Friday, 9 January 2009

2008 Confirms Value of Portfolio Diversification

Just finished crunching the numbers to see how my portfolio performed in 2008 and was pleased to see that the diversified portfolio strategy that I adopted back in May 2007 (the structure of which is shown at the bottom of this blog though it doesn't show complete returns since cash dividends and interest from bonds do not show up) paid off by significantly limiting my losses in 2008.

Here are the numbers compared to a few benchmarks (I've done a bit of rounding and used a couple of ETFs that track the benchmarks so my numbers may be off a percent or so but the big effects are what I am after):
  • -21% My portfolio in Canadian dollars
  • -35% TSX in Canadian dollars
  • 6% DEX Canadian Bond Index
  • -37% S&P 500 (US stock index) in US dollars
  • 6% US Aggregate Bond Index in US dollars
  • -42% MSCI EAFE (Europe, Australasia, Far East) Index - various foreign currencies
The benefit to my portfolio is explained by two factors:
  1. the 19% decline in the value of the Canadian dollar against the USD, which boosted the value, or more precisely limited the losses of US holdings in CAD terms
  2. the presence of bonds whose gains offset some of the huge equity losses
The moral of the story is that diversification works. Assets that work in different directions in different years bring stability. That also means that during 2009, when I expect equity markets to recover, my portfolio won't go up as much as another invested only in equities.

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