Can your portfolio ever get too big for the couch potato strategy?

Can your portfolio ever get too big for the Couch Potato strategy?

Its whimsical name gives this passive investment strategy an image problem, but it really is perfect for everyone. Here's why.

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Q. Can your portfolio ever get too big for the Couch Potato approach? Between success in my family business and an inheritance, I now have over $5 million in liquid investments. Could I be missing out on valuable investment options only open to high-net-worth individuals by remaining strictly a Couch Potato investor?
Tom

A. Although the simplicity of the Couch Potato portfolio is one of its great virtues, it can give the impression that it’s not diversified enough for a multi-million-dollar next egg. Consider the Vanguard Balanced ETF Portfolio (VBAL), one of several innovative ETFs that allow you to build a complete portfolio with a single trade. On the surface, it’s just one holding, so you can appreciate the reluctance to invest hundreds of thousands of dollars in a product like this. But if you pop the hood, you will see this ETF actually holds seven underlying funds, which in turn hold almost 12,000 stocks and bonds from dozens of countries. Vanguard’s white paper on this family of ETFs explains that such a global portfolio provides “a high level of exposure to around 94% of public market securities.” That’s about as diversified as one can get, even with $5 million or more to invest.

To add some perspective, Warren Buffett has said he wants 90% of his estate to be invested in an S&P 500 index fund when he dies. At last count, Buffett’s net worth was close to $90 billion USD.

Of course, Tom, there will be no shortage of salespeople ready to flatter you by offering access to exclusive opportunities available only to “accredited investors.” These include hedge funds, private equity (ownership of businesses that are not publicly traded), peer-to-peer lending, real estate partnerships, and on and on. It’s possible that some of these opportunities would go on to deliver outsized returns without undue risk, but you will likely have to accept not only high risk but also high expenses, illiquidity and a lack of transparency. You’re not giving up anything by taking a pass and just sticking to boring old index ETFs.

That said, there are a number of ways in which a large portfolio should, indeed, be treated differently from a modest one. For starters, keeping your costs low becomes much more important as your wealth grows. If an investor with $50,000 can trim her fees by 0.10% annually, that works out to less than a dollar a week. But on a $5-million portfolio, every additional basis point (0.01%) is $500 a year, so you can argue that sticking to super-cheap, plain-vanilla index ETFs is even more important with a bigger portfolio.

Tax efficiency also becomes extremely important for high-net-worth investors. Tom, your RRSP and TFSA probably make up a relatively small part of your overall nest egg, and the vast majority of your holdings are likely to be in a taxable account. Moreover, you’re probably in the highest tax bracket and will be for most of your life. Here again, traditional broad-market ETFs are ideal. They make tax-loss harvesting easy, and they tend to have very low turnover, which means little in the way of capital gains taxes.

Depending on your level of investing experience, you may want to consider some professional advice. Not everyone is cut out to manage a large portfolio across multiple accounts. The good news is, when your portfolio is large, you should be able to negotiate a very reasonable fee, and it will be tax-deductible in your non-registered account, which can effectively reduce the fee by half if you’re in the highest tax bracket. A good advisor who helps you maintain a low-cost, broadly diversified and tax-efficient portfolio should be able to add value, especially if they are also providing financial planning services in addition to portfolio management.

There’s no question that managing a large portfolio is more complicated than a modest RRSP or TFSA. But in terms of your fundamental investment strategy, nothing needs to change, even if there are two commas in your account balance.

Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.

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