 19.3% respectively, handily beating the regular portfolios and our competitors. But premium portfolio 3 in particular had a heavy allocation to oil and gas stocks. As oil prices crashed, the portfolios crashed with it.

Like most others, I was blindsided by the sudden crash in oil prices. Just in September, oil investors had been expecting the price of oil to average above $90 a barrel in 2015. Some blame the recent crash in oil prices on the resurgent oil production in North America, but theres a problem with that theory. Most oil investors would have factored in North American production increases in their forecasts in September. So while I feel responsible for the poor performance of the Premium Portfolios, Im not sure what I could have done differently.

What brought the Premium Portfolios down can just as easily bring it back up. If a stock falls by 75%, just getting back to the same level as before would translate into a 300% gain. Thus, if oil prices recover meaningfully in 2015, I believe the premium portfolios will handily beat the overall stock market.

Thus, for 2015, whether Premium Portfolios will outperform the market hinges on the big question: Will oil prices recover? While I obviously cant guarantee it, I believe they will. I will write more about this topic on my monthly TFSA update on this blog, so stay tuned.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.