Is the Couch Potato a good choice for larger portfolios?

Is a Couch Potato good for large portfolios?

Pooled funds are one option for large portfolios but not necessarily the best

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Q: I have a portfolio of just over $400,000 with an advisor in active mutual funds with fees between 1.75% and 2.80%. My investment firm is now recommending a pooled fund that is 0.50% cheaper. I also have a self-directed TFSA, where I use the TD e-Series index funds. Is the Couch Potato appropriate for larger portfolios, or would I get a better return by staying with an advisor?

Don 

A: There are two distinct issues to address here. The first is whether the Couch Potato strategy is effective with portfolios of several hundred thousand dollars or more. The second is whether investors with large portfolios should use an advisor or manage their money on their own.

The first answer is easy: the Couch Potato works no matter how large your portfolio is. Active money managers often try to paint indexing as an unsophisticated strategy that’s only appropriate for beginners and small accounts. This is nonsense: many of the largest institutional investors (think pension funds and endowments) use indexing to manage billions of dollars, and this isn’t because they lack the time and resources to find a better solution. They do it because the evidence is overwhelming that most active strategies underperform.

That said, investors with larger portfolios do have access to active managers at lower cost. In your case, Don, the lower-cost pooled funds your advisor is recommending probably aren’t available to the firms’ smaller clients. Active management has a better chance of success if it’s cheap, but if you’re still paying close to 2% your odds of outperforming an index fund over the long term are very long indeed.

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Now let’s tackle the second question, which is a little harder. A self-directed portfolio like the one in your TFSA is always going to be cheaper than anything your advisor offers: the TD e-Series funds average about 0.45% in management fees. But while it’s easy to manage a small TFSA on your own, an inexperienced investor may find it difficult to build and maintain a large portfolio across multiple accounts.

To be a successful DIY investor you need a rare mix of time, skill and discipline, and you need to genuinely enjoy it. If that doesn’t sound like you, a good advisor can add value for his or her fee, but that fee should be lower than you’re paying now. With $400,00 to invest you should be able to find an advisor whose all-in cost is less than 1.25%.

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