Your Complete Guide to Index Investing with Dan Bortolotti

9 Secrets of the Empowered Investor, Part 1

2010-09-05T22:21:13+00:00June 8th, 2010|Categories: Indexing Basics|48 Comments

I recently interviewed Keith Matthews for a forthcoming column in MoneySense. Keith is a partner and portfolio manager at Tulett, Matthews & Associates (TMA), an investment counsel firm in Montreal. Index investing is at the heart of TMA’s philosophy: the firm builds widely diversified, passively managed portfolios for its clients using mutual funds from Dimensional Fund Advisors and iShares ETFs.

During our discussion, Keith explained that he recently boiled down his 15 years of investment management experience into a concise framework that he shares with his clients. He’s identified nine factors that contribute to an investor’s long-term success, and he’s agreed to share them with readers of Canadian Couch Potato. I’ll present them this week in a series of three posts. (The material was originally written for TMA clients only, so I have made a few modifications to give them broader appeal.)

What’s more, Keith provided me with a copy of his excellent book, The Empowered Investor, which explores these ideas in greater detail and eloquently makes the case for index investing.

“A structured portfolio is not just about diversification,” Keith explains. “It is about bringing together a series of concepts or principles to match each investor’s unique situation. What follows are nine critical factors you must consider when thinking about your long-term investments. Each is essentially a pillar in a structured investment planning process. Ignoring them can lead to costly outcomes. Implementing all of them together will help you reach your personal financial goals and increase your odds of creating a successful long-term investment experience.”

Disclosure: I am not a client of Tulett, Matthews & Associates (their minimum portfolio size is a wee bit out of my league) and this is not a sponsored post. I asked Keith if he would be willing to share his insights simply because I think they will be an enormous help to readers. He generously agreed to do so.

1. Investors with a financial plan will have a better outcome.

The lack of a financial plan is at the root of many challenges that investors experience. If you want to achieve financial independence, you need to start by reviewing your goals and life targets, saving rates, and your consumption and  lifestyle habits.

An investment plan comes next. This will map out your long-term investment objectives, time horizons, target asset allocation, tax consequences, risk tolerance and investment strategy. Seeking advice from a financial planning professional can be an important part of this process.

Successful investors keep their long-term goals in mind at all times. This helps them avoid being swayed by market movements and other distractions.

2. Asset allocation is the dominant factor in a portfolio.

Choosing an asset allocation — the relative mix of stocks, bonds and other asset classes in your portfolio — is one of the most important decisions an investor can make. While market timing and stock picking may be exciting, the academic literature has shown that asset allocation decisions have a far greater impact on portfolio performance.

As a result, asset class investing is the most prudent and successful long-term strategy. It’s the one that has been used for decades by the smart money, such as pension fund managers. The best way for retail investors to adopt an asset class strategy is to use index funds or ETFs that track broad-based stock and bond indexes.

3. There’s a difference between good and bad diversification.

Many investors believe that they are diversified because they own 15 stocks or 10 mutual funds. But often their holdings overlap: a portfolio of five bank stocks, five mining stocks and five income trusts is not well diversified. Similarly, if you hold four Canadian equity funds, chances are that they hold many of the same companies. That’s bad diversification, and it can be costly in the long run.

Good diversification means having exposure to all of the major asset classes with little or no overlap. These asset classes include government bonds, corporate bonds, real return bonds, Canadian stocks, US stocks, international stocks, and emerging market stocks. The equity components can be subdivided further into large- and small-cap stocks, and value and growth stocks.

See also:

9 Secrets of the Empowered Investor, Part 2

9 Secrets of the Empowered Investor, Part 3


  1. David June 8, 2010 at 1:17 pm

    Another very useful and informative posting.
    Thank you.

  2. Al June 8, 2010 at 2:48 pm

    I have recently embraced passive index investing after spending 10 years where my actively managed money did nothing. I’m a little leery of downplaying market timing during this economic cycle as I think we’re going to have a rough year but then again I thought that in 2008-2009 and missed out on most of the upside rally.

    I’ve got time so I’ll stick to my plan.

  3. Michel Serre June 8, 2010 at 3:20 pm

    Good article. Looking forward to the follow-up. After 20 years of investing, this is what I now do, although I find that the U.S. have far better low fee funds available. We are therefore left with ETFs, for the most part. Thanks.

  4. Jay June 8, 2010 at 6:03 pm

    Great post as always Dan. Keep up the good work!

  5. Michael June 8, 2010 at 7:45 pm

    Great article and count me in for the book draw!

  6. Lyne June 8, 2010 at 8:41 pm

    Very interesting, looking forward to the next article. Thank you.

  7. The Passive Income Earner June 8, 2010 at 9:52 pm

    Nice post. I look forward to reading your future posts!

  8. John June 8, 2010 at 9:07 pm

    The point on good and bad diversification is key … I must have missed it thus far in my financial self-education.

  9. Kristi June 8, 2010 at 9:20 pm

    I follow your blog weekly – and find it really helpful. I’m looking forward to the rest of these posts as my goal for this next month is to switch my portfolio from my (poor) manager to a self-managed index portfolio.

    Tks for keeping the” blog fires burning” – only wish you had time to post daily.


  10. Financial Cents June 9, 2010 at 5:31 am

    I look forward to my next issue of MoneySense magazine! In recent years, I’ve been “converted” to index investing and now hold a few ETFs because of it. Good, informative post. I look forward to future posts (and hopefully the book)! Cheers.

  11. 6miths June 9, 2010 at 9:01 am

    Looking forward to parts 2 and 3. Have been a simple ETF indexer for some time. Keep all the great info coming. Cheers. John.

  12. Ben June 9, 2010 at 9:14 am

    Thanks for this post and others, as a young person starting investing this blog has been a great resource. I am glad to have been able to start right with ETFs from the beginning. Thank you.

  13. Lisa June 9, 2010 at 9:57 am

    I’m sold on the index-investing idea, and moved all my RSPs over to TD e-series in the global couch potato asset allocation model. Trouble is, the market tumbles lately have extinguished any gains from early 2010, and are now rapidly eating holes through my initial investment… Nervous? Yeah, a bit. I know that I’m in it for the long haul, but when I hear friends bragging about making $2K per trade on currency trading (U.S. and Canadian dollar accounts), I can’t help feeling as if I might be doing something wrong…

    Still, thanks for the info & count me in on that book draw!


  14. Canadian Couch Potato June 9, 2010 at 10:05 am

    Lisa: There will always be someone bragging about some brilliant move they made. They will conveniently keep their comments to themselves when they lose. Currency trading is pure speculation, as currencies have an expected return of zero and move randomly an unpredictably. If you’re in for the long-haul, you will be the one boasting to friends in 20 years!

  15. Marc-O June 9, 2010 at 10:16 am

    93.6%, really? Can’t wait for 4-9. Yay, I’m in the contest!

  16. DM June 9, 2010 at 10:19 am

    Hi Dan, thanks so much for this post. I look forward to reading about the next 6 pillars. To your point, while the evidence suggests that over time most active management strategies fail to beat their benchmark (and the ones that do shift from year to year, so precious few actively managed funds CONSISTENTLY beat their benchmark), it is equally clear that most DIY investors fail to match the index! For me the three reasons are: 1. Performance chasing; 2. lack of integrated financial plan; and 3. the difficulty some have in sitting back on their laurels and avoiding the thrill of market timing/stock picking. Thanks as always for your informative blog.

  17. Canadian Couch Potato June 9, 2010 at 10:30 am

    Marc-O: The Brinson work on asset allocation is quoted everywhere in the index investing literature, though I admit that the papers are very heavy on math and hard to digest. William Bernstein wrote a post about this that may be interesting:

  18. Canadian Couch Potato June 9, 2010 at 10:33 am

    Doug: I couldn’t agree more. Many DIY investors are their own worst enemies. That is one place where a good advisor may be of value: if he/she can rein you in and convince you to stay the course, then it’s worth the fee.

  19. Pacific June 9, 2010 at 12:56 pm

    Count me in.
    Interesting work (as usual!)

  20. Erick June 9, 2010 at 2:52 pm

    Looking forward to winning a copy of that book ;)

  21. Len June 9, 2010 at 4:22 pm

    Another informative post – thx.

    Any chance of a future article on a Couch Potato Dividend Portfolio (RRSP and non RRSP). I am hooked on getting dividends and as such I am investigating an ETF strategy instead of individual stocks.

  22. Canadian Couch Potato June 9, 2010 at 4:53 pm

    Len: Sure, I’ll consider it. But, really, your choices are pretty slim: XDV and CDZ are the only Canadian dividend ETFs!

  23. Sam June 9, 2010 at 8:53 pm

    Little did I expect that Asset Allocation’s rate of return variability is in the 90 percentile. That was an eye opener. Thanks for the unadulterated news on Finance. It sure clears up a lot of clutter one reads in finance articles de jour.
    Love your posts!

  24. Blitzkrieg June 9, 2010 at 11:57 pm

    That book sounds exactly like what I need to read right now, as I am in the process of switching to an indexed portfolio.

  25. newlybornkid June 10, 2010 at 11:46 am

    Another great post!

    I’m almost 90% sure that I will be changing my RRSP holding into passive index ETFs. I have 15 to 20 years of horizon. However, what if there were some kind of big market correction within two to five years of my retirement? What is the strategy then?

  26. Canadian Couch Potato June 10, 2010 at 12:53 pm

    Newlybornkid: Once you are within five years of retirement, your allocation to stocks should be much lower than it is now. As a rule of thumb, many advisors recommend that any money you will need in five years or less should be in safe investments like money market funds or GICs.

  27. Brian June 10, 2010 at 1:53 pm

    Hi Dan,

    Count me in please! Keith Matthews sound’s like a very intelligent person. I’ll have a look at his book next time I’m at the book store.

  28. Jared June 10, 2010 at 3:07 pm

    Very interesting reading. Of 20+ finance blogs i read, this has been one of the most helpful. Have just moved all my RSP’s to TD e-funds this year, and enjoying the feeling of control i have over my own outcome now, rather than it being eaten by 3% mer’s and an advisor (salesman) telling me everything will be ok..
    Book sounds like interesting reading, would love to go through it.


  29. Canadian Couch Potato June 10, 2010 at 3:14 pm

    Thanks, Jared. Everything is just fine with a portfolio that charges 3%. As long as you’re the advisor and not the investor. :)

  30. Habsfan June 10, 2010 at 5:48 pm

    As always, a fantastic post! I read every article you write here and very much enjoy them. These 9 Pillars are absolute gold.

  31. […] Canadian Couch Potato is writing an excellent series of posts on the 9 secrets of the empowered investor. Part 1 is available here. […]

  32. […] Canadian Couch Potato interviewed Keith Matthews to come up with 9 secrets of the Empowered Investor however it is not nearly as hilarious as my own Top 10 excuses for Getting into […]

  33. This and That: Don’t Buy Stuff You Can’t Afford and more… | MoneySense June 11, 2010 at 7:04 am

    […] Canadian Couch Potato is writing an excellent series of posts on the 9 secrets of the empowered investor. Part 1 is available here. […]

  34. TJ Machado June 11, 2010 at 6:42 am

    By combining passive investing instruments and strict asset allocation with frequent rebalancing you are automatically taking advantage of market timing albiet in a systematic way – so I would not downplay the value of market timing – assuming it is not knee jerk. The concept of non-overlapping asset classes is a fundamental concept that even some of the mutual fund companies do not get. For example they have “Asia except Japan” funds and “emerging market funds” and no separate Latam or Africa funds. How am I supposed to build out global diversification with these kinds of offerings? Thanks for the excellent post.

  35. Jeff June 11, 2010 at 7:16 am

    Good easy reading.

  36. Canadian Couch Potato June 11, 2010 at 8:59 am

    TJ: I think it’s important to understand that systematically rebalancing a portfolio has a different objective from market timing. When most investors talk about market timing, they’re talking about trying to forecast when a market will move up or down. Rebalancing makes no forecasts, except perhaps in a very general away that assumes markets will revert to the mean eventually. Mostly it’s a way of maintaining a consistent risk exposure.

  37. Allawi June 11, 2010 at 9:35 am

    Thanks. Very interesting article.
    Looking forward the other parts

  38. Renee June 11, 2010 at 12:53 pm

    Good article, thanks. Though I’ve had some success buying individual stocks, I’ve recently been moving toward ETFs. Why? Because there’s more to life than obsessing over stock charts, and ETFs are much less stressful. Looking forward to reading the rest of the series.

  39. James June 11, 2010 at 1:35 pm

    Great post and blog. I find myself coming back for more quite often.

  40. js_cooldude June 11, 2010 at 8:58 pm

    Great post, looking forward to the others

    (and the book!)

  41. Len June 13, 2010 at 7:51 pm

    Its taken us about 6 months but we’ve finally transferred everything from Investors group over to TD – in the last 12 years our adviser was the only one who made a profit – and a good one. Thanks to ETFs and the Couch Potato strategy – we’re looking forward to making decisions for ourselves and achieving long term goals.

  42. Canadian Couch Potato June 13, 2010 at 11:40 pm

    Len: Congratulations on taking control of your finances, and best wishes with your investing!

  43. Derek June 14, 2010 at 12:13 am

    Interesting post.

    I find that time horizon of investment funds is a big factor in my investing. The wife and I are about 1-2 years away from a mortgage, and securing my nest egg in the short term is critical to my strategy. Ive been trying to find good advice on integrating this situation with a passive investment strategy… but how found little commentary other than focusing on fixed income. I find that time horizon is generally passed over in discussion other than to discuss strategy for those that have a long time to sit on their money.

    Maybe I’m just not searching in the right place… curious if others have found that same.

  44. James June 15, 2010 at 9:20 am

    Great post, great advice. Eye-opening graph on Asset Allocation.

  45. Wealthworm June 15, 2010 at 11:02 am

    I think that the first point is such an important one. And to further clarify, I think the part about having a simple financial plan will make the biggest difference in the beginning so a person can have enough extra money to invest. Great post!

  46. Lisa June 15, 2010 at 11:42 am

    Thank you so much for the Bernstein article and your reply to my earlier post. Bernstein’s point about “letting George do it” is picth perfect.

  47. Chad June 15, 2010 at 8:47 pm

    An excellent series of posts that I have captured as a ‘cheat sheet’ for future reference, and for when I’m asked why I invest the way I do!

  48. Maxwell June 22, 2010 at 4:40 pm

    The book looks awesome!

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