Indexing your way to the perfect portfolio - MoneySense

Indexing your way to the perfect portfolio

Dan Bortolotti walks you through all the necessary steps to become the ultimate Couch Potato investor in the MoneySense Guide to the Perfect Portfolio.

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The Couch Potato is an investing concept that goes back to the early days of MoneySense magazine. It refers to the classic passive investment strategy of using exclusively a small number of index mutual funds or exchange-traded funds (ETFs).

The idea is simplicity itself: it can consist of holding as few as four funds, typically a fixed-income one and three equity funds holding equal parts Canadian, U.S. and international stocks.

Set it and forget it

All you need to do with such a portfolio is add to it over time, perhaps rebalancing yearly, so there’s very little tinkering necessary. No need to check the latest quarterly results of some individual stock you fear you’ve overweighted, no need to worry about over- or under-valuations in particular regions of the world or sectors of the economy. Merely “set it and forget it.”

The term Couch Potato refers to the fact the owners of such portfolios can sit back on the couch and no nothing but fiddle with the remote: get on with living life without fretting about the stock market, interest rates or the economy. The term originated with American columnist Scott Burns. It has been adapted in Canada by MoneySense and especially our Index Investing columnist and editor-at-large Dan Bortolotti, who also writes his own Canadian Couch Potato blog.

The idea also shows up under the similar moniker of the Easy Chair portfolio. In any case, readers may be interested to know that the revised second edition of Bortolotti’s MoneySense Guide to the Perfect Portfolio has just been published and should be available on newsstands shortly if not already. Or you can order it online here. The one-year-old first edition has been sold out for several months now.

Having just edited the guide and written the foreword to it, I think any reader interested in this approach to investing would do well to obtain a copy.

Doing it yourself via discount brokers

At the price of a single discount brokerage trade ($10), it’s well worth it. I mention discount brokerages because this is a major focus of the guide. If you’re new to the idea of online investing—perhaps you still use a full-service brokerage or use an investment advisor oriented to mutual funds—Bortolotti takes you through all the steps necessary to make the change to doing it yourself via a discount brokerage. Then he evaluates the pros and cons of the two main types of building blocks for the Couch Potato: index mutual funds and ETFs.

Those who prefer the complexity, thrills and heartaches of stock-picking might want to read the article in the guide by Andrew Hallam, author of Millionaire Teacher. Hallam describes his own route from stock junkie to Couch Potato enthusiast, despite enjoying relative success at the former activity. He just didn’t feel the odds would remain in his favor.

Both Bortolotti and Hallam are what I’d describe as indexing “purists.” Just as it’s impossible to be “half pregnant” they would argue the benefits of indexing only accrue to investors who fully embrace the philosophy.

That makes it a difficult paradigm to embrace for those with existing portfolios chock-a-block full of individual stocks, actively managed mutual funds and a smattering of ETFs. It can take years to fully transition from one investing mindset to another: those with DSC (Deferred Sales Charge) mutual funds face the barrier of waiting for redemption schedules to wind down while tax considerations make it difficult to convert any non-registered portfolio to a couch potato portfolio.

Core & Explore as interim step

In the interim, though, investors could consider a “core and explore” or “core/satellite” approach that puts index funds at the core of registered portfolios (where tax consequences of switches are minimized), while perhaps retaining existing holdings in non-registered portfolios.

I might add the Guide to the Perfect Portfolio nicely complements what I call the Findependence Day model. Both focus on discount brokerages holding ETFs or index funds. The third element I emphasize is fee-only financial planning, a subject Bortolotti’s guide touches on. He is, however, somewhat skeptical about mutual fund managers and stockbrokers, quipping that “the financial industry, as a whole, is not a Potato-friendly zone.”

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