Did you hear about ‘couch potato portfolio’ or ‘Canadian couch potato’ from your friends or colleagues? Are you looking to invest in it but have several questions in your head? No need to worry! In this post, we’ll answer all your questions and explain more about the couch potato portfolio. So, settle down and read!
Couch Potato Portfolio: 101 guide
When we hear the word ‘couch potato’ we might think of a couch kept in the living room and a potato. If we look at the literal meaning of the term, it refers to a person who spends his entire day watching television by sitting on his couch. However, the couch potato portfolio has nothing to do with these. It is basically a low-cost investment strategy that is simple to execute, requires minimal maintenance, and carries minimal risk. Let’s find out more about the couch potato portfolio.
What is the couch potato portfolio?
According to Investopedia, the couch potato portfolio is an indexing and passive investment strategy. It requires annual monitoring and it is suitable for those investors who don’t have sufficient time to monitor and manage their investment. It is also suitable for those who have a long-term horizon. The investment strategy is named so as even a couch potato can invest in it and get returns with minimum efforts.
Here are some of the key features of the couch potato portfolio:
- It is an indexing strategy and it only requires annual rebalancing and monitoring. However, it yields impressive ROI in the long-run.
- In the portfolio, growth is facilitated by equities while debt instrument acts as a shield against market volatility.
- The portfolio appreciates less than the market and it even declines less.
- The investment is divided equally into bonds and common stocks. A 50/50 split is maintained all round the year.
- Offers wide diversification amidst several bonds and stocks
How the couch potato portfolio came into existence?
The introduction of the couch potato strategy dates back to the 90s. The strategy is said to be the brainchild of Scott Burns who was a columnist (financial) of the Dallas Morning News. He introduced the ‘passive investing’ concept for investors, whereby they could earn good returns with minimal efforts. In passive investing, investors have to put their money in low-fee funds like efs or index funds.
Burn ideated to create an investment portfolio that only includes two investments (bonds and stocks) that are equally divided. The idea behind this was to put investors’ money in a balanced array of US bonds and stocks. The passive investment has two assets: the index fund of US stocks and index fund of US bonds. While the index fund of US stocks tracks S&P 500, index funds of US bonds track the US bond market.
The index of a passive strategy includes all companies in the market, unlike mutual funds which include investing in possible winning companies. Hence, Burn thought that the portfolio will be much safer for investors as it would provide a close approximation to the performance of the market as a whole. So, if the stock market crash, there are bonds to cover the investors as they’d still be performing. Similarly, if a bonds tank, the stock market would be performing.
Furthermore, Burn suggested that investors could check their investment once a year to find the asset that is performing better and sell it to buy the other asset. For instance, if stocks value more than 50% of the portfolio, you can sell some of your stock index funds and then buy more of bond index funds from that money to ensure an even split (balancing).
Why you should choose a passive investment like a couch potato portfolio?
According to market analysis, Canadians pay the highest annual fees in the world i.e. 2-3% of the portfolio to fund managers in order to actively manage their investments. However, ROI is not really impressive. In fact, a large fraction of the managed funds in Canada perform poorly. If we look at the data of 10 years say 2007 to 2017, we find that only a quarter of managed Canadian equity funds surpassed their benchmarks and performed well. In the global sphere, only 6% of international equity funds of Canadians yielded high returns and fewer than 2% funds outperformed the S&P 500. Even if the mutual funds are performing well, investors were unable to leverage additional earning as most of the benefits were weighed down by the salaries given to the fund manager.
Clearly, it is not a great option to pay 2-3% for getting your funds actively managed. A better option is to invest in passive funds and pay a small percentage of it as fees. Hence, you should invest in the couch potato portfolio to maximize your returns at a minimum cost. You can become a couch potato investor by just paying 0.2% annual fees or even less.
Let’s take an example: You have a portfolio of $20k. So, you’d be easily able to save $4600 if you invest in couch potato rather than investing in mutual funds that require active management.
What is the Canadian Couch potato?
As you know, Burns introduced the concept of a couch potato in the 90s. A decade after this, MoneySense magazine’s writer Dan Bortolotti brought the concept of ‘Canadian couch potato’ for Canadians.
Canadian couch potato portfolio is similar to a traditional couch potato strategy with additions in terms of enhanced diversification with more equities. Furthermore, Canadian couch potato portfolio tracks three markets: Canadian bond market index, Canadian stock market index and International stock market index.
How you can become a couch potato investor?
Do you wish to become a couch potato investor? Looking for options at your disposal? So, here’s the answer:
Canadian investors have three options:
- You can open an account with any online brokerage and buy ETFs
- You can buy index funds by opening an online investment account
- There’s a third option of rob advisor. With a Robo advisor account, you can choose from a portfolio of ETFs that match with your risk profile
Now you must be wondering, “Which investment method is the best?” So, we’ve curated some pointers for your help.
When you should choose online brokerage?
- If you have a large portfolio
- If you intend to select customized ETF portfolio and asset allocation
- You want to give minimum management fees. Generally, it’s around 0.15%
- If you prefer to carry out your transaction manually
- Those looking to make lump-sum and infrequent transactions should also choose an online brokerage
- If you have the interest in additional asset classes like real estate, socially responsible investment and emerging markets
- You want to rebalance your portfolio manually once every year
- If you don’t make investment decisions based on emotions.
When to rely on an online investment account?
- You have either a small or large portfolio
- If you want automated transactions
- You are fine with selecting from limited index funds (3 or 4)
- If you don’t want complete manual trading and need some automated assistance
- If you can invest in smaller sums frequently
- If you want to pay low fees from 0.2% to 0.3%
- You want to rebalance once a year
- If you are okay with basic asset classes
When to choose Robo-advisor?
- You have either a small or large portfolio
- If you want ETFs and index funds to be selected by matching your risk tolerance
- You want automated transactions
- If you make small yet frequent investments
- If you are okay with paying 1% or lower as investment fees
- You are interested in asset classes like socially responsible investments, real estate or emerging markets
- Don’t want to re-balance yourself
- If you need an automated account that prevents you from making a decision based on emotions
- If you also want to leverage financial planning services in addition to couch potato investment.
If you are looking for an investing strategy where you can earn benefits in the long-run with minimum efforts and low-cost investment, then you should bank on couch potato portfolio. It yields close-to-market performance and it comes with less risk than other investment options.