Model Portfolios

Many new Couch Potato investors are anxious to build a portfolio of index mutual funds or ETFs, but they aren’t sure where to begin.

These model portfolios can help you get started. Once you become more familiar with the Couch Potato strategy and the products available, you can modify them to suit your needs. You can also adjust the proportions in any of these portfolios to suit your risk tolerance: conservative investors can allocate more to bonds and less to equities, while aggressive investors can do the opposite.

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1. The Global Couch Potato

This simple portfolio—popularized by MoneySense magazine—gives you exposure to stock markets in all developed countries, as well as a firm foundation of Canadian bonds. It’s suitable for investors with a moderate risk tolerance and a time horizon of at least ten years.

Canadian equity	20%
US equity	20%
International equity	20%
Canadian bonds	40%

There are several ways to build a portfolio with this allocation. The ETF option (Option 1 below) has the lowest annual fee, but because you will pay a trading commission each time you add money, it is most suited to larger portfolios and investors who contribute no more than once or twice a year.

Mutual funds are more suitable for investors with smaller portfolios and those who make monthly contributions. Option 2 is the cheapest, but it is only available to investors who open an online account with TD Canada Trust, or through a TD Waterhouse discount brokerage account. Those who use other discount brokers can choose either Option 3 or 4.

If you’re investing a very small amount (less than $10,000 or so) you can get this exact asset allocation from the ING Streetwise Balanced Fund. The MER is higher (1%), but there are no transaction fees, no need to open a discount brokerage account, and no need to rebalance.

Option 1 (iShares ETFs)	Option 2 (TD e-Series funds)
iShares S&P/TSX Capped Composite (XIC)	TD Canadian Index – e (TDB900)
iShares S&P 500 CAD-hedged (XSP)	TD US Index – e (TDB904)
iShares MSCI EAFE CAD-hedged (XIN)	TD International Index – e (TDB905)
iShares DEX Universe Bond (XBB)	TD Canadian Bond Index – e (TDB909)
Total cost: 0.35%	Total cost: 0.45%
Option 3 (RBC + TD funds)	Option 4 (Altamira + TD funds)
RBC Canadian Index (RBF556)	Altamira Canadian Index (NBC814)
RBC US Index (RBF558)	Altamira US Currency Neutral (NBC856)
RBC International Index (RBF559)	Altamira Int’l Currency Neutral (NBC877)
TD Canadian Bond Index – I (TDB966)	TD Canadian Bond Index – I (TDB966)
Total cost: 0.74%	Total cost: 0.63%

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2. The Sleepy Portfolio

This portfolio was created by Canadian Capitalist, who updates it quarterly on his excellent blog. It goes beyond the basics to add emerging markets and real estate, and splits the fixed income component between short-term bonds and real-return bonds. Because it holds just 25% in fixed income, it’s suitable for investors with a fairly high risk tolerance and a time horizon of at least 10 or 15 years.

Canadian Capitalist does not believe in hedging foreign currencies, so he uses Vanguard ETFs (traded in US dollars on the New York Stock Exchange) for his US and international holdings. If you prefer to use funds that are hedged to Canadian dollars, substitute iShares’ XSP for VTI, and iShares’ XIN for VEA.

The Sleepy Portfolio has a weighted MER of 0.20%, which is about as low as it gets. (The all-Canadian version would be considerably higher at 0.32%.)

Canadian equity	20%		iShares &P/TSX Capped Composite (XIC)
US equity	22.5%		Vanguard Total Stock Market (VTI)
International equity	22.5%		Vanguard Europe Pacific (VEA)
Emerging markets equity	5%		Vanguard Emerging Markets (VWO)
Canadian real estate	5%		iShares S&P/TSX Capped REIT Sector (XRE)
Short-term bonds	15%		iShares DEX Short-Term Bond (XSB)
Real-return bonds	5%		iShares DEX Real-Return Bond (XRB)
Cash	5%		[any money market fund]

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3. The Investors-Aid Income Couch Potato

Investors-Aid Co-operative of Canada is a non-profit group devoted to “low investment costs and fair returns.” The group favours large-cap and dividend-paying stocks and advises against volatile asset classes such as emerging markets.

The allocation below is based on the Co-op’s recommendations for conservative, income-oriented investors. More aggressive, growth-oriented investors can scale back on the bonds and add a large-cap component or two, such as iShares’ XIU and XSP.

The overall cost of this portfolio is 0.40%.

Canadian equity	15%		Claymore S&P/TSX Canadian Dividend (CDZ)
Global equity	10%		Claymore Global Adv Monthly Dividend (CYH)
Real estate	10%		iShares S&P/TSX Capped REIT Sector (XRE)
Canadian bonds	55%		iShares DEX Universe Bond (XBB)
Cash	10%		[any money market fund]

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4. The Half–Baked Couch Potato

Claymore, the second-largest provider of ETFs in Canada, includes several sample portfolios on its website. One that we like is a traditional 60-40 split between equities and fixed income; the latter component includes preferred shares as well as bonds.

Claymore’s fixed-income ETFs are excellent, and all the company’s funds offer a pre-authorized cash contribution (PACC) plan, which can be a money-saving feature. But we suggest using lower-cost iShares and Vanguard ETFs for the equity component. This cuts the overall MER in half, to just 0.23%:

Canadian equity	20%		iShares S&P/TSX 60 (XIU)
US equity	15%		Vanguard Total Stock Market (VTI)
International equity	12.5%		Vanguard Europe Pacific (VEA)
Emerging markets equity	5%		Vanguard Emerging Markets (VWO)
Real estate	7.5%		iShares S&P/TSX Capped REIT Sector (XRE)
Preferred shares	10%		Claymore S&P/TSX Preferred Share (CPD)
Government bonds	15%		Claymore 1-5 Year Gov’t Bond (CLF)
Corporate bonds	10%		Claymore 1-5 Year Corporate Bond (CBO)
Cash	5%		[any money market fund]

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5. The Ivy League Couch Potato

This allocation is suggested by David Swensen in his book Unconventional Success. Swensen is the chief investment officer for Yale University and widely considered an investing genius.

Swensen believes that real estate should be a major part of a portfolio (20%), and he shuns corporate bonds in favour of inflation-protected bonds. His model portfolio is designed for US investors, so we have tweaked it for Canadians.

This portfolio’s overall cost is 0.31%.

Canadian equity	15%		iShares S&P/TSX Capped Composite (XIC)
US equity	15%		Vanguard Total Stock Market (VTI)
International equity	15%		Vanguard Europe Pacific (VEA)
Emerging markets equity	5%		Vanguard Emerging Markets (VWO)
Canadian real estate	10%		iShares S&P/TSX Capped REIT Sector (XRE)
Global real estate	10%		Claymore Global Real Estate (CGR)
Government bonds	15%		iShares DEX Government Bond (XGB)
Real-return bonds	15%		iShares DEX Real Return Bond (XRB)

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6. The Über–Tuber

For something ultra sophisticated, consider this portfolio based on the academic work of Eugene Fama and Kenneth French. The Fama-French research demonstrated that value stocks and small-cap stocks have historically delivered higher returns than the overall market and is the foundation of the funds created by  Dimensional Fund Advisors.

Do-it-yourselfers can build similar portfolios with Claymore’s fundamental ETFs (which give more weight to value and small stocks) and several US-listed ETFs (unfortunately, no Canadian products cover the more exotic asset classes). Because this portfolio has so many funds, it would be expensive and unwieldy for an account less than $100,000.

This portfolio’s overall cost is 0.38%.

Canadian core equity	12%		Claymore Canadian Fundamental (CRQ)
Canadian small-cap equity	8%		iShares Small Cap Index (XCS)
US core equity	8%		Claymore US Fundamental (CLU)
US value equity	4%		Vanguard Value (VTV)
US small-cap equity	4%		Vanguard Small-Cap (VB)
International core equity	8%		Vanguard Europe-Pacific (VEA)
International value equity	4%		iShares MSCI EAFE Value (EFV)
International small-cap equity	4%		Vanguard All World ex-US Small-Cap (VSS)
Emerging markets equity	4%		Vanguard Emerging Markets (VWO)
Real estate	4%		Claymore Global Real Estate (CGR)
Short-term bonds	40%		iShares DEX Short-Term Bond (XSB)

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