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It’s time to try the One-Minute Portfolio

Lots of investors would welcome a simple, effective portfolio any time, says this Canadian analyst, but especially in a crazy market like this.

To hell with investing. That’s what we say.

What’s the point of poring over all those stock tables and analyst reports in a temperamental market like this, anyway?

And even if we absolutely have to put our money somewhere, can’t we just get it over with and get on with something else?

Yes you can! That’s the message from Mr. Larry MacDonald. He says it’s time to go to the One-Minute Portfolio.

This singularly unchallenging portfolio, also known as the “lazy” portfolio or the Couch Potato Portfolio, seems like a timely idea. Especially in a market where the best-laid plans of mice, men and money managers seem to go awry most of the time anyway.

So let’s turn to Investor's Digest of Canada and get it over with.

Just two purchases

In fact, Mr. MacDonald is just getting around to updating the One-Minute Portfolio. He hasn’t done it for over two years (sounds like just the thing for procrastinators).

This portfolio “is for people who want decent returns on their investments yet would rather go fishing or play a game of bridge than labor over stock charts and balance sheets.”

In fact, we can tell you right away what’s in the One-Minute Portfolio (then you can go and dig up the garden or something).

There are two exchange-traded funds (ETFs). One is iShares S&P/TSX 60 Index Fund (TSX-XIU). The other is iShares Canadian Bond Index Fund (TSX-XBB). And that’s it.

The first tracks the S&P/TSX 60 Index, i.e., the 60 largest companies on the exchange. The second tracks the Scotia Capital Universe Bond Index, a broad basket of some 900 Canadian bonds spread over government and investment grade corporate bonds.

“Thus, with just two purchases, an investor achieves a diversified portfolio.”

The Couch Potato

The first such Canadian portfolio — the Couch Potato — was conceived in 2003 in MoneySense magazine. It was carried over when that publication merged with Canadian Business. It involves a little bit more effort, using four ETFs instead of two. (The inventor of the idea, by the way, appears to have been Mr. Scott Burns of the Dallas News.)

Mr. MacDonald set up his own One-Minute Portfolio in the same year, 2003. By the time he had introduced it to readers of Investor's Digest of Canada in January 2007, it had returned almost 60 per cent. That represented an average compound annual return of about 12.4 per cent.

In 2007, the portfolio gained about 10 per cent. In 2008, the financial crisis pulled it down to a loss of nine per cent.

Toting it all up, that made the average annual return 7.5 per cent. In the first quarter of 2009, the portfolio was up about 6 per cent.

Once the portfolio is in place, you have to roll up your sleeves and get to work once a year. Hint: it’s a lot less work than cleaning out the garage.

Balancing act

The only real effort, says Mr. MacDonald, comes at the beginning or the end of the year, when you rebalance the weights of the two ETFs.

“In general, the relative weight for equities is raised whenever stocks are underperforming relative to their long-run return of nine per cent annually,” says the analyst, “Vice versa, the relative weight is lowered if stocks are outperforming their historic average.”

When the portfolio first saw the light of day in 2003, the balance was 60 per cent in the stock ETF, 40 per cent in the bond ETF. For 2004 it went to 70 in stocks, 30 in bonds since stocks were still running below their long-term average.

In 2005, the balance was switched back to 60-40. And in 2006, when stocks were riding high, it was evened out at 50-50. In 2007, when stocks were roaring in the bull market, the equity ETF was in the minority for the first time, at 40 per cent. It stayed there through 2008.

When the portfolio was rebalanced in December 2008 after the big sell-off, it returned to 60-40 in favour of equities.

The rule is not hard and fast. Your balancing act should also be based on how much risk you’re willing to take on, says the analyst. Some will like to keep the two sides of the portfolio pretty evenly balanced.

Use your age

If you like the idea, says the analyst, now is the time to get started. “It is preferable to start a One-Minute Portfolio during periods when stocks are trending substantially below the average historical return on stocks. Like now.”

How you should set it up? Use your age. Mr. MacDonald gives his Investor's Digest of Canada readers a loose formula.

Set the weight of bonds equal to your age less a percentage reflecting how much stocks are below their long-run average returns (on a two- to three-year average, the TSX is in negative territory thanks to the crash of 2008, so you could go at least 10 percentage points down from the nine per cent average return).

If you are 45, you could thus start today with a 25 to 35 per cent weighting in bonds. The less risk you want, the higher the portion of bonds. As you get older, the percentage of the bond ETF would rise.

Got it? That’s enough work for now. We’ve got better things to do than go on about investing.