Hey folks.  I hope everyone using this site did well this past year. Value investors should have come out in pretty good shape. For my part, the final numbers are in for 2016, with investments appreciating by 14.5%.


In comparison the S&P 500 rose 9.5%; well within the range of its long-term averages.


S&P 500 (various time periods)

Average S&P Nominal Annualized Returns

10-Year (2007-2016)


15-Year (2002-2016)


20-Year (1997-2016)


25-Year (1992-2016)


30-Year (1987-2016)



From my point of view my return for 2016 represents a strong showing as my average annual return hovers around the 12% mark; better than the 30-year long-term average of the S&P. Overall I see this as a validation of my long-term investment strategy.

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I’ll keep my fingers crossed that I can keep beating the S&P averages but we all know past performance does not guarantee future results.


Modest Expectations for Return on Investment

Frankly, I don’t set out to beat the S&P as that would mean I’d be taking on more than market risk; a strategy that statistically would inevitably break-down and fail. One way I believe I’ve been able to do better than the S&P is to have realistic expectations of what I can achieve in any one year.


Read: How I Learned to Stop Worrying and Love the Markets

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A key strategic element in managing my expectations is my choice of an annual ROI (Return On Investment) target.  The target locks in a mindset where investment decisions are made within a context of preserving capital combined with a deliberate approach to growth.


Too low an ROI target and I may as well hit the snooze button and invest in BBB+ rated bonds. Too high a target and I lean out uncomfortably far on the risk curve. What’s the sweet spot? Mentally I target a logically chosen 7% growth and typically I finish the year in a far better position. It’s a personal trick that works for me.


How I Calculate my ROI Target and its Connection to the Risk-Free Rate

While I use the S&P 500 30-year annualized return as my main high-point benchmark it is not my annual ROI target. Its only role is in assessing how the portfolio actually performed in any one year.  For one thing, no-one knows at what level the S&P will end the year; so impossible to use as a target.


The usual ROI target I use is actually on the low side. It’s the yield forecasts of the risk-free 10-year treasury. To this I add in a conservative inflation forecast of 3-4% and a sizable buffer of 150-200 basis points since yields and inflation are a moving target themselves.


The goal here is to have a “sticky” ROI target that will, in all probability, remain fixed over the medium term irrespective of Fed actions to increase short term rates or upwardly revise their inflation projections or targets.


Essentially, I aim for my portfolio to better the returns you’d get from TIPS (Treasure Inflation Protected Securities) by 1-2%.  My target is a nominal portfolio return of between 6% and 7%. Since I’m overweight equity, if I don’t do better than 7% then that signals a couple of things; one being that I may have taken on too much risk.


For 2016 both the lower bound target (7%) and high-side benchmark (10.19%) were beaten so I’m smiling at how the year turned out.


MyAssetClass.com is an Online Value Investor Discussion Forum Where Investors Present their Experiences with Value Investing and Share their Best Investment Ideas.Breaking Down What Worked in 2016

From a practical point of view, there were two main drivers that propelled my portfolio’s growth in 2016.


The first driver. An exceptional year for Canadian stocks.


Canadian equities rose 18 per cent in 2016, the biggest increase since 2009. The index now sits less than 3 per cent from a record reached in September 2014. The S&P/TSX’s world-beating advance marks a reversal for the index, which slipped 11 per cent in 2015 for its worst annual decline since 2008.

The Globe & Mail, December 2016


The Canadian portion of my holdings rode the wave as the S&P/TSX Composite, Canada’s main stock index, rocketed up 17.5%. My portfolio followed the index despite a relatively low correlation; as the saying goes “a rising tide lifts all boats”. I ended the year with a 48% allocation in Canadian equity.


So, the question can be asked: Will the TSX perform as strongly in 2017; having 2 consecutive banner years? It’s improbable. In fact, there is about a 1-in-5 chance that 2017 will have comparable or higher returns from that index.


The second driver. The out-performance of US madcaps. Since the financial crisis I’ve been a fan and holder of the Russell MidCap ETF (ticker IWR).



My portfolio is madcap heavy and has mirrored the growth profile of IWR that rocketed up 25% this past year. What more can I ask for from an investment.


Read: Does Size Matter? Value Investing in Mid Caps


Will IWR deliver gains again in 2017? It’s probable as the fundamentals of this passive ETF are solid and unchanged.


But not everything is rosy in portfolio land. European and Asian holdings underperformed and depressed my overall performance big-time; disappointing returns for the second consecutive year.


On the Horizon: Lots of Geo-Political Uncertainty and Lots of Investment Risk

So, where am I now? I have the same ROI target for 2017, 7%. I also have cash to invest since I’ve been pulling gains as the markets have moved higher.


At this point, I’m a bit trigger shy about buying equity as there as some pretty daunting themes which could spell bad news for gains in 2017. If there ever was a year where political uncertainty is transformed into investment risk, this is it. Below are some of the key political events in 2017 to watch and monitor for fall-out in the financial markets.


2016 Portfolio Returns – Beating the S&P-Political Events to Watch

Source: GSAM

Read: Clear and Present Danger – Investment Risk


The greatest investment risk being the uncertainty regarding the new Trump administration’s policies.  To round out the list of known-unknowns that we have to deal with are: a possible divergent monetary-fiscal policy, control of inflation, the ailing European economy and, the threat to globalization.

Additionally, the Shiller PE has hit 28 and climbing, at these valuations, we’re due for a correction. When the other shoe will drop is anyone’s guess but we are due for a serious price adjustment.

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To tune my asset allocation, early in the past year, gains went into notes and energy stocks. Now, as different risk factors manifest themselves I will likely deepen positions in global mid-caps, notes and, cash; becoming a even more defensive. So far January has been strong month for the markets but things can change in a heartbeat.


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