Does the Couch Potato Work After Age 50?

Readers often ask me whether the Couch Potato strategy is suitable for investors  approaching retirement, or even those who have stopped working. In his recent book, Retirement’s Harsh New Realities, Gordon Pape addresses the same question—and I strongly disagree with his advice.

Pape acknowledges that the Couch Potato strategy is simple and low-cost, but “the real questions are how safe the investment is and how much you will end up earning on your money by adopting a passive strategy,” he writes. “I think the couch potato approach fails on both counts, for two reasons: time horizon and human nature.”

Fatal flaws?

“Passive investing requires taking a long-term view, ten years or more,” Pape argues, but “many people, especially those over fifty, aren’t comfortable with the idea of waiting many years for a decent return. They need to see profits sooner.”

Second, he argues, it’s not realistic to expect people to adhere to a passive strategy because markets are too volatile. He offers the massive losses of 2008 as an example: “How many couch potato investors would have had the fortitude to stick with the plan through that debacle?”

Pape goes on to explain how he set up a model Couch Potato portfolio in January 2008 and tracked it to the end of April 2011. During this 40-month period, the portfolio delivered an annualized return of just 1.06%. “Most people would not be happy with that, and with good reason.”

His final verdict: “While it’s true that you might do worse by actively managing your money, at least you, and not the markets, are in control of your financial fate.”

Blurring two ideas

Pape’s book, like his previous work, includes a wealth of excellent advice for Canadians who are nearing retirement, but he badly misrepresents passive investing.

To begin with, Pape is wrong to declare that a passive strategy requires at least 10 years. It’s equity investing that needs a long horizon: active or passive management has nothing to do with it. An investor with a shorter time frame can simply adjust the allocation of a passive portfolio to suit her goals. A 65-year-old who is retired, or a parent saving for a teenager’s education, might keep 80% of the portfolio in a short-term bond ETF and only 20% (or less) in equities. Passive investing is suitable for any time horizon.

Pape writes that “the performance of the portfolio during the 2008 market crash shows that this approach is not risk-free or even low-risk.” I’d love to know who ever claimed that it was. Why should anyone expect indexing to be less risky than active management? Risk exposure is determined by asset allocation, not by management style.

Perhaps Pape was referring to the idea that active managers can change the asset mix during times of crisis to protect against big losses. However, the evidence suggests that they cannot do this reliably, and that over market cycles active management usually underperforms a strategy of buy, hold and rebalance.

Lamenting his model portfolio’s 1% annualized return from 2008 to mid-2011, Pape says: “This is the reality of couch potato investing—timing counts for a lot. If you set up a portfolio a few months before a market plunge, it will take years to recover.” Once again, this is the reality of equity investing, and active-versus-passive is completely irrelevant. Everyone knows that stocks can lose money over periods of 40 months—which is why his model portfolio of 60% stocks is not suitable for that time horizon. If you don’t have several years to recover from a severe market decline, then you shouldn’t invest in stocks, period.

The illusion of control

Pape argues that investors over 50 should not use a passive strategy because they “need to see profits sooner.” He later argues that with an active strategy “you, and not the markets, are in control of your financial fate.” Really?

Saying that older investors “need profits sooner” is like saying farmers need rain next week: it might be true, but there’s nothing they can do about it. As Alexander Green explains in The Gone Fishin’ Portfolio, six factors affect a portfolio’s performance: how much you save, how long your investments compound, your asset allocation, how much you pay in expenses, how much you lose to taxes, and the return on your investments. We can control the first five—and only two (costs and taxes) are closely linked to the active-versus-passive question. No one can control the return they get on their investments, whether they admit it or not.

Whether you’re 20 or 97, the markets give what they give. If you need market-beating returns to reach your goals, then you either need to take more risk (which opens you up to larger losses), or you need to lower your expectations and save more money. Building a retirement strategy without understanding this is downright dangerous.

Passive investing is not for everyone, but the choice to become a Couch Potato has nothing to do with your age, or how close you are to retirement. Make sure your investing decisions are based on facts, not myths and misinformation.

47 Responses to Does the Couch Potato Work After Age 50?

  1. Dan M January 3, 2012 at 10:01 am #

    I always appreciate how you respond when you do not agree with what someone has written: counter with facts and evidence, link to support them, and critique the words not the author.

    Everyone else on the internet could learn a thing or two from your approach. Keep up the good work!

  2. Canadian Couch Potato January 3, 2012 at 10:07 am #

    @Dan M: Thanks for mentioning that. One of my best teachers used to say, “Attack the point, not the person.”

    Mr. Pape writes a lot of excellent advice for Canadian retirees, but unfortunately his comments about passive investing are based on some fundamental misunderstandings about the strategy. Given that this book will be read by tens of thousands of people, the other side of the argument needs to be out there.

  3. Fuchsy44 January 3, 2012 at 11:34 am #

    @Dan M – I couldn’t agree more.

    I am going to use this article as a reference to people who say they are too old to switch to passive investing. Thanks!

  4. Ken January 3, 2012 at 11:54 am #

    You have to remember that Pape is the guy who for years has touted the CHIP program as a wise investment for seniors! In fact, it is a wonderful program FOR THE BANKS and the best way for a senior to eventually loose all their property in interest payments. This makes ALL his advice very suspect before it is even read…

  5. Joseph January 3, 2012 at 12:15 pm #

    Pape forgets about dollar cost averaging. Don’t sink all your money in at once; buy over a period of time to take advantage of market fluctuations and adjust your portofolio.

  6. FHM January 3, 2012 at 12:16 pm #

    @Ken – I was about the make the same exact same comment.
    @Dan – many thanks for sharing your investing ideas with us.

  7. Michel January 3, 2012 at 1:33 pm #

    Plus, with a passive strategy, you stand a much better chance of succeeding during a major downturn (2008), than with an active trading strategy (…his human nature comment). Active, to me implies that you will know when to sell and when to buy again after the downturn. Luck would be needed.

  8. Pat January 3, 2012 at 2:35 pm #

    Dan, thanks for the great analysis. I’m glad you weren’t put off by the negative comments you got from some people the last time you critiqued what Gordon Pape was saying. This kind of post is among the most valuable because a lot of us (myself included) can’t always see through the flaws in the arguments and might be misled. Not only is it important to see the data that shows passive investing works well, it’s equally important that nonsense arguments against passive investing be shown for what they are, especially when they’re written by prominent financial writers. Please keep the critiques coming! You are also being generous in stating that you are presenting the “other side of the argument” – actually you have the facts on this issue whereas some of what Pape says on this issue is flat-out wrong, and a lot of the rest of it is misleading.

  9. Canadian Couch Potato January 3, 2012 at 2:45 pm #

    @Pat: Thanks for the supportive words. I probably wouldn’t have commented on this issue if the advice came from an obscure writer. But Mr. Pape has a huge following, and he is very influential. I’ve certainly heard from many older investors who share his opinion, and I hope they will reconsider based on the arguments I’ve made above.

  10. Sampson January 3, 2012 at 6:19 pm #

    I think a big part of the issue lies in the word ‘passive’. It seems most people, whether money managers, PF bloggers, media, are quite selective in their use of this word.

    As you point out, Pape’s arguments often refer to equity investing, and asset allocations weighted heavily with equities or other volatile assets – and really have NOTHING to do with active vs. passive at all.

    Why can you not have a 90% cash/GIC + 10% equity allocation, but those monies invested in holdings using passive investing approaches? This would be 100% passive.

  11. Canadian Couch Potato January 3, 2012 at 6:41 pm #

    @Sampson: I agree there is some confusion about the term passive. Today, in all of the academic literature and among practitioners, “passive” means investing in entire asset classes using a long-term strategic allocation. That means no security selection (stock picking), no tactical shifts (moving in and out of asset classes based on your outlook), and no market timing (moving to cash).

    However, some people who buy and hold individual stocks for the long term (like dividend growth investors) sometimes call themselves passive, because they almost never trade. In fact, Benjamin Graham used the term this way in The Intelligent Investor. This isn’t wrong per se, it’s just a bit confusing.

    But you’re right, a long-term portfolio with 90% in GICs and 10% in an equity ETF is passive—assuming you’re not changing those allocations based on your market outlook.

  12. Maxwell C. January 3, 2012 at 10:31 pm #

    Juuust thought I’d make a posting about it here. I just noticed that PC Financial’s main page is encouraging people to invest in their index mutual funds (provided of course by CIBC Securities). I recall reading in the past that the MERs were quite high on these. Is it really that bad?

  13. Canadian Couch Potato January 3, 2012 at 10:52 pm #

    @Maxwell: I wrote about the PC Financial/CIBC offer a while back. I’m not sure whether the account fees have changed since then, but at the time, they were prohibitive. Here’s the original post:
    http://canadiancouchpotato.com/2010/10/08/index-funds-from-pc-financial-no-thanks/

  14. Dean January 4, 2012 at 12:37 am #

    Some thoughts on Mr. Pape’s comments (in quotes):

    “the real questions are how safe the investment is “…Safe? Safe to do what? Return capital or generate a real return? Either has more to do with asset allocation than investment strategy as already mentioned.

    “how much you will end up earning on your money by adopting a passive strategy”…Perhaps Mr. Pape should familiarize himself with the writings & research of people like Bogle, Berstein, and others in the field. Passive investing has consistently outperformed managed mutual funds as far back as anyone has compared them. You can find a period of time where the outcome will favor active management if that’s what you set out looking for. But you will be looking for the needle in a haystack of time periods where passive management has outperformed. That’s not an argument in favor of passive investing. It’s a fact. And as far as outperforming passive investing as a stock picker…puhlease. Adding a rather large amount of company-specific risk to the equation for neglible gains (again, read the research not the marketing) doesn’t fit well with Mr. Pape’s human nature concerns.

    “I think the couch potato approach fails on both counts, for two reasons: time horizon and human nature.”…Dan’s already addressed the time horizon quite favorably. Human nature is one of the strongest arguments for passive investing, not an argument for active investing.

    “How many couch potato investors would have had the fortitude to stick with the plan through that debacle?”…Is there any reason to expect it to be fewer than the individuals holding active mutual funds with bloated MERs or stock pickers glued to BNN and their computer monitors exquisitely aware of the market’s decline?

    “While it’s true that you might do worse by actively managing your money, at least you, and not the markets, are in control of your financial fate.”…Oh really. Does Mr. Pape consider himself to be smarter than the markets? I certainly don’t. This comment removes all credibility from the author in my eyes, regardless of who it is.

    I agree with Dan M. above. It’s always best to take the higher road in these debates…something at which Dan here excels at. I’m just going to point out that in an industry 100% dependant on hype and marketing to generate ongoing revenue, we have Mr. Pape while our friends to the south have Mr. Cramer. Follow either at your own peril. And thanks again Dan for rationalizing the “other side” of this debate. I think I share your frustration that this type of information is so costly to the average investor who takes it at face value because of the name on the cover.

  15. Pat January 4, 2012 at 6:50 am #

    @Dean, well said!

    For another ridiculous comment by Mr. Pape on passive investing, check out the article he wrote May 20, 2010 at the 50Plus.com site, entitled Couch potato investing. His point in the last paragraph on Page 1 is shockingly bad/misleading:

    “I can see the attraction of the couch potato approach, however I have some problems with the idea, starting from what I see as a misleading basic premise. Canadian Business magazine in a recent article on the strategy said: “When you look at results over several years, about 80 per cent of actively managed funds lag behind the market.” That may be true but what no one bothers to say is that 100 per cent of all ETFs and index funds lag the market, at least if they are being run correctly. The reason is simple: expenses and fees. Even if a fund achieves a 100 per cent correlation with its benchmark index, that has to be discounted by the management expense ratio (MER). So don’t build the case for being a couch potato investor on the idea that index-based securities are somehow better than actively-managed funds when it comes to beating (or even matching) the indexes.”

    http://www.50plus.com/money/couch-potato-investing/455/1/

    Yikes!

  16. Canadian Couch Potato January 4, 2012 at 9:09 am #

    @Pat: Thanks for the link. These arguments are old and tired, as they rely on anecdotes and not evidence. This is a classic example: “Money managers like Kim Shannon, Peter Cundill, and Francis Chou piloted their mutual funds through the carnage [of 2000-02] safely. Not only did they not lose money; they actually made profits for investors during that period.” And how many other active managers were able to do the same? Without this information, the anecdote is meaningless. Here’s the full story, in a special SPIVA report about this period: http://bit.ly/w5QTjx

    The results were similar for the 2008–09 bear market:
    http://www.canadiancapitalist.com/so-much-for-bear-market-outperformance/

    There is scant evidence for the common refrain that active managers can reliably protect you during bear markets. They may save you from the worst of the losses in the short term, but they typically miss the recoveries, and over the long term (full market cycles) they typically lag. Which is why during the last 10 years (one of the worst decades for stocks), most low-cost index funds have been in the top quartile, beating at least 75% of their peers:
    http://canadiancouchpotato.com/2011/04/20/how-did-the-couch-potato-stack-up/
    http://canadiancouchpotato.com/2011/08/12/ishares-etfs-looking-back-and-forward/

    As for his other point, Pape is right that ETFs almost always lag their indexes slightly, since investing is never free. But as you and I know, it is pretty easy to keep those costs to 30 basis points or so. Active managers, as a group, lag the indexes by much more:
    http://canadiancouchpotato.com/2010/05/10/indexing%E2%80%99s-dirty-little-secret/

  17. Chad Tennant January 4, 2012 at 9:10 am #

    Pat, I second that “yikes”.

  18. Dan Hallett January 4, 2012 at 3:00 pm #

    @Dan B – I haven’t read Mr Pape’s book but it seems that you have quite capably (and correctly in my view) rebutted his claims with respect to CP investing. Well done.

    A note re: the bear market that began in 2000, I think Pape’s point is a valid one – at least from my perspective. That was one of those unique markets whereby the bear market (much like the prior bull run) was very concentrated by stock and sector. In other words, there were many places to hide and for anybody with some price sensitivity, it was an easy call to make. And I don’t say that in hindsight but as someone who was advising investors and advisors in the late 1990s bull run and the bear market drop that began in 2000.

    But it’s unusual because usually bear markets have greater breadth, as was the case in 2007-09. And in that kind of market, there isn’t any place to hide when staying in stocks – i.e. impossible to make the kind of call that I and many others made in 2000.

  19. Canadian Couch Potato January 4, 2012 at 3:26 pm #

    @Dan H: Thanks for the comment. I’m happy to concede that the tech bubble was a period where pure cap-weighted indexing really did seem to let investors down. A lot of prudent managers did manage to add value during this period.

    I guess the real question is, did those managers also capture the huge gains that preceded the bubble’s bursting (the mid-1990s) and the four-year bull market that followed (2003-06)? To add value over the long term, you need to be right on the way out and on the way in.

    I like to remind people that Greenspan’s “irrational exuberance” comment in 1996 was followed by three more years of fantastic returns that would have doubled your money before the bubble finally burst. So he was right, but if you followed his advice, you didn’t necessarily do well. :)

  20. Andrew January 4, 2012 at 4:17 pm #

    Any back test using a lump sum at any arbitrary starting date implies that riskier asset classes may be overvalued at that particular point. To make the back test more useful, for demonstration purposes, a variety of randomly chosen start dates should be used.

    That said one should never begin a portfolio with a lump sum. A better strategy is to leg into it from cash using dollar cost averaging. Much better still is to use a value averaging strategy – this means that as the portions are allocated over time to various asset classes the classes that are overvalued will get less and the more undervalued will get more. Value averaging is like rebalancing during dollar cost averaging. It is recommended to use a minimum of a year and more like 3 years to fully invest. Patience!

    I would love to see a post by Dan about using the value averaging strategy with his couch potato portfolios.

    http://en.wikipedia.org/wiki/Value_averaging

  21. Dan Hallett January 4, 2012 at 5:00 pm #

    @Dan B: I can’t give you a general number off the top of my head but value managers I follow(ed) did pretty well – but generally lagged – in the up periods. Overall, they added value because they made money while the market was halved. And if you can do that – again, a rarity but common in 2000-03 – you don’t need to keep pace with the market on the way up.

    That said, I won’t want to use the 2000-03 bear market as proof of anything other than the fact that every bear market is unique. There are always common themes but the finer details are different almost every time. And the tech bust was highly unusual in that it was very much a divided market that, in the boom period, disregarded valuation; but then suddenly got a jolt of reality and realized that all of those dirt cheap stocks – i.e. income trusts, small cap stocks and anything other than big cap growth – were an absolute steal.

    Canadian banks were trading at single digit P/E ratios in 1999. I don’t expect to see that kind of broad-based disregard for valuation again in my career. But this trip down memory lane doesn’t negate the very good points raised in this excellent post. This isn’t an active vs. passive issue at all. This is an issue of having an asset mix that is appropriate for your circumstances. And if you do that well, the active vs passive issues is less important.

  22. Canadian Couch Potato January 4, 2012 at 6:12 pm #

    @Dan H: I wasn’t an index investor back then, of course, but I wonder what I would have done. Banks trading at single-digit P/Es while tech stocks were trading at 100 times or more? What a bizarre universe. It’s pretty impossible to imagine if you didn’t live through it—kind of like 22% mortgages in the 1980s. Thank goodness investors today don’t have to deal with such challenging conditions. :)

  23. Johny January 5, 2012 at 7:31 am #

    Here is a compelling essay.

    http://www.stanford.edu/~wfsharpe/art/active/active.htm

    J.

  24. Jon Evan January 5, 2012 at 11:59 am #

    Passive investing appears to have different connotations. There are the Couch Potato portfolio examples here to buy & hold dividend stock investors to other strategies that refrain from market timing, no active stock picking nor tactical shifts in asset mixes. Pape seems to have only one kind of passive investing in mind but his example does illustrate the point that only certain personality types will be able to hang on during down years (younger people). Those who are older BUT can’t use asset allocation to mitigate risk because they haven’t saved enough and have to carry a higher equity weight might bail out and lose. Now, Pape in his writings has told such individuals caught in such a conundrum that instead of using passive couch portfolios they should look for safe (safer) assets with higher yields such as quality preferred shares, income trusts, or corporate bonds which are actively picked primarily for the yields. That seems to be Pape’s preference for the boomer generation entering retirement. Personally, I like the idea of passive investing (call me cheap) but I don’t like the MERs of ETFs. Why can’t one be a passive investor and not buy index funds or ETFs? Why not just buy individual bonds or GICs for one’s fixed income allocation and unbundle an index to obtain the stock portion. Take XBB for example with it’s .3% MER. That’s $30,000 in fees over a ten year period with 1 million in XBB! Buying individual GICs or bonds surely wouldn’t cost that. Likewise unbundling an equity ETF and buying the individual stocks (one needs only buy a concentrated representative sample of the index) would save on the yearly MERs which add up big over a decade. Would you still call this passive investing? Am I missing something?

  25. Michel January 5, 2012 at 12:17 pm #

    To Jon, Sounds good to me. The only drawback I see is in regards to buying your own bonds. The fees can be high. And also, every year or so you would have to sell and buy a few stocks if you want to maintain any resemblance to the index. Yes, my sense is that this strategy could be called a form of passiveness.

  26. Al January 5, 2012 at 12:47 pm #

    I think it’s also important to distinguish between active management where you are paying fees to have someone change up asset allocations/individual stocks while for most people active management means I bought a Cdn equity mutual fund(for example) which has a higher MER. In a market downturn, that manager is not going to move to cash in a big way so it really offers no more protection than an index fund.

  27. Canadian Couch Potato January 5, 2012 at 4:15 pm #

    @Jon Evan: Regarding the idea that older investors “should look for safe (safer) assets with higher yields such as quality preferred shares, income trusts, or corporate bonds which are actively picked primarily for the yields,” this is actually one of my biggest gripes with Pape’s advice. He assumes that higher yield = higher total return. If it were that easy, we would all pick our investments that way and thump the market every year.

    Hand-picking corporate bonds offers no guarantee of better risk-adjusted returns than a corporate bond ETF. And picking stocks with good yields is not a simple recipe for outperforming the market, contrary to widespread belief. Just because a security pays distributions does not mean it is less risky, or any more likely to outperform the relevant index. It’s not all about income.

    If you want safety, you’re going to get 1% or 2% total return. That sucks, but that’s the reality. If you want or need more, you need to take more risk, period. There seems to be this assumption that if the market delivers poor returns, you can just go out and harvest them somewhere else.

    RE: your comment about the cost of ETFs like XBB, it’s true that even 30 basis points adds up to a high fee in a large portfolio. However, from speaking with industry insiders I can tell you that the retail spreads on individual bonds are extremely high, so assembling bond portfolio on your own will usually cost much more. (Not always, of course, but you need to work with a broker you really trust.)

    GICs are a perfectly reasonable alternative to a short-term government bond ETF. The pricing is transparent, the risk is identical, and you even earn a little more return because you’re compensated for the lack of liquidity.

    In terms of stocks, I agree it’s also reasonable to unbundle some ETFs to avoid paying the MER. For example, with a large enough portfolio, buying all the REITs in iShares XRE can make a lot of sense. However, once you get into broader asset classes (like US equities, say), this is no longer practical, especially if you can find an ETF with a very low fee.

    Hope this helps clarify.

  28. Eric Rice January 5, 2012 at 5:12 pm #

    Read both articles. Agree with you totally. I am 25 years retired. I am a buy and hold investor. My net worth has about doubled in 25 years. REITs are my primary choice for investments. Last year the tse Index was down 11.1% and the REIT Index was up 13.91 %. Guess who made money last year.

  29. Canadian Couch Potato January 5, 2012 at 5:29 pm #

    @Eric: Thanks for the comment. Real estate is an excellent diversifier and an important part of a portfolio. Just remember that it does not have a higher expected return than the broad market: one should expect these two asset classes to perform about the same over the long term. Real estate has had an amazing three-year run, but it underperformed the TSX Composite in all but one year between 2003 and 2008. But because the two assets classes are not highly correlated, holding both can lower volatility over the long term.

  30. jon evan January 6, 2012 at 9:29 am #

    @CCP “this is actually one of my biggest gripes with Pape’s advice. He assumes that higher yield = higher total return.” I think Pape speaks from a different vantage point. It’s true those in the accumulation investment phase seek total return rather than income. However, when you’re 75 like Pape, yield & preservation of capital is more important than total return particularly if you have no ongoing income except from the annual yield that your accumulated capital brings. Pape’s example is of a 71 y.o who has a nest egg of 450,000. To topup pension he requires an additional 20,000 annual income from his investment. How would he get that? Pape suggests investing his nest egg into quality preferred shares, corporate bonds, and income trusts which could earn the required 4.5% yield for income but as well could safely preserve capital to hopefully continue providing that yield for an unknown number of years. In this situation yield for income would be more important than total return. How do you see it?

  31. Canadian Couch Potato January 6, 2012 at 10:04 am #

    @Jon Evan: This is a real mental stumbling book for a lot of investors, I realize. Remember that there are two sources of return: income and capital appreciation. Ignoring taxes for a moment, they are equivalent. They are also fundamentally related to one another. When a company pays a dividend, its stock price falls. When a bond’s coupon is higher than the prevailing rate, it must be purchased at a premium, which means it will mature at a loss.

    So income is not really more important than price appreciation: they are two sides of the same coin. Preferring one over the other is like taking money out of one pocket and putting it another. It may be more comforting and predictable to rely on income-oriented investments in retirement (and there’s nothing wrong with that), but the strategy does not promise higher returns or lower risk.

    For example, investment-grade corporate bonds with coupons of 4.5% these days may well have YTMs closer to 2%. So even though they may supply you with income, they would not “safely preserve capital to hopefully continue providing that yield for an unknown number of years.”

    I found this paper from Vanguard helpful in understanding the common income-versus total-return question:
    https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf

    Here’s a summary:

    Investors spending from a retirement portfolio typically employ one of two well-known methods: the total return approach or the income approach. Historically,
    these approaches have been discussed as mutually exclusive—an investor follows
    either one or the other. In reality, the two approaches are similar in many ways,
    and in fact operate identically up to a point. Using the total-return approach, the
    investor spends from both the principal and income components of his or her
    portfolio. Under the income approach, the investor typically spends only the
    income generated by the portfolio, which often is not sufficient to meet spending
    needs. To make up for the shortfall, many investors elect to either increase
    their allocation to bonds, tilt their bond holdings toward high-yield bonds, or tilt
    their equity holdings toward higher-dividend-paying stocks—none of which are
    preferred strategies for maintaining inflation-adjusted spending over long periods.

  32. Jon Evan January 6, 2012 at 12:32 pm #

    @CPP Thanks for that Vanguard article :).
    I can see why you previously suggested I go to an advisor rather than sort this out myself ;). The average DIY investor gets a headache when he/she tries to juggle all these balls particularly when it comes to nearing retirement when so many variables come into play! I should take your advise…

  33. Canadian Couch Potato January 6, 2012 at 1:00 pm #

    @Jon: Glad the paper helped. Nope, this stuff is definitely not easy to understand and manage on your own.

  34. Dale January 11, 2012 at 8:06 am #

    Good on ya for correcting Mr. Pape. Couch Potato is tailor made for those over 50, and even retirement.

    Wondering if you would consider creating a Canadian SnowBird Portfolio? As you had begun, it’s one with more safety but with income at its core.

    Perhaps 70-80% bonds, the equities and reits in higher income.

  35. Leo C. January 11, 2012 at 5:55 pm #

    http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/how-do-your-retirement-plans-stack-up/article2297362/

    I read Papes live chat on G&M. Why does he even bother with this type of interview when all he can do is cop-out with generalities because he cannot give advice in the context of this type of interview. Even his comments are of no use to the person seeking advice let alone curious readers. Aside from that his advise is next to useless. Like listening to a politician dodging election questions.

  36. Andrew January 16, 2012 at 4:43 pm #

    Jon
    Instead of bonds, any bonds, consider GICs from credit unions. Negotiate the rate – you will get up to 1.5% above what a comparable duration bond yields. They are insured up to 100k. Credit Union GICs are like A rated corporates, sometimes even B, in terms of yield. You can’t trade like bonds for cap gains but if liquidity is not an issue a 5 to 7 year ladder that rolls over several times a year will beat most bond ETF portfolios at much less cost as well.

  37. Andrew January 16, 2012 at 4:49 pm #

    Another point
    If you combine high yield savings accounts with credit union GICs and a small amount of equity ETF your MER for the entire portfolio could be as low as 0.043% at 20% equity (0.215% average MER for a broad world index and Canadian index ETF).

    This is like paying $21.50 a year on a 50K portfolio, and only $215 on $500K. Over 30 years on a 50K portfolio you save $25605 in fees! $256,050 saved on a $500K portfolio.

  38. Dale January 17, 2012 at 8:18 am #

    Hey Andrew, that would work nice for the cash component of a 50-plus portfolio, but for more juiced yields one can also get more by adding the high yield bond etf’s for Canada and US to a bond portfolio. 6-10% yield. One could also add the nice yield from a utilities etf.

    I also think (for a small portion) that adding covered call etf’s is a great way to ramp up income. the bmo banks zwb yields close to 9%, and if you want steroids there’s the hex that yields above 16%. A sprinkling of those two could extend the life of a retirees portfolio.

  39. Andrew January 18, 2012 at 1:05 pm #

    Dale
    I did a study of the high income ETFs like HEX. I analyzed pairs trades of the enhanced income ETF with its equivalent hedge to take out the noise of the market. For example ZWB with HIF or HEE with HIE and HEF with HIF. The study period was April 1 to Sept 1 of last year.
    I also studied HEE and HED, HEF and HFD and HEE with HED.
    The total returns were negligible or negative implying the enhanced income ETFs had capital losses that met their income at least. I took into account the tracking error of the hedges.
    The only pair that worked during this stressed period was Energy HEE with HED which had a moderate positive return of 4%.

    I would not use the enhanced income ETFs because of their derivative nature, except maybe in a small amount in a registered account if the initial setup showed value where there were capital gains on top of the income.

    The problem with the high yield ETFs is that some of them are the junk of the junk. The best high yield bonds are taken by managers of mutual funds. These would be the ones that have the best value proposition which then determine the default rate of the portfolio as a whole (which influences the return) and the yield.

    High yield can be one of the rare cases where managers can add considerable value over passive approaches. The others are municipal bond funds in the USA, Small cap value funds, particularly in niche markets, and some international funds in lesser developed markets.

  40. Dale January 18, 2012 at 1:46 pm #

    Hey Andrew, thanks for that. I will do some research on that and likely get back to you with a question or two. Do you have the same impression of shorter term bond etf’s such as cbo or some of the gov bond etf’s. Thanks again…

  41. Dale January 19, 2012 at 10:44 am #

    Hey Andrew, could you please elaborate (or simplify actually) on the problems with cbo. I have a small position in that, and none in hex.

    Are you writing that they do not make the actual yield/return by writing covered calls on the banks? The income has been falling though, possibly to reflect that reality.

  42. Dale January 21, 2012 at 7:44 am #

    I’ve looked at some research on US covered call etf’s (given that there’s some history there) and I really like what I read. They did very well in the 2008 downturn. They should also do well in a sideways market – that works if we’re in year 11 of a 18-20 year secular bear market.

    And if equity markets rise, no worries (of course) the equity portion of a balanced model portfolio will allow you to participate in the party. And you’re still getting some enhanced income.

    I have a small position in zwb (banks covered calls) and it is working very well for now. I have about 9% capital apprecation and I’ve received 9-11% income.

  43. Brian December 18, 2012 at 9:47 am #

    Andrew –

    I am new to Couch Potato Investing but the conventional way is not working for me. I am a senior, retired, and I’m interested in your thoughts about how this might work for someone who has to start withdrawing from RRSP in a couple of years. Also would appreciate your thoughts on how best to get started.

    Thanks

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