Ways to build a Couch Potato portfolio

Tangerine, the well-known online bank, offers pre-fab portfolios of lower-fee index mutual funds or exchange traded funds (ETFs) that are as simple as you can get. You choose the investment fund with your preferred asset allocation (the proportion of stocks vs. bonds in your portfolio, more on this below) and that’s it, you’re done. The management expense ratio (MER) fees on these portfolios range from 0.72% to 1.06%, depending on which one you choose. That’s a significant savings over the 2% charged by a typical actively managed equity fund; on a $100,000 portfolio you’d save between $993 and $1,280 annually, which is added to your investment returns and will compound over time.

But do the holdings in these funds perform as well as actively managed funds? I was an investment advisor with Tangerine from 2013 to 2018. Part of my role was to compare Tangerine clients’ mutual funds held at other banks and mutual fund dealers to the Tangerine index-based mutual fund portfolios (they did not yet offer the ETF portfolios at that time). There was no comparison. It was extremely rare to find a higher-fee mutual fund mix that beat the Tangerine approach over the long-term. Chalk that up to the lower fees and the passive (indexing) investment approach.

No other provider offers a ready-made portfolio of index mutual funds that contains all the necessary Couch Potato components (Canadian, U.S, and global stocks, as well as Canadian bonds), so the next Couch Potato difficulty level is to build your own portfolio of individual index mutual funds. All the major banks offer such index funds, but only grudgingly, with fees of 1% or more. The exception is TD’s e-Series funds, which stand out for having the lowest fees in Canada: their MERs range from 0.25% to 0.40%. You can select an individual fund for each of the four main asset classes and combine them in any proportion, from cautious to aggressive. You can purchase the TD e-Series funds through discount brokerages including TD Direct Investing.

Next, we come to ETFs, the darlings of the industry. Their primary appeal is their rock-bottom cost: you can build your own portfolio of ETFs for less than 0.15%. ETFs are also available in enormous variety from several providers—including Vanguard, iShares Horizons, TD and BMO—and through any online brokerage. 

Because there are so many ETFs to choose from, and you need to buy and trade the funds yourself as a self-directed investor, this Couch Potato method requires a certain comfort level with managing your own investments. But many MoneySense readers know that it’s well worth the time and energy to do the research and go the DIY route. 

Rather than limiting yourself to the basics, advanced spuds can find ETFs that zero-in on specific categories of bonds or stocks: short-term or long-term bonds, government or corporate bonds, large companies, small companies, dividend payers and many others. You can also expand your portfolio to include asset classes like emerging markets, real estate, or preferred shares—none of which are available with the other options we’ve discussed. These assets might protect portfolio returns during extreme economic conditions, such as stagflation, so adding them could give you an improved all-weather Couch Potato portfolio.

Finally, nothing should strike fear into the hearts of the big banks, mutual fund providers and advisors more than one-ticket asset-allocation ETFs. These ETFs give investors an all-in-one portfolio solution that is globally diversified and automatically rebalanced, with a one-ticket ultra-low-cost purchase.

I track the performance of the leading asset allocation ETFs on my blog.

Managed portfolios at rock bottom pricing. What’s not to like? This should be the nail in the coffin for high-fee mutual funds, and the only question is the timing. 

For more information on all these approaches, including sample portfolios, historical returns and a tool that will help you select the appropriate one-ticket asset allocation ETF, click on the appropriate links above, or the tabs provided for the other sections of this package.

Asset allocation, risk tolerance and time horizon

Before you can become a Couch Potato investor, you must determine the best asset allocation (percentage of stocks, bonds, etc.) for your portfolio based on your risk tolerance and time horizon.

Stocks are held for long-term growth, but they can be volatile. Bonds have a tendency to go up in value when stock markets take a serious hit, so they manage the stock market risk (2022 has been an exception). While there’s no guarantee of this inverse relationship, it’s generally accepted that holding stocks and bonds together builds a lower-risk portfolio.

There is nothing more important for an investor than remaining within your risk tolerance level. If you take on too much risk and bail on your investments during market corrections, you create permanent losses. It is often said the only good portfolio is the one you can live with through all the ups and downs of the market. 

Your time horizon is also a crucial detail. Stock and bond portfolios can take time to recover from market corrections, although bond-heavy portfolios will typically recover much more quickly than portfolios with more stocks. If, however, you have money that you think you’ll need access to within two years or less, it might be wise to stick to risk-free options, such as high interest savings accounts and GICs. 

The majority of investors will embrace a balanced portfolio. Conservative investors would opt for more bonds than stocks, while aggressive investors would choose more stocks than bonds. Younger investors with decades to go in the accumulation stage might hold an all-equity portfolio. They would certainly need to have a higher tolerance for risk as well.

Are you disciplined enough to rebalance?

Couch Potato portfolios are very low maintenance, but you do need to rebalance them from time to time. The idea is to keep your asset mix close to its long-term target allocation, and that can mean selling whatever has recently gone up and using the proceeds to buy what’s gone down. That sounds easy in theory, but very few investors do it with discipline. In a year when bonds have fallen sharply and stocks have delivered double-digit returns, will you have the discipline to sell the better performing stocks to buy the bonds that are tanking? 

One of the great benefits of managed funds is that they’re rebalanced automatically: the Tangerine funds do it quarterly. A report by Vanguard found that investors who held balanced funds were less likely to make changes to their portfolios during the financial crisis of 2008 and the five years that followed, which means they weathered that event far better than most. The authors pointed out that these one-fund options “may actually help to insulate investors from one of the most insidious risks their investment portfolios face: their own behaviour.”

You also won’t have to worry about rebalancing if you hold a one-ticket asset allocation ETF, or if you’re investing with a robo-advisor (see below).

Other considerations before you self-direct

Fees on small accounts are another factor to consider before you go DIY. Bank-owned brokerages often charge $100 a year on RRSPs that don’t meet their minimum account size requirements—typically $15,000 or $25,000, depending on the brokerage. Some may charge higher trading commissions if your balance is below a certain threshold. It’s almost never worth paying these account fees, so if your portfolio is small, choose a no-fee option such as Tangerine. 

Also, keep in mind that at Questrade you can purchase ETFs for free. But during rebalancing you will be charged a trading fee for when you need to sell ETFs. BMO now also allows you to trade many ETFs with no commission. That list includes ETFs from some of BMO’s competitors. You’d be able to build a Couch Potato portfolio with no trading costs. 

Self-directed investors might also consider chatting with a fee for service advisor to obtain conflict-free advice, as these professionals are not tied to any investment products since they are compensated for their time and not on selling you products. That said, they generally cannot make recommendations on buying and selling specific securities – just investment, tax, and saving strategy.

With a plan in hand, you can then move on to manage your own ETF Couch Potato portfolio at one of the best online brokerages in Canada. 

Be a more tax-efficient Couch Potato investor

The Couch Potato strategy is straightforward if you’re investing in tax-sheltered accounts such as RRSPs and TFSAs. But if you have a large non-registered (taxable) account, the simplest solutions don’t work as well. Now you need more flexibility to ensure your portfolio is built in a tax-efficient way.

ETFs give you such options, including specialty bond funds designed to minimize tax if held in non-registered accounts. Experienced investors can also use U.S.-listed ETFs, which can also be more tax-efficient. 

For more information on creating the most tax-efficient ETF Couch Potato portfolio, read this post. 

In the end, there’s no single Couch Potato that’s right for everyone. The best solution for you isn’t necessarily the cheapest: it’s the one that will allow you to comfortably and confidently manage your portfolio for the long term. 

What about robo-advisors?

Canadian robo-advisors allow investors to access advice and own a managed and well-diversified Couch Potato ETF portfolio, with very reasonable fees. For example, based on a $100,000 investment portfolio, the annual fees would range from about $400 to $800 (0.40% to 0.80%) depending on the robo-advisor selected. Human advice is also available. A few of the robo shops even offer financial planning. You can get everything under one (robo) roof. 

For more information, check out our reviews of the best robo-advisors in Canada. 

Active vs. passive robos

Some of the Canadian robo-advisors use passive index ETFs for their portfolios. Other robos will employ some actively managed ETFs, as well as some active asset allocation. Active asset allocation means they adjust the ETFs and asset classes held in the portfolio in response to economic or market conditions. 

If you are interested solely in passive robo management, look to Wealthsimple, Justwealth, NestWealth, RBC Investease and Invisor. Other Canadian robo-advisors provide various forms of active management. 

All said, robo-advisors have also been a game-changer in Canada. For those who want a managed portfolio and advice, robos are far superior to the traditional mutual fund approach. 

Watch: BMO ETFs-Investing with Specialty ETFs for Income

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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