Unveiling the 2011 Models

The new year is a time for change. When I first created this blog 12 months ago, I added a page of Model Portfolios almost as an afterthought. Little did I know that it would become the single most popular page on the site. After hearing lots of feedback from investors, looking more deeply into […]

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The new year is a time for change. When I first created this blog 12 months ago, I added a page of Model Portfolios almost as an afterthought. Little did I know that it would become the single most popular page on the site.

After hearing lots of feedback from investors, looking more deeply into the specific funds, and seeing the launch of new products, I decided that the Model Portfolios page needed some updating. I’ve revised some of the portfolios and added a few entirely new ones. I’ve also removed a couple that seemed redundant in this new light.

One of the main principles of Couch Potato investing is not tinkering your portfolio, so I thought it was worth describing the thinking behind these changes. None of them have anything to do with market conditions.

No more currency hedging

The original Global Couch Potato portfolio used currency hedging in its US and international equity funds. I’ve become convinced that currency hedging adds an extra layer of costs that the long-term investor does not need, especially given that hedging strategies are poorly executed by many funds. So I’m now recommending unhedged funds for this basic index portfolio. (The one exception is the RBC International Index Fund in Option 3, because the only unhedged international index funds in Canada are much too expensive.)

In Option 1 (the ETF variation), I have decided to recommend a 40% allocation to the iShares MSCI World Index Fund (XWD), rather than 20% to the iShares S&P 500 Index Fund (XSP) and 20% to the iShares MSCI EAFE Index Fund (XIN). XWD holds approximately equal amounts of US and international equities (plus a trivial allocation to Canada), but unlike XSP and XIN it does not hedge currency. It also simplifies the portfolio by turning two holdings into one, and still allows Canadian investors to trade on the TSX rather than using US-listed ETFs.

Making things simpler

Over the last couple of years I have come to appreciate the value of simplicity. While keeping costs low is always important, adding a few basis points in MER is often worth it if it means reducing the number of funds in a portfolio. Fewer funds means less rebalancing and lower transactions costs, especially with US-listed ETFs.

That’s why I’ve created the new Complete Couch Potato, which takes advantage of Vanguard’s Total World Stock ETF (VT). This gem of a fund covers virtually the entire world (unlike XWD, it includes emerging markets) in one fell swoop. You can cover all these markets at slightly lower cost with three Vanguard ETFs, and I suggest this option as well, but there’s a lot to be said for the simplicity of this one-stop solution.

Specialized options

I started writing a regular ETF column for Canadian MoneySaver last fall, in which I’ve suggested some specialized portfolios, including an income-focused portfolio in the January 2011 issue (on newsstands now). I’ve included this new Yield-Hungry Couch Potato, as well as an updated Cheapskate’s Portfolio, and will add others in the future.

I’ve also put together a  simple Fundamental Couch Potato for investors who want to use fundamentally weighted indexes, rather than traditional cap-weighted funds. After much thought, I’ve decided to recommend PowerShares ETFs for the US and international components, rather than their counterparts from Claymore, which follow the same strategy. Claymore’s flagship Canadian Fundamental ETF (CRQ) has tracked its index extremely well (and significantly outperformed the market) since its inception. However, the tracking error on Claymore’s US and international fundamental ETFs have been so large that I can’t recommend them in good conscience. There’s reason to expect that this will change as the funds improve their sampling methodology, and if that happens, I will happily reconsider.

I look forward to your feedback on these new Model Portfolios.

24 comments on “Unveiling the 2011 Models

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