Signs that you might be a Canadian couch potato
Although the term has been used since the early 1990s, Couch Potato investing remains incredibly popular. The good news is that it’s never been cheaper, or easier, to become a Couch Potato Investor. In this article, I’ll show you 3 ways that you can create a winning portfolio the Couch Potato way, but first, I’ll explain exactly what this passive investment strategy is all about.
What is couch potato investing?
Couch Potato investing represents a move away from an active investment management strategy, which adheres to the belief that it’s possible to consistently outperform the markets by identifying the companies that will outperform, something that also requires frequent buying and selling of those companies. Couch Potato investors, on the other hand, recognize that very few active managers have been able to even match the overall performance of the market. Rather, what ends up happening is that they tend to charge investors an arm and a leg for the opportunity to try, further eating into returns. That’s not a winning strategy, in my books.
The premise of a passive investment strategy, aka the Couch Potato model, is to generate returns that will match the market, by using low-cost index funds, or ETFs, whose holdings mirror those of a broad market benchmark index, such as the S&P/TSX. The passive approach to investing comes with 3 distinct advantages: Lower investment fees, a more hands-off approach, and more consistent, if not better returns, in the long run.
The origins of couch potato investing
The concept of Couch Potato investing was popularized in the early 1990s by Scott Burns, a personal finance writer for the Dallas Morning News, and co-founder of AssetBuilder.com. According to Burns, all an investor needed was a portfolio comprised of two low fee index funds, one for stocks, and the other for bonds.
By holding two funds, with say, a 50/50 mix, Burns believed that investors could achieve a balanced portfolio that would match the returns of their underlying market indexes. The only real work involved would be to rebalance the portfolio at least once per year, ensuring that the asset allocation remained at 50/50, or at whichever mix you were striving to achieve ie. 60/40, 80/20, etc.
About 10 years after Scott Burns introduced Couch Potato investing in the US, MoneySense Magazine made the term popular north of the border, along with some small changes that made sense for Canadian investors. Personal finance writer Dan Bortolotti has kept the spotlight on Couch Potato investing through his aptly titled blog, Canadian Couch Potato.
A couch potato strategy for Canadians
As a Canadian, there are a couple of considerations you should make when building their Couch Potato portfolio. For starters, you’ll need to decide whether to invest in a taxable, or non-taxable account ie. RRSP or TFSA. If you’re aiming to build your RRSP or TFSA, then you won’t need to worry so much about tax efficiency, or the types of income earned by the underlying investments you hold.
To diversify your Couch Potato portfolio, you’ll want to make sure that you’re not only choosing Canadian equities, but the US, and international as well. While the Canadian market has provided solid historical returns, it represents only about 2-3% of global markets, and failing to diversify beyond our border will result in missed opportunities and potentially more risk. Recently, Noah Solomon made a powerful case for investing beyond Canadian borders on The MapleMoney Show podcast.
The good news is that there is no shortage of low cost, passive investment options for Canadians. Not only that, but there are more choices than ever when it comes to investing on your own, either through a Robo advisor, or a discount brokerage. Without further ado, here are my top 3 ways to invest like a couch potato, in Canada.
3 ways to invest like a couch potato
Traditionally, Canadian Couch Potato investors have used one of the following 3 investment products to build their portfolio. Each one follows a passive investment strategy, with a focus on low fees. They’re also very easy to purchase and rebalance, some more so than others. As we take a closer look at what’s available, I’ll let you know why you may want to consider each option.
Tangerine investment funds
Tangerine is one of Canada’s leading online banks, so it only makes sense that they would know a thing or two about simple, affordable investing. After all, low fees and convenience is part of their DNA. Tangerine Investment Funds include a family of 5 index mutual funds, with each one representing a different asset allocation. The funds are well diversified and provide exposure to Canadian, US, and global markets. The MER for all Tangerine funds is a respectable 1.07%, much lower than what you’d pay for an actively traded Canadian equity mutual fund.
What makes them great?
Tangerine Funds offer simplicity at a very low cost. There are no account fees or minimum investment amounts. You can arrange for regular contributions from your bank account, and your holdings are automatically rebalanced. In other words, once the plan is set up, it’s pretty much hands-off.
What Are the Drawbacks?
While Tangerine MERs are a very respectable 1.07%, there are cheaper couch potato options out there, as you’ll see below. As well, you won’t have that much control over the investments you choose, compared to if you were buying individual ETFs. So, what you gain in hands-off simplicity, you lose when it comes to getting the lowest possible fees, and the ability to customize your portfolio.
Who are they best suited for?
Tangerine Investment Funds are ideal for someone who is new to index investing, or who doesn’t want the hassle of having to open a discount brokerage account, do their own trading, or manually rebalance their portfolio on an annual basis. For more information, you can check out my full review of Tangerine Investment Funds, which I’ve recently updated.
TD e-Series funds
TD e-Series Funds have long been a staple for Canadian Couch Potato investors. In fact, they once made up the lion’s share of my portfolio for many years, before I made the shift to ETF investing. Like the Tangerine Funds, TD e-Series funds are index mutual funds, with a few notable differences. For starters, TD e-Series MERs are much lower, ranging between .33% and .50%. Unlike Tangerine, the individual funds are not aligned to specific asset allocation, giving the investor more control over how they wish to invest.
Recent changes to the TD e-Series are making this fund more readily available. Previously, you had to either buy them through a TD Direct Investing discount brokerage account, or visit a TD branch in person, open a mutual fund account, and then convert the account to e-Series after the fact. While DIY investors will still need to purchase TD e-Series via an online broker, they are now available for sale through any number of Canadian discount brokers.
Other recent changes include TD switching the underlying market indexes of the funds to match those of the TDs family of ETFs. For investors, the end result is even lower MERs, as they will be dropping a further .05% across the board. Feel free to check out my full review of TD e-Series, which I recently updated to include the upcoming changes.
What makes TD e-Series great?
In my opinion, TD e-Series remains the best option for index mutual fund investors. The ultra-low MERs approach ETF territory and the funds have performed very well, historically speaking. You can choose from various funds to build your ideal asset allocation, and, like most mutual funds, there is no cost to place trades, which makes it easy to buy in small amounts.
What are the drawbacks?
If your focus is solely on fees, then there are cheaper options, with ETFs. Buying TD e-Series funds through an online brokerage is still very much a DIY endeavor, and there is some work involved with purchasing the funds, and manually rebalancing your portfolio. TD e-Series trade like mutual funds, unlike ETFs, which can be bought and sold in real-time, like stocks.
Who is TD e-Series best suited for?
I would recommend TD e-Series to someone who is getting into index investing, but wants more control over their investment choices, and doesn’t mind doing a little legwork. They are also suitable for folks with smaller portfolios, and for more frequent trades since there are no commission fees. Like me, you may find yourself buying TD e-Series before eventually graduating to ETF investing.
ETF investing
Couch potato strategy number three involves investing in exchange-traded funds, or ETFs. ETFs didn’t even exist when the original Couch Potato investors were doing their thing. But, as it turns out, these ultra-low-cost broad market investments are perfectly suited to the Couch Potato approach. Like index mutual funds, ETFs track an underlying stock market index in an attempt to closely match the returns of the market. But it does so at an even lower cost. MERs on individual ETFs can run as low as .07%-.10%. They also trade like stocks, so they can be traded in real-time, on the market.
Where can I invest in ETFs?
Individual ETFs can be purchased through any online brokerage, or through a Robo-advisor. While there are lots of great discount brokers out there, I recommend Questrade for ETF investors. That’s because they’re the only online broker in Canada that offers unlimited, no-commissions on ETF purchases. That’s right. Because ETF trade like stocks, there is normally a trading fee, which can be as high as $9.95 per trade. But with Questrade, you avoid that altogether. It’s where I hold all of my ETFs.
If you prefer the hands-off approach of a Robo-advisor, Wealthsimple is a great choice. You can open an account online, and start investing almost immediately. They’ll create a customized portfolio for you, for a very low annual fee (.50% up to $99,999, .40% over $100,000). There are no fees to purchase funds, and Wealthsimple ETFs have the same low MERs you’ll find anywhere else. You’re paying a small premium with the annual fee, to have everything done for you.
What makes ETFs great?
Low MERs are the biggest draw for ETF investors. But with respect to building a Couch Potato portfolio, they also offer strong potential for return and access to a wide range of investment funds. While Tangerine and TD e-Series are limited to a few funds, there are literally thousands of ETFs to choose from, making for endless ways to customize your portfolio. Also, the ability to diversify makes ETFs ideal for large portfolios.
What are the drawbacks?
If there’s a drawback to buying individual ETFs, it might be having to choose from so many different options, making them less suitable for new investors. Also, there’s a bit of work involved, in that you need to trade through an online broker, and you’re responsible for your own rebalancing, in most cases. If you’re making frequent trades, fees can add up, so you need to be careful. That’s why I’m partial to Questrade, as the free ETF purchases make life so much easier.
Who are ETFs most suitable for?
Anyone can buy ETFs, but if there’s a suitable investor, it’s someone who has a medium to a large portfolio, and is more of a buy and hold investor, as frequent trading of ETFs can result in high fees. If you’re building a Couch Potato portfolio inside a discount brokerage account using individual ETFs, it means that you’re willing to put in some time doing your research, and don’t mind handling your own rebalancing from time to time. If you prefer a more hands-off approach, you can still purchase ETFs through a Robo-advisor, like Wealthsimple, or ModernAdvisor. But, there is even one more way to add ETFs to a Canadian Couch Potato portfolio, through something called asset-allocation ETFs.
Asset allocation ETFs
These days, asset allocation ETFs are becoming more and more popular, because they combine the beauty of low fees, with the ease of a fully diversified portfolio and automatic rebalancing. Inside each of these ETFs, you’ll find a mix of Canadian, US, and international stocks, as well as a mix of government and corporate bonds, aligned to specific asset allocation. For example, the Vanguard Balanced ETF Portfolio (VBAL), has a weighting of 40% bonds, and 60% stocks, with an MER of .25%. The MER is a bit higher than what you’d find with an individual ETF, but if you’d rather not handpick your own Couch Potato portfolio, or have to manually rebalance, it’s a fair tradeoff.
Signs that a Canadian couch potato portfolio may be for you
If investing is something that seems complicated, or feels completely overwhelming, it’s a sign that Canadian Couch Potato investing may be right for you. No longer will you have to worry about doing endless research to find undervalued stocks, or be subject to the high costs of actively traded mutual funds. And with options from Tangerine investing, TD e-Series funds, as well as a bevy of ETFs at your disposal through brokers like Questrade and Wealthsimple, it’s never been easier to build a Couch Potato portfolio.
You’ll benefit from knowing that your holdings are going to deliver market returns, all with minimal fees. You just need to decide which style you prefer; are you ok with having a bit less control, with handpicked funds and automatic rebalancing? Or would you like to do some of the work yourself, and benefit from the lowest possible fees. A Canadian Couch Potato portfolio has you covered either way.
Comments
Great post Kim!
To your point about historical references, I have another take. The timeframe is everything really; you can spin any data to meet your needs if you pick the appropriate investment window. I’m not saying you did this in your article, rather, I find many financial articles don’t take this bias into account. While I like your point about contexting, (85-year timeframe vs. 25-year timeframe), choosing an investment window to articulate portfolio returns is something writers need to take into consideration when discussing returns. Even avoiding a few high-return investment days on the market is enough to skew data.
I’m a big fan of Couch Potato investing, in my RRSP in particular, but no doubt many global potatoes got hammered over the last decade or so. This is why diversification is important not in the short-term, but in the long-run since ultimately over a few decades of investing, things will even out in the wash. Most investors can hold stuff for 1 year, let alone 10 or 20 or better still 30 years.
On being a potato for part of my portfolio anyhow, I don’t mind “market returns” – because my asset allocation is designed to get me at least 4% every year for the next 25 years in my RRSP.
Also, with the rest of my portfolio (dividend-paying stocks, my goal is not to hammer the market with my stock returns but rather execute the right balance of risk and reward that meets my investment objectives. Too bad many financial articles do not talk about this more – invest to meet your financial needs, not others – do what is right for you. Personal finance and investing is well, personal after all 😉
Since you write about finance, you know how hard it can be to write anything that applies to everyone. You’re right. The whole point of personal finance is to find something that works for you.
I think Couch Potato investing will be a great strategy once the next secular bull begins. Since no one knows precisely when that will be, it’s not easy to pin down the right time to execute the strategy. If you’re under 30, you’re probably OK gradually adding to a Potato portfolio over the rest of your investing lifetime. Just realize that there will be ups and downs and that no one knows what your final average annual return will be.
If you’re over 30, you might consider a smaller Potato position as part of your overall portfolio. Again, there’s no one size fits all solution. The point is to do the work needed to find what’s best for you. You put it best: “invest to meet your financial needs”
Thanks for your comments Mark! 🙂
Go 2 Cents! Your post reads better than a lot of what I have read from various economists, lately. Not that I am advocating people take your advice, but refusing to consider what it means for them would be, in my opinion, a big mistake. Since I have always felt Buy & Hold was really a marketing, rather than an investing strategy (having worked a number of years in Financial Services), I can’t adopt the Couch Potato approach for myself. Still, having a plan is better than not having one. That said, given the massive demographic change we are about to experience, I am not willing to bet my future on a theory that says the market has to continue making new highs during the majority of the years available to me in which I might earn a return in the stock market. The false belief that the U.S. housing market could only go higher is what convinced too many people there, and a good number around the world, to put their life savings in harm’s way. Even though the “experts” may have known otherwise, that is not what they were telling and selling unsuspecting customers.
Thank you Ian. For the record, I wouldn’t want anyone to follow my advice either. I try not to give explicit advice, but just to put information out there that people may not have considered.
I think a lot of buy & hold info is about marketing, but I know that quite a few people really believe it’s the best way to invest. My aim is to get them to look at both sides and find a compromise that fits their goals and risk tolerance. I think the risks of investing in both bonds and equities are often vastly understated and frequently misunderstood.
I hope there are a lot fewer “unsuspecting customers” when the next financial crisis hits. Educating investors about the choices available to them has not been a strong suit of the financial services industry.
Thanks for your comments! 🙂
Great post!
If the risks for investing in bonds and stocks are understated, and with the returns for investments in GICs being less than the real inflation rate, what other investment vehicles are available to people saving for retirement? Gold? Real Estate?
Gold has been working great, but I’m not sure I want to buy it at $1600. We have the bulk of our savings in GICs at the moment. I know that real returns on some of them are very low. But given the risks in the markets right now, -1% to +3% sounds more appealing than larger losses.
There are lots of different ways to invest and I’ll try to write about a few alternatives in a future post, but the best way to manage risk is to manage your exposure. Smaller positions work better when uncertainty rises.
Thanks for stopping by! 🙂
Good article. There is much ‘doom and gloom’ being reported in the last few months, and no one really knows what will happen in the next 6 months. For my peace-of-mind, I just moved OUT of XIU into XCB. I want to worry less, and relax more this summer!
Interesting move. I’ve often thought of investing in corporate bonds as a good way to capitalize on the success of corporations without the higher risk in equities. The monthly distribution doesn’t hurt either. 😉
Not a bad idea to see how things play out in the U.S. and Europe over the summer and go at it again with a fresh set of eyes in September. Thanks for sharing your idea and I hope you find that peace of mind this summer!
I never liked the idea of benign neglect when it comes to your investments. Sure, I’m more of a buy-and-hold proponent, but I’m still monitoring my investments and following trends.
As for the time frame, if everyone just looked at the 85 year window then nobody would invest in bonds or GIC’s, since the return from stocks far surpass other investments. But since we deal with 25-40 year investment windows we need to ensure we have an appropriate asset mix for our own situation. I would hate to buy an index fund at the wrong time and watch it return nothing in a bear market.
You basically summed up the point I was trying to get at perfectly! I guess it’s that “benign neglect” feel that I object to the most. Investing just isn’t that easy.
Thanks Echo!
You’re a treasure, Two Cents. Too few bloggers possess the courage to point out the dangers of Lazy Portfolios.
That said, there is a crying need for this sort of thing. We entered a new world when we made middle-class people responsible for financing their own retirements. We now have millions of people investing in stocks who possess little desire or ability to learn how stocks work. That’s a dangerous combination.
My take is that we need a modified approach to Coach Potato Investing.
What we need to do is to lift the Social Taboo that now applies to pointing out to people the times when Coach Potato Investing becomes dangerous. As you point out, there are times when it works well and there are times when it is a disaster. We need to tell people that, clearly and firmly and without apology.
There’s never in the history of the U.S. market been a time when investors bought stocks that were fairly priced and did not obtain a super long-term return. And there’s never been a time in the history of the U.S. market when investors bought stocks that were insanely priced and did not endure gruesome losses. Why not just let people know that? Then people can invest in Coach Potato fashion without having to worry about seeing their retirements fail as a result.
Simple is good. It’s simple plus deception that is causing all the trouble. To not let people that valuations matter is deceptive.
Rob
You know Rob, one of the great things about blogging is that it doesn’t pay enough to make me worry too much about toeing any particular party line. Besides, my constitution dictates that I probably couldn’t do that even if I wanted to. (Maybe that’s why I’m not rich! ;))
Your point about the novelty of DIY investing is a great one. A lot of people 40 and under don’t realize that investing in the markets wasn’t standard before the advent of mutual funds. It’s great for the “average” person to have access to the public markets, but investing is not as easy as the investment industry sometimes makes it sound.
Buying and holding is great – as long as you buy value. Buying and holding overvalued equities or any other asset doesn’t seem like a great idea. Thanks for continuing to remind us of that fact and thanks for sharing your thoughts here.
I’ve enjoyed deploying bonds as my secret weapons when markets crash–then greedily buying stock indexes with the proceeds.
As for the couch potato, here’s the interesting part. Few people have the nerve to follow such a strategy. Don’t get me wrong: I’m a firm believer in it. But it asks people to be fearful when others are greedy and greedy when others are fearful. And very few people can do that. Too many people try making decisions based on where they think the economy is headed, and the vast majority of market timers don’t do very well. When there’s blood in the streets, and the economy is screaming Uncle, they don’t want to buy stocks. And when the economy has a rosy consensus, and things are getting more expensive, they feel better about paying higher prices.
As for couch potato investing, I don’t think many people can do it over a lifetime. I think it would be great if they could, but I’m not so sure they can. As popular as it has become, online, I would bet that very few people will be able to follow the method for long. Psychologically, it’s tough. There are plenty of people who started their serious investing very recently and they will never know how they react to market declines until they hit them, mentally, between the eyes.
The couch potato returns (4% as an average return over the past decade) is paltry compared to the returns of someone who bought the lagging index over the past ten years, and rebalanced manually when things got really screwy (September 2001; 2002/2003; 2008/2009). Profits made by people who thought dispassionately and rebalanced in such a way (while buying the lagging index each month) made a heck of a lot more than 4% annually. I know that I made more than double that annual return over the last decade, by purchasing laggards and rebalancing when things got screwy. (Yeah, everyone online probably says that, I know) But then, how many people had the guts to do that? A true believer in the method would have done it. But most of those who tout this method or the basic couch potato method, would have crumpled, I believe, making far less than 4% annually, never mind more.
But if someone with discipline sticks to an allocation of stock and bond indexes, they will be buying bonds when markets rise, and stocks when markets fall. Manually rebalancing when things get way out of whack is a way to beat the vast majority of investment professionals over a lifetime. During volatile markets, it’s a way to make a killing. During bull markets, the bond component adds a drag to the performance. But I can live with the slight drag, when it occurs. After 22 years of dispassionate investing, I don’t mind thinking about protecting some of it now (I have 41% in bonds, and will continue to buy the lagging index, while having a bond index proportionately close to my age) The markets have certainly given me far greater rewards than I ever would have realized, 22 years ago.
I certainly feel fortunate.
It sounds like your version of the Couch Potato strategy takes valuation into account. You’re buying when others are selling. To me, that’s not really a strict Potato strategy, which advocates rebalancing once a year regardless of valuations.
I would personally prefer your way, but to each their own.
Thanks for sharing your experiences Andrew! 🙂
I should add one thing. I certainly didn’t invest dispassionately for the first ten years or so. Thankfully, the markets ripped it up from 1989 to 1999.
While the post reads well, it’s long on speculation and conjecture, and short on fact. For example:
>>but secular cycles that last 15-20 years can have a meaningful impact on your portfolio.
Any data to support that?
We can ‘logic’ our way around all we like, but the numbers have shown repeatedly that the indexes, the lazy approach, outperforms 97% of every other strategy – over a long period of time.
For example, I’m sure we can all agree that the markets are low right now. What are we supposed to do when the markets are low? Not wait until they recover. The academics have shown that the markets will typically recover in 2 or 3 one-day recoveries, NOT gradually. So you have to sit out these low periods because if you don’t you miss the recovery. You’ll by buying back in after the markets have recovered, and you’re back to selling low and buying high.
As for 15-20 year timeframes, there’s a fallacy that the investment timeframe for most people is when they start saving until they’re 65. If you’re 65, how much longer do you have to invest? Probably another 30 years? Sounds like a long timeframe to me. Nothing happens at 65 – our investment timeframe isn’t from when we start to 65; it’s from when we start to closer to age 90. And again that’s a long enough timeframe that the indexes will outperform 97% of everything else over that timeframe – including the people that call this lazy investing.
There’s tons of data to support the idea that secular cycles and sequence of returns have a marked impact on your retirement savings. For starters, you can look at anything by Ed Easterling at Crestmont research.
It looks like the numbers you’re looking at are different than the ones I am. The markets are not “low” right now. They are are only a few percentage points away from recent highs and PE ratios are not at historically low levels: http://www.johnmauldin.com/outsidethebox/converging-on-the-horizon
When I spoke of 15-25 year time frames I was assuming most people do the bulk of their saving between the ages of 35 and 60 – not that they would begin at 65. I would hope that most people have finished saving by 65 and are enjoying the fruits of their life’s work. Why risk that you’ll lose that money in a bear market?
There’s nothing wrong with index investing, but blindly following the advice of those who have a vested interest in keeping all of your money in the stock market until you’re 90 is something we need to be really careful about. Investment returns will depend on how you allocate your assets: are you going to put 75%, 50%, or 20% in equities? For how long? The risk levels are a lot different for each. When you invest is important too. Buying when valuations are high is going to be a losing proposition.
Thanks for your comments.
I may be a very novice investor, but I’m afraid I don’t understand the point of your article. It seems to be saying that Couch Potato strategies aren’t good, or are at least not optimal, but there doesn’t seem to be a better alternative presented. The closest reference to that I saw was:
“But it’s not much better what you could have achieved with a CDIC-backed 5-year GIC ladder.”
Doesn’t that imply that it was a little better, despite everything else doing poorly? What’s wrong with that?
Is there something else that people should be doing instead, or in addition to Couch Potato investing?
I really just don’t see where you’re going with this.
The point is not necessarily that Couch Potato Investing is a bad strategy, but that we need to be careful about using one-size-fits-all appproaches. Putting all of your money into this approach and expecting annual returns of 6%-8% like clockwork isn’t realistic – especially in a secular bear market.
It’s not that there is no alternative to CP investing, but that there are so many alternatives that will work just as well or better – too many to include in a single article. No strategy offers predictable returns.
The point of the article is that no matter which investment approach you take, you can’t predict your returns in advance – and investing is not as easy as some of the Couch Potato proponents make it sound.
Thanks for your questions Jeremy. 🙂
The next 20 years are going to be prime investing years for me… if stock prices go down! I know I’ll be putting in much more in the future that I have now so declining prices would be a bonus. Echoing My Own Advisor above, my financial plan is built on a 5% real return so I’m not depending on a lucky result. I’ve already paid a high price for a house and a CPP increase might pass eventually, so hopefully those boomers won’t sell us overpriced stocks too 🙂
Taken in the abstract, getting the index return doesn’t mean anything since it varies so widely. But it does still have some value in that it’s a return anyone can get with little work and without “making an investment” involving an envelope full of cash and a dark alley. In that sense it’s comparable to GICs. They are rarely the best choice but they do make money and have no barriers to entry and few risks.
I like the way you framed your discussion. For someone with a 20 year plus time frame who doesn’t already have a lot invested in the markets, gradually committing capital when valuations come in is a good plan.
I like the low fees of the Couch Potato strategy. I just think it would work better with some kind of valuation component where you buy when valuations dip rather than based on the calendar. I think it could add more return for relatively little effort – especially in the current investment climate.
Thanks for sharing your thoughts Value Indexer! 🙂
I want to do something like what you describe but I’m taking the long-term plan and making small adjustments when I think it’s right instead of staying out entirely until everything is perfect. If most investors behave in an instinctive way and lose money, it stands to reason that going the opposite way might make you the one they lose it to 🙂 But there’s a lot of false signals and feedback loops so by avoiding slightly overvalued markets you may actually give up a fair portion of the long-term return. And with undervalued markets it’s “the market can stay irrational longer than you can stay solvent”.
If investment returns are a reward for risk at least there’s a lot of opportunities for reward now!
You said:
There’s tons of data to support the idea that secular cycles and sequence of returns have a marked impact on your retirement savings. For starters, you can look at anything by Ed Easterling at Crestmont research.
Yeah – but you’re completely missing the point. There’s even more data that shows that YOU CAN”T BEAT THE MARKETS OVER THE LONG TERM. (capped for emphasis). Surely you know that market timing – which is what you’re inferring here – does not outperform passive index investing. That has been proven statistically, repeatedly.
Secular cycles have impacts. But the implication that therefore trying to beat these cycles will improve your earnings has been shown to be false.
Secondly, in terms of the ‘to age 65’ timeframe, perhaps I wasn’t clear with my point. The investing timeframe for most of us is not 30’is to 65. It’s 30’is to 90. Someone at 65 still has a 30 year investing timelime – and that’s longterm by any stretch. The idea that someone at 65 becomes someone with a ‘conservative, short investment timeline’ is a myth. A 65 year old person still needs to be investing for the longterm – and that implies equities.
You said:
Putting all of your money into this approach and expecting annual returns of 6%-8% like clockwork isn’t realistic – especially in a secular bear market.
Of course it’s realistic. Again, you’re throwing in market timing. Expecting 6-8% ***over the long term*** is absolutely fine with equities. that’s the entire point behind passive investing. You’ll get those rates of return as long as you ignore advice to start doing market timing. Those that DO start doing market timing, thinking they can outhink the market and earn more money short term, well again it’s been shown repeatedly that 97% of the time those people fail to outperform the index over the long term.
Again, my goal is not to “outperform the market”. It’s to gain the best return possible without losing money. As for the data, I’ve seen the passive investing propaganda and I do understand where they’re coming from. But there’s just as much data to refute much of that research. Without a specific study in front of me, it’s difficult to address generalities. There are plenty of people who do fine investing actively, or even less passively, or without equities. The fact that academics have failed to document their progress does not negate that reality.
I know there are folks out there who are absolutely evangelical about passive investing. (The fact that many are in the financial services industry should raise red flags for the average investor.) I understand that the average investor won’t do well day trading or swing trading – at least not without some education and experience. But I don’t think telling everyone that there’s only one way to invest and that they can expect a given return in any time period is accurate. If there are any passive investors out there that will let me invest my money for the next 30 years with a guaranteed 8% return whereby they will make up the difference if it doesn’t work out, I’d be very surprised.
I still completely disagree with the idea that a 65 year old should take the same approach to investing as a 35 year old. Once you lose the ability to make up for investment losses with earned income, you’re at a different level of risk. Further, each person’s situation is different and must be taken into consideration. Perhaps a multimillionaire can afford more market risk. Someone who saved their whole life to have just enough to retire is in a completely different boat. Markets can and do go down. When that happens relative to your life cycle is extremely relevant.
Timing the market is what every investor does whether they want to admit it or not. When you buy something, you are betting it will rise by the time you need to sell it – whether that’s 10 minutes or 10 years from now. Buying anything without regard to time and price doesn’t appeal to me, nor do I think it’s a wise way to purchase any product. If others want to invest that way, that’s their prerogative. Claiming it’s the right way or the only way is more than debatable – as we’ve shown by our discussion here.
Thanks for the reply Glenn!
When enough experts tell u to get out of a market, that is when u buy that market.
I’m going to vote for you for President, Two Cents (I mean of the United States — this will probably require another move on your part). You have a way of being fair enough to both sides to achieve at least small progress in helping all of us to see the other fellow’s or gal’s point of view.
The Coach Potato People are on to something very important. They are smart and good people who have made important contributions. I obviously believe that their ideas could be improved in very significant ways. I wish that instead of Coach Potato People talking only to other Coach Potato People and Valuation-Informed Indexers talking only to other Valuation-Informed Indexers, we could all be talking to each other and learning from each other. We all want the same thing — to invest effectively. And we all have happened as a result of our particular sets of life circumstances to have picked up on different pieces of The Great Big Investing Puzzle. Instead of sniping at each other, let’s join forces!
I think that is going to happen. It HAS to happen — so it will. I believe that your brave and kind efforts are helping bring the wonderful day when that happens a bit closer with each post you put up.
I very much look forward to reading your post about why the historical data is not as good a guide to what will happen in the future as I believe it to be. I am highly confident that I will learn important things by reading it.
Rob
Thanks so much Rob. One move every 10 years is more than enough for me! 🙂
I really tried to keep this response as balanced as possible, avoiding the low road at all costs. The fact that the market is tanking this morning based on some of the debt issues I’ve been highlighting since the inception of this blog is of little satisfaction to me. I really wish we had fixed these problems a decade ago when the damage might have been more contained.
I look at historical data a lot when I’m studying the markets. It can be very useful. But I think it can be dangerous to only look in the rear view mirror. At least being aware of what’s right in front of you has to be factored in as well. More on that later.
I hope you keep writing about this too. I commend you for remaining a gentleman while others choose the low road.
Though Dan and I write under the MoneySense banner, I had no idea that he was going to post on the same topic on the same day (and vice versa). There was no intention to “pile on” and I can assure you that I’m not part of any “cabal”.
It was impolite on my part to have said you were “smoking something”. It’s not a nice thing to say and for that I apologize.
I don’t apologize for the point I was making though. I find it contradictory to say valuations matter and suggest (a) gold (an asset class that is impossible to value) and (b) REITs (an asset class that is in many ways overvalued today).
“While there is ample historical data to support the type of ultra-long term returns Potatoes hope to garner, there is also plenty of data to show that taking valuations into consideration can help boost those returns further.”
As I wrote in my post, this is the crux of my disagreement. I’d like to see data. Show us studies of real world investors (adjusted for survival bias) who are doing better than their benchmarks by moving in and out of asset classes. On the other hand TAA mutual funds that promise excess returns by switching asset classes have posted dismal returns:
http://www.canadiancapitalist.com/david-dreman-on-tactical-asset-allocation/
Anyone can look at a chart and develop a strategy that would have beat the benchmarks in the past. It is much trickier to boost returns in real time.
I’m not sure how carefully you read the follow-up post. I did not suggest that either gold or REITs were a good investment. I was answering a reader who directly asked me to comment on those 2 asset classes. I actually said that I have never been in gold and that I have never acted on my temptations to buy it. I also explained why.
As for REITs, I gave a quick take on Canadian and U.S. real estate prices but did not recommend buying REITs. In fact, I try not to recommend anything specific because I would not presume to know better than anyone else what a given investor should do. I make observations and let people do with them what they want. I invest according to my principles, but I don’t try to get others to follow them or suggest that I know best. I’m still learning and I probably always will be.
If you want data, the Crestmont site is crawling with it.
I only deal in real time and today was a great day to have the right tactical asset allocation. I made some money and I’m going to sleep very well tonight. My attention to macro events means today’s sell-off was no surprise and I was in a position to profit from it. I’ll quote Barry Ritholtz:
“I’ve said this hundreds of times, but it bears repeating again:
• During a secular bear market, an investor’s job is to preserve capital and manage risk.
• During a secular bull market, it is to maximize return.”
If there’s a solid risk management component to passive investing, I don’t see it. That’s why I don’t use the strategy. If others feel it delivers the risk-reward balance they’re looking for, I wish them well.
Thanks for the apology CC and thanks for stopping by.
“If there’s a solid risk management component to passive investing, I don’t see it.”
Perhaps, you should have looked closer. The risk management component is called rebalancing, which calls for adjusting the portfolio to changes in asset values. In a market advance, it would mean selling bonds and buying stocks. In a market decline, it would mean an investor moves a bit of money out of bonds into stocks.
I haven’t seen any evidence so far that shows TAA at work in the real world. I haven’t even had an answer on how your own portfolio compares to a benchmark. I have little interest in pursuing this discussion further. I wish you all good luck.
What happens when stocks and bonds are highly correlated as they have been for the most part over the past couple of decades? I would rather have a solid exit strategy than hold forever on the assumption that my money will grow no matter what.
My benchmark is zero. I’m above that. I don’t care how I perform compared to an index that might be negative from one year to the next.
I can see why you might have little interest in pursuing this discussion. Clearly, we measure just about everything by very different standards. I wish you all the best as well.
Wade Pfau (Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan) has done some amazing research on Valuation-Informed Indexing. I invite all my Coach Potato Investor friends to take a look at these three links:
1) Valuation-Informed Indexing beat Buy-and-Hold in 102 of the 110 rolling 30-year time-periods now in the historical record:
http://wpfau.blogspot.com/2011/01/valuation-informed-indexing-preliminary.html
2) Long-term timing provides comparable risk and the same average asset allocation as a 50/50 fixed allocation strategy but with much higher returns:
http://wpfau.blogspot.com/2011/03/long-term-conservative-investors-and.html
3) A super thread on Pfau’s research at the Bogleheads Forum (I am banned from the forum on grounds that my posts are “inflammatory” but I offer my best wishes to any of the many good friends I made while I was able to post there who may be listening in here today):
http://www.bogleheads.org/forum/viewtopic.php?t=75585&postdays=0&postorder=asc&start=0
The good news is that each time prices fall our willingness as a society to listen to new ideas increases. I’ve seen that at every board and blog at which I participate. I can tell you as someone who has spent nine years studying and developing and promoting the new ideas, we are someday all going to look back at the reluctance we evidenced re these ideas and wonder what the heck we were thinking!
My best wishes to you, CC.
Rob
At first glance, I find this interesting. It is a little bit thin to hang your hat on, don’t you think? The author himself says that the research is preliminary and he has to test a wide variety of assumptions before he can confidently say he’s not data mining. Also, the strategy outlined here does not take higher expenses and taxes into account. Any competing strategy to buy-and-hold should be adjusted for real world expenses because a strategy (such as January Effect) that beats the benchmark before expenses but lags after expenses would simply be an interesting but impractical anomaly.
There’s a typo in the post above. It should say “in 102 of the 110 rolling 30-year time periods.”
Rob
Thanks for chiming in Rob. You are much more knowledgeable on the research behind valuation informed indexing than I am. 😉
(I fixed the typo.)
Somewhat new reader here… I’m just wondering if you have regular posts sharing what you’re doing in your portfolio? I’m sure that would be of interest to a lot of readers!
I haven’t done that, partly because I haven’t been very active as an investor for several years now. I can tell you, as I’ve mentioned on the site many times, that I am mostly invested in GICs (Canadian version of CDs) for a number of reasons that I’ve outlined before.
However, I’ve been trading a small position in HIX – a single inverse ETF that goes up when the TSX falls. I’ve done well with it lately, as you might imagine, but have been selling some off as the market falls to lock in gains. I’m left now with only 25% of my original position. (The original position was only about 4% of my portfolio.)
I do plan on becoming a little more active once I have more time – and once some of the economic morass clears. In the meantime, I’m following the markets and honing my strategies. I don’t have a set system that I use yet, and I expect my approach will evolve as I learn more.
I would hesitate to provide real-time moves even if I did have a more exciting portfolio because I’m afraid others might construe that as an invitation to do what I’m doing.I don’t consider myself an expert, so I wouldn’t want anyone else to lose money if I made a mistake – and I’m sure I will.
Still, if I become more active in the market, I’ll try to give a rough idea of what I’m doing and why.
Thanks for reading Value Indexer! 🙂
I find real-time updates a little boring 🙂 Unless you’re a trader, just posting the latest status 2-3 times a year can be a good way to show where you’re going.
Gotcha. I’ll do my best. Yikes. TSX down about 450 as I write this. I’m happy with my asset allocation today, but sad to see this crash – not surprised, but sad just the same. 🙁
By the way, Jim Otar’s Unveiling the Retirement Myth has a lot of great analysis. Instead of using forecasts or historical averages, he tests many different strategies and parameters by figuring out the average and range of outcomes for how they would have performed in the last 70 years and then defines lucky, normal, and unlucky outcomes so you really get a better sense than a single number. He analyzes the US, Canada, UK, Australia, and more and shows how they differ. It’s a very interesting perspective on adjustments to the standard “couch potato” model.
At first glance, I find this interesting.
Thanks, CC. That’s kind. People who are skeptical of these ideas obviously respond to such studies differently than someone like me who has been a true believer for years. I’m more likely to learn from the reactions of someone like yourself than from my own reactions, which are obviously influenced by a strong bias. So I take some comfort that you find some tiny appeal in the ideas (I certainly understand that you are by no means endorsing them and maintain [properly so, in my assessment] a strong skepticism).
It is a little bit thin to hang your hat on, don’t you think?
Yes and no.
Do I think we need lots more research and lots more discussion of the research? Yes. Obviously.
But what are my practical options here?
You either adjust your stock allocation in response to changes in valuations or you do not. It’s a yes or no. There is no possible middle ground (if you adjust your allocation only moderately, you are timing the market and that makes you a moderate Valuation-Informed Indexer and excludes you from the Buy-and-Hold club) The case for Valuation-Informed Indexing needs to be strengthened with more research and more discussion. We are in 100 percent agreement. But the case for Buy-and-Hold does not exist, according to my assessment. You can’t expect me to go with that over VII, can you? And I don’t have any other options available to me in the real world.
You will have a hard time accepting that I truly believe that there is no case for Buy-and-Hold. But I can assure you that I am 100 percent sincere in saying that. You don’t see it because you believe (you are sincere too, of course). I have a different view because I believe that all of the research that supports Buy-and-Hold was rooted in a mistake. There was a time when many, many smart and good people really believed that the market is efficient. But if that were so, Shiller’s research couldn’t have showed what it showed. My view is that Shiller’s research showing that valuations affect long-term returns negates all of the research that once was thought to support Buy-and-Hold. So Buy-and-Hold has nothing supporting it and VII at least has common sense going for it (price matters in every area other than stock investing) plus 140 years of data plus a good (but, no, not big enough to justify perfect confidence) number of very well-done studies.
It could be that work will be done in the future that will persuade me that VII is the worst strategy ever concocted by the human mind. I cannot rule out the possibility. But I must today do something with my money. Given what I believe about the two options available to me, I have to go with VII.
The single biggest problem that comes up in these sorts of discussions (I have participated in tens of thousands of them) is that Buy-and-Holders view their position as the default position. Their view is that, if you don’t have absolute proof that something else works, you must go with Buy-and-Hold. But why? The idea that we don’t need to take the price of stocks into account when setting our allocations defies common sense. How did this idea that defies common sense ever become the default belief for so many?
I think it’s because Fama’s research on the efficient market theory came before Shiller’s research showing that valuations affect long-term returns and thereby revealing the efficient market as a myth. It was just an historical anomaly. Had Shiller’s research come first, I don’t think there would be one Buy-and-Holder today. It’s just that millions came to believe in Buy-and-Hold before there was academic research supporting VII and now we are going through a difficult transition period in which we need to persuade those millions of people to take a second look at things.
That’s hard when you have believed in something with your heart, mind and soul for many years. I get that. I like Buy-and-Holders and I feel for them. But I don’t see it as a act of kindness for me to pretend that I agree with them when I believe with my heart, mind and soul that they are following investing strategies that are going to destroy their retirement hopes. Friends help friends when they see them getting into trouble. I wouldn’t want a friend who wasn’t willing to stick his neck out for me a bit when I messed up (or when he believed me to be messing up).
We’re on the same side, CC. We’re all trying to do the same thing — obtain a good return on our money without taking on excessive risk. The two sides need to find a way to communicate with each other in a way that helps people on both sides learn over time. Learning is one of life’s true free lunches.
I cannot learn what I need to learn by myself. I need to have the input of people who disagree with me to make my ideas sharper and better informed over time. You need that too. We all need to be working together. I hope you see where I am coming from. I like you, CC, and I hope that perhaps you can come to like me a bit. Despite our differences about what works in stock investing (which are just the result of us having traveled different roads and having experienced different sets of life circumstances). So long as our disagreements are friendly, they are life-affirming (I am not saying that this particular interaction has not been friendly, but making reference to many interactions that I have had with Buy-and-Holders over the years that ended up being less than friendly, to my great dismay).
Thanks again for the helpful and constructive and positive (and downright friendly!) back and forth.
Rob
The Couch Potato strategy was summarized by Scott Burns when in 1987 as financial writer for the Dallas Morning News he suggested that investors simply put half their money in an index fund that tracked the stocks in the S&P 500, and the other half in an index fund that tracked the entire US bond market. Every year, he said, rebalance the portfolio so it’s once again 50% stocks and 50% bonds. “You need to pay attention to your investments only once a year,” he wrote. “Any time it’s convenient. Any time you can muster the capacity to divide by the number 2.” A very simple approach and I like simple!
Unfortunately, this type of investing practically means sometimes buying high and sometimes selling low in order to “once a year” rebalance the portfolio. This goes against common sense for many of us!
Now Canadian Capitalist (CC) above introduces a twist: passive investing with “risk management” where he calls for “rebalancing”. But unlike Scott Burns above who calls for “anytime” rebalancing CC introduces a rebalancing technique which calls for adjusting the portfolio to changes in asset values based on market timing of sorts i.e. quoting CC: “In a market advance, it would mean selling bonds and buying stocks. In a market decline, it would mean an investor moves a bit of money out of bonds into stocks.” CC’s twist to rebalancing appears different from CCP’s annual ‘rebalancing’ which follows Scott Burns’s approach.
Obviously, passive investing is evolving and presenting other flavours so it seems to me. Now, I think this is a good thing!
Yes. CC’s method of rebalancing isn’t quite the same as the original Potato program. I suspect he would argue that it doesn’t constitute “market timing” because he doesn’t rebalance according to market events. (I’m pretty sure market timing is not something he supports.) If I understand him correctly, he rebalances when he adds money to the portfolio – so that is a twist on the original idea of rebalancing according to the calendar.
I tend to think of risk management in terms of limiting losses via position size and a strict stop loss discipline. Everyone has their own way to invest. There doesn’t have to be one right way. I’m sure there are huge variations among those who consider themselves passive investors just as there are among active investors – and every type in between. As long as you’re happy with your risk/reward ratio and your results, vive la différence! 🙂
Thank you for your observations Jon!
This is a good and interesting post, but I’m not sure it works as a rebuttal. What’s missing from your argument is any concrete alternative proposal to passive investing. The couch potato people are saying: active strategies can’t outperform passive strategies. And you’re saying: we have no guarantee past returns will persist into the future, and my benchmark is therefore zero. But that doesn’t respond to the core point of the couch potatoes: regardless of whether past returns persist into the future, active investors generally can’t outperform passive strategies.
There isn’t just one concrete alternative, but a whole host of them. There are so many ways to invest with almost infinite combinations of investment vehicles to buy and sell at different times. It’s impossible to study this empirically. There are too many variables.
The fact is, Couch Potatoes have a lot of data because the strategy is simple and therefore measurable. Active investors will make so many different choices over the course of their investment lives that it’s impossible to pin them down and study them en masse. Some of them will do better than Potatoes and some will do worse. Active investors can outperform passive investors. The fact that academics haven’t documented it doesn’t mean it doesn’t happen.
There’s an interesting piece in the Globe this morning on an investor who has only been in GICs since 1980. He says he’s done the math and he’s about even with S&P 500 returns based on his investments – and he’s probably slept a lot better than many equity investors.
This type of strategy may not suit everyone, but this gentleman is happy with his returns and his retirement lifestyle. They are comparable to what he could have earned as a Potato. Who are we to say he should have invested differently? My point is not to say that Potatoes are wrong, but to point out that there are a lot of other vegetables in the garden and we should be free to give them a try – especially in a secular bear market where passive strategies will underperform.
Thanks for reading and contributing Viscount! 🙂
It’s funny that you mention the all-GIC guy, because that’s exactly the strategy my father used because he was very risk-averse. Unfortunately, my father completely missed the 20 year bull run for stocks from the 80s and ended up running out of money quite early into his retirement (and had to take a reverse-mortgage on the house to stay afloat).
I am strongly suspicious of that guy’s math — I suspect he made the same mistake the Beardstown Ladies made in calculating his overall returns. Most of the references I’ve seen suggest that investing in long bonds would have come pretty close to stock market returns over the last 20 and 30 years (e.g. see here: http://www.researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_Mar_2011_The_Biggest_Urban_Legend_in_Finance.pdf ), but I strongly doubt GICs would have. There’s also the issue that in any taxable investment account, the GIC strategy would have been clobbered.
I’m sorry to hear about your father’s experience. The 20 year secular bull market would have been a great time for passive investors.
I can’t vouch for the math of the gentleman in the Globe article. For the same reason, I can’t say he’s wrong either. Who knows which GICs he bought, when he bought them, and in what quantity?
I’m not sure whether he had these GICs in an RRSP or a taxable account, so I can’t comment on that either. He did mention that he was able to retire when many of his colleagues were forced to put it off because of a serious market downturn. His advice to other investors:
“don’t be swayed by advisers who warn GICs can’t keep up with inflation and taxes – they want you to buy stocks and mutual funds because that’s where they get their fees.”
Whether he’s right or not, the title of the article says he has no regrets.
Will some active strategists beat passive strategies, going forward? Yes.
In the past, have most active strategists (mutual fund managers, hedge fund managers, pension fund managers and endowment fund managers) beaten passively rebalanced indexed strategies? The evidence suggests, no.
There will be those who can beat a passive, indexed approach. But the statistical odds of someone deciding that they want to be among them–ahead of time–and succeeding, are pretty low. Those who want to try, will go for it. Some of them will succeed. Would I succeed? Almost certainly not. So I choose to commend the effort of others, but skip the ride.
Have the markets changed? Well…that’s what every generation says. I love reading old finance books because they sing a rhyming tune, whether they’ve been written in the 40s, 50s, 60s or 70s, 80s, 90s, or the beginning of the 21st century. I have read hundreds of them: plus ca change, plus ca la meme chose.
I’ve seen some of the data on actively managed funds too, and I suppose that’s one reason I ditched mutual funds quite a few years ago – that, and the fees. I really like ETFs.
Your point about active investing not being for you is kind of what I’m getting at. Some folks will do fine with passive investing because they trust the strategy and will therefore stick to it. Others can’t stomach the losses that will happen some years and might end up inadvertently buying tops and selling bottoms. Still, I think there’s another crowd – the educated traders – who truly understand risk management and have a system that works for them. The idea is to educate yourself and find a strategy that works for you.
It’s funny that you mention history rhyming. I just wrote an article for Monday on that topic. I suppose I should be writing about the U.S. debt downgrade, but I just don’t have any idea what will happen on Monday morning – and my money is positioned in such a way that I don’t really need to be too concerned about it one way or another.
Thanks for stopping by Andrew! 🙂
I’ve been reading books and articles like mad to learn how to be an investor. The couch potato strategy seemed for a short time to be the easiest to comprehend. It seemed rational. But now, with what’s been happening in the world lately, I don’t understand how anyone would want to put a single dollar into the great casino called the stock market. It’s like the people who have their money and emotions invested in the way things usually work can’t see the obvious right in front of them. To me it’s obvious, because I’m unattached. Everything is crashing down around us, hard times ahead for most people. Perhaps VERY hard. The United States has gutted itself financially. Laws and legislation put in place since 2001 have stolen the most basic rights from the people living there. It brazenly, arrogantly invades one country after another on behalf of the corporations that own it. An Orwellian surveillance system is being constructed and the masses are so asleep they hardly think it matters. Canada is all to happy to go along for the ride. It’s the same in EVERY western country, it’s all happening at the same time. This cannot end well.
My one and only comfort is that the gold I bought in 2008 has more than doubled in price, with no end in sight! China recently opened a gold exchange and encourages its citizens to invest. Central banks all over the world are purchasing large quantities for self protection. It may seem expensive now, but it’s not going to drop in price for a while yet. Same goes for silver. Don’t let the business guys on TV scare you away from something so simple and straightforward. Couch potatoes, turn off your TVs and stand up!
I came across a story from USA today March 12, 2014.
The period from 2000 to 2014 the S&P 500 returned 3.5% average!
See Link below
http://www.usatoday.com/story/money/columnist/waggoner/2014/03/13/lessons-from-14-years-of-misery/6381747/
Regards,
Brian
The criticism this article levels at couch potato investing is one that applies to stock market investing in general unless you believe that you can time the markets (which lots of research suggest fund managers and the vast majority of investors cannot do on a reliable basis). That is the downside of stock market investing. You can get better returns, but you must expect and be able to handle the volatility. The alternative is to invest in safer instruments, but then you run the risk that you wont be able to keep up with inflation. Your investments may not have decreased, but your purchasing power certainly has. I’m not sure what the authors alternative to couch potato investing is, but the real danger lies in switching your strategies based on what you think the market is doing. Deciding that the market is risky and moving out of stocks into bonds/gics IS market timing and someone who did that several years ago based on what market commentators where saying at the time has missed out on good returns (by the way, the 10 year returns on the couch potato are significantly better now as of 2015 than when this article was written). And going into gold at that time would have been a disaster. I’m not sure the author has a true grasp of what couch potato investing really is if it is practiced correctly. It does not mean you set it and forget it nor do you need to have the same risk profile throughout your investing time frame. You need to ensure you have the correct asset allocation for your particular circumstance and stage in life. As Glenn has pointed out, the time frame for investors in their 30s and 40s is closer to 50 years but that doesn’t mean they keep the same asset allocation over that time period. As they approached retirement, they can increase the fixed income component to reduce the volatility and help preserve their capital for the years they will be withdrawing. The couch potato strategy does utilize valuation too as when you add new funds and/or re-balance, you are doing it from the funds that have done well into the ones that have not. The author points out that they don’t want to hammer the market but rather balance the right risk and reward to achieve their goals and that is absolutely a sensible approach. If you decide the volatility of stock market investing and therefore the couch potato is not for you and you can achieve your goals with GICs/bonds there is nothing wrong with that, but whatever approach you take make sure you fully understand and stick with it.
Although there’s no date on the article, it reads like it was written about 2010. I hope the author moved out of GICs into at least some equities so he could have participated in the huge run up in stocks during the last 5 years. I agree with Gavin’s comments – the author does not appear to understand how the couch potatoe strategy (buy, hold, rebalance, stay the course) works.
I must have missed the point of this article. Don’t use couch potato because it only yielded 4%… so? What is being suggested as an alternative? If you know of a sure-fire method to make 8% when markets would provide 4%, let’s have it.
I echo other’s comments. The author clearly has not read much of CCP. Making comments like:
“Buying when valuations are high is going to be a losing proposition.” figuring this out is much easier said than done. The market looked overvalued for the entire run through the late 80 right up to 2000. And if you sat on your hands to wait you missed out on the biggest bull run in history. Would the author have suggested GICs in the early 90s as well?
Since 2008 we have been on a tremendous run again and indexers have done very well over that period.
The comment that you could have got close to 4% on GICs over that period is just bogus as well. unless you thin k2% is close to 4%. The difference of 2% return means double your money over a 35 year period.
The author said this about CCP: “The investment returns it generated over the past 10 years, however, were somewhat lower than advertised.” Ummm no. it was exactly as advertised. Talked the index minus a small fee. CCP goes out of his way to explain there are no guarantees on returns, the past will not predict the future, no one can predict the future, there can be long times of underperformance. No where did he ever say that all 10 yr periods will be similar to the historic average. This to me clearly shows that the author has not read much about, and does not understand the strategy that she is bashing.
The author also says there are soooo many alternative strategies that are better. But the only thing she provides as GICs and gold. Any well read investor knows this is the comments of an armature since neither have any chance of outpacing inflation over the long term.