The plight of today’s cautious investor is on sad display in the performance of the Two-Minute Portfolio in 2024.
The Globe and Mail’s 2MP is a continuing experiment in simple stock-picking where you invest equal amounts in the two largest dividend payers in each of the 11 sectors in the S&P/TSX Composite Index, as measured by market capitalization. The 2MP is all stocks, so it’s in no way a “safe” strategy. But it has a proven history of losing less in down years than the S&P/TSX Composite Index.
In years when the index is hot, the 2MP sometimes get smoked. Such is the case for 2024 – the 2MP produced a total return of 11.1 per cent, while the S&P/TSX Composite Index made 21.7 per cent. These numbers were supplied by Morningstar Direct, which looks after 2MP data.
The 2MP’s equal weighting of stocks ensures limited exposure to weak sectors while providing a taste of the best performers. The past year offers a lesson on how this approach can go awry.
First, there’s the telecom problem, as represented in the 2MP by BCE Inc. (BCE-T) and Telus Corp. (T-T). Morningstar says the pair lost 28.5 per cent and 10.7 per cent, respectively, in 2024. Underweighting telecoms in a portfolio last year was an effective solution, but the 2MP has nearly 10 per cent of its assets in the sector.
The financial sector presented the exact opposite difficulty. Banks in particular were outstanding, but the 2MP was much more limited in its exposure than the index. Another drag on the portfolio was the presence of Toronto-Dominion Bank, an outlier among the Big Six banks last year in having a declining share price. Investors punished TD after it pleaded guilty to conspiracy to commit money-laundering and agreed to pay U.S. regulators a penalty of more than US$3-billion.
The strict diversification rules of the 2MP have worked well in the past, most notably in years where the index fell. There were four down years for the index since 2009, and the 2MP outperformed in each. Most recently, the index fell 5.8 per cent in 2022 and the 2MP dipped 3.2 per cent. In 2018, the index lost 8.9 per cent and the 2MP dipped 1.7 per cent.
Morningstar has moved to a new system for tracking the 2MP, which means that returns back to inception in 1985 cannot be calculated. However, the annualized total return from inception through the end of 2023 was 9.98 per cent, which compared with 8.21 per cent for the index.
The recent disappointing numbers from the 2MP reflect the challenge faced today by investors who want to be in the stock market, but are concerned about the volatility we’re likely to see in 2025 and beyond. It must be said that long-term investors need not worry about such things – they’ll do fine with a low-cost, index-tracking exchange-traded fund.
But there are situations where investors will want to manage near-term volatility or, in other words, the sharpness of market moves both up and down. A year ago, 5-per-cent guaranteed investment certificates were an attractive way to diversify and protect a portfolio. GIC rates are in the 3-per-cent zone these days, which makes then much less appealing.
Bonds did okay in 2024 and offer their usual diversification benefits for investors concerned about stock market declines. Low-volatility ETFs are another thought for those hoping to lose less in a down market.
The 2MP is for investors who prefer to own stocks directly, but don’t want to get bogged down in picking specific shares. The strategy covers Canadian stocks only – you still need U.S. and international content.
Also, the 2MP works best using brokers with no commissions for buying and selling shares. The performance numbers quoted above do not include trading commissions, which can be as high as nearly $10 at some online brokers. Zero-commission brokers include Desjardins Online Brokerage, National Bank Direct Brokerage and Wealthsimple.
Commissions are an issue even after you set up the 2MP because there’s annual rebalancing to add and subtract new stocks and equalize your holdings in each of the other stocks back to 4.5 per cent of the total. Remember, there are 22 stocks in the 2MP in total.
Here are the 2MP changes for 2025:
- Materials: Barrick Gold Corp. (ABX-T) is replaced with Agnico Eagle Mines Ltd. (AEM-T)
- Industrials: Canadian National Railway Co. (CNR-T) replaced with Thomson Reuters Corp. (TRI-T)
- Health care: Sienna Senior Living Inc. (SIA-T) replaced with Andlauer Healthcare Group Inc. (AND-T)
- Information technology: OpenText Corp. (OTEX-T) replaced with CGI Group Inc. (GIB.A-T)
- Utilities: Brookfield Infrastructure Partners LP (BIP.UN-T) replaced with Hydro One Ltd. (H-T)
- Real estate: Canadian Apartment Properties REIT (CAR.UN) replaced with Colliers International Group Inc. (CIGI-T).
You’ll find the complete 2MP lineup for 2025 in the accompanying chart, with data on dividend yields. That’s another thing about the 2MP – it’s a strong dividend producer. The average dividend yield for the portfolio is 2.9 per cent, a nice offset to the latest inflation rate of 1.9 per cent.
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