There’s a catch-22 facing many would-be investors that’s keeping them out of the market. On the one hand, they feel they lack the financial knowledge to handle their own investments confidently. On the other hand, they don’t want to rely on the advice provided by financial advisors, who often have a vested interest in selling products that pay them the largest management or trading fees.
Indeed, according to a MoneySense online poll, 46% of respondents said the biggest barrier to investing for the average Canadian is that it’s too complicated or confusing, and 30% said they don’t trust financial advisors.
But there’s a solution that gets around both these roadblocks: Couch Potato investing.
For those new to the idea, the Couch Potato method is a simple approach to building a well-diversified, low-maintenance and low-cost portfolio of stocks and bonds using passive mutual funds or exchange-traded funds (ETFs). As a couch potato investor, you don’t need to spend hours researching various assets in an attempt to pinpoint potential market “winners,” which can be like finding a needle in a haystack. Instead, you own the entire haystack, by investing broadly in the total market overall, while keeping costs down. It’s called index investing, and it’s a passive investment strategy that differs from the typical active investment strategy of most financial advisors.
To use a sports analogy, rather than trying to guess which pro hockey team might win the Stanley Cup in a given year, you own small pieces of the entire league and profit from the entire operation—which includes both winners and losers.
What’s more, by using this easy, low-cost investment approach that aims to match overall market performance—not beat it—you’ll likely do better than if you paid an advisor to invest your money in mutual funds. How so? Simply put, Canadians pay some of the highest fees in the world to invest in actively managed mutual funds; about 2% comes off the top of a typical equity fund’s earnings before you see a red cent. The lazy couch potato investor can build a portfolio for less than 1/10 of that cost—more like 0.2% or less—which means more investment earnings flow into your account rather than your advisor’s.
While the general premise of the Couch Potato remains the same, a lot has changed since MoneySense brought the strategy to Canada some 22 years ago. The portfolios have long included the same four core building blocks—Canadian stocks, U.S. stocks, international stocks and bonds. But portfolio strategy and investment options have evolved, and now there are many more ways to be a Couch Potato.
Watch: BMO ETFs-Investing with Specialty ETFs for Income