Defensive investing

With fear still the dominate emotion in the markets, many investors are sitting on the sidelines. Leery of losing money in stocks, they are retreating to bonds, GICs, and high-interest savings accounts to protect their assets.

As I have said in the past, safety is fine but it can be overdone. When the return on your money doesn’t at least match inflation (now at 2.9 per cent) your purchasing power will be gradually eroded over time.

I have always maintained that a well-balanced portfolio is a better option. It allows you to minimize risk while creating more upside potential than fixed-income securities or savings accounts can offer.

To prove the point, I created a model Defensive Portfolio for my Internet Wealth Builder newsletter in March 2008 in anticipation of a correction in the stock markets. It consisted of a 40 per cent weighting in the iShares DEX Universe Bond Index ETF (TSX: XBB) and a 10 per cent weighting in each of six blue-chip, dividend-paying stocks. The stocks currently in the portfolio are Fortis (TSX: FTS), Canadian Utilities (TSX: CU), Enbridge (TSX, NYSE: ENB), BCE Inc. (TSX, NYSE: BCE), TransCanada Corp. (TSX, NYSE: TRP), and Scotiabank (TSX, NYSE: BNS). The opening value of the portfolio was $10,000.

The aim was to provide readers with a model that would generate a reasonable return while protecting capital from heavy losses during market slides. That goal was put to the test very quickly, in the crash of 2008-09. The portfolio stood up well, dropping 15.6 per cent to February 2009 which was much better than the performance of the S&P/TSX Composite Index.

When I last reviewed the portfolio in late August 2011, the total value, including dividends, was $13,602.92. That represented a total return to that point of just over 36 per cent. Considering the fact that was achieved despite the market crash, this portfolio has been doing its job and more!

The period since August has been another difficult one so let’s take a look at how it stands now. Prices are as of early afternoon on Jan. 13.

Results: The market value of this portfolio as of Jan. 13 was $13,026.42. We have also received dividends/distributions of $1,370.29 for a total value of $14,396.71. That is a cumulative gain of almost 44 per cent over the original valuation. That works out to an average annual compound rate of return of 9.98 per cent since the portfolio was launched. When you consider we achieved that despite the devastating crash of 2008-09, I think you’ll agree that is an excellent result.

Comments: All the securities in the portfolio performed well during the period with the exception of Bank of Nova Scotia. The stock price actually lost a little ground since August as financials in general were hit. However, two dividends of $0.52 each in September and December gave us a small total return gain since the last review.

We had an especially strong performance from Enbridge which gained more than $4 a share since last August. Canadian Utilities added $3.86 while BCE Inc. gained $3.30.

Despite the poor result from BNS, we are retaining it in the portfolio for now. Everything else is doing well.

The original portfolio balance has been distorted by market movements in the almost four years since it was launched. For example, the original 40 per cent weighting of XBB is now down to 33.2 per cent. I will not rebalance the portfolio at this time, however if you wish to emulate this model and you are just starting out I suggest you use the original allocations: 40 per cent to XBB and 10 per cent to each of the stocks.

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