The paradox of Couch Potato investing

The paradox of Couch Potato investing

It extraordinarily simple, but it’s not easy


couchpotato_322When it comes to so-called Couch Potato investing, there’s a bit of a paradox involved. Conceptually, it’s a simple enough concept but that doesn’t mean it’s easy to execute. That’s according to Mr. Couch Potato himself, Dan Bortolotti, famously the blogger behind Canadian Couch Potato, a consulting editor at MoneySense and also an investment adviser with PWL Capital Inc.

Bortolotti is also the author of the MoneySense Guide to the Perfect Portfolio, which is an excellent introduction to the topic of Couch Potato investing. It’s complete with guidelines on how to open a discount brokerage and how to execute your own trades. And of course, it’s one of the best sources in Canada on Exchange-Traded Funds or ETFs, portions of which were excerpted in the September/October issue of MoneySense. Bortolotti and his PWL colleague Justin Bender are often cited in the magazine. When I used to write the Portfolio Makeover, a typical Bender portfolio did indeed seem to be simplicity itself: 20% Canadian equity, 20% U.S. equity, 20% international equity and 40% Canadian bonds, usually in the ETFs of Vanguard Canada or iShares Canada. Bender just launched a new blog.

At the Retire Rich event weekend before last, Bortolotti presented a similarly simple-appearing portfolio: 20% Canadian equity, 20% US equity, 20% international equity, 10% emerging markets equity and 30% government and corporate bonds, with a combined MER of just 0.14%, Bortolotti said. But despite the simplicity of such a portfolio, it’s about as diversified as you’d ever want: representing some 4,000 stocks in 30 countries and 12 currencies.

So how is this hard to execute? Diehard do-it-yourself investors may be able to do this all themselves if they have nerves of steel and the time and energy to do their own research and follow the markets.

Bortolotti thinks most people need the help of a financial adviser, particularly in the stages that precedes product selection: setting a realistic, specific and attainable goal, and determining your ability, willingness and ability to take risks. He concedes that younger folk a long way from retirement (in their 20s or 30s) may be able to get by without an adviser but as wealth rises and time horizon shortens, the stakes rise considerably. As Bortolotti says, “it all depends on the time horizon and income stability.”

The critical step of the half dozen that he outlined is the third: choosing the asset mix. This is “the single most important investment decision,” he said, “take as much risk as you need to but no more.”

The asset allocation will allow you to estimate future expected returns. Long-term, PWL uses 7% for stocks and 3% for bonds, minus investment costs. With no adviser, that cost might be around 0.3% for ETFs and other fees. On a portfolio 70% stocks to 30% bonds, Bortolotti calculated the expected return this way: 7% of 70% is 4.9%; 3% of 30% is 0.9%. Subtracting 0.3% in fees, the expected return for that portfolio would be 5.5%.

But now that he’s dealing with clients, Bortolotti says expected returns are one of the most misunderstood concepts. It’s a long-term average figure but the reality is you almost never experience that particular return–5.5% in this example–in any given year. In fact, since 1970, a global stock portfolio returned on average 9% a year.

But if you define the range of 6 to 11% as normal, over 44 years, annual returns only fell in that narrow band five times. The rest of the time, markets were either hugely up or scarily down. “Returns are never slow and steady. It’s a rollercoaster.”

That’s why we diversify: some asset class is always underperforming, which is the reason we diversify. Actually choosing and acquiring the ETFs are steps four and five. They need to be broadly diversified, plain-vanilla funds with a low. Three to six is good, 10 to 12 is “probably too many.” The last step is of course to stay the course. Again, it’s easier said than done. Most investors need help with this.

LIVE CHAT: Dan Bortolotti takes your ETF questions on Thursday, Nov. 20 at 1 p.m. EST »

Jonathan Chevreau blogs at and other sites. He can be reached at [email protected].