Alexander Green retired at age 43 after having made his fortune as an investment adviser, market analyst and portfolio manager. He thinks the efficient markets hypothesis—one of the fundamental ideas behind the Couch Potato strategy—is bunk. “I have serious philosophical differences with those asset-allocators who recommend index funds because they believe it is impossible to beat the market,” Green writes in The Gone Fishin’ Portfolio, first published in 2008 and newly released in paperback. “That’s simply not true. I have beaten the market soundly with my own stock portfolio over the past two decades.”
So what investing strategy does Green recommend for you and me? Indexing, of course. He doesn’t spend any time throwing darts at active management. He simply explains that most people would be better off managing their own money in a simple, low-cost, highly diversified portfolio that requires minimal maintenance.
Green identifies six factors that affect a portfolio’s performance: how much you save, how long your investments compound, your asset allocation, how much your investments return annually, how much you pay in expenses, and how much you lose to taxes. Only one of these is beyond the investor’s control: “No matter how proficient you are as an investor, you cannot control your portfolio’s annual investment returns. Yet this is the factor that so many investors spend their time fretting about.”
Green’s suggested portfolio is entirely made up of Vanguard mutual funds. These are only available in the US, but Canadians could easily build a similar portfolio with ETFs and an extra allocation to Canadian equities. Here’s how it breaks down by asset class:
| US broad-market equity | 15% |
| US small-cap equity | 15% |
| European equity | 10% |
| Pacific equity | 10% |
| Emerging markets equity | 10% |
| Short-term bonds | 10% |
| High-yield corporate bonds | 10% |
| Inflation-protected bonds | 10% |
| REITs | 5% |
| Gold mining stocks | 5% |
The book does an eloquent job of describing how the various asset classes work together to reduce volatility and enhance returns. For example, Green doesn’t advocate holding gold directly, but points out that mining stocks have a low correlation with the S&P 500, making them an excellent diversifier. (Note that gold miners make up a much larger proportion of the TSX, so Canadians could easily drop this part of the portfolio.)
The rest of the book summarizes how important—and how difficult—it is to stay the course with a passive portfolio. When Green explains how to rebalance, he acknowledges that “I can tell you from working with hundreds of investors that most have a strong compulsion to add to those assets that are performing best, not those that are performing the worst.”
What I like most about The Gone Fishin’ Portfolio is that it is refreshingly free of ideology. Green is a stock picker and he’s had great success, but he asks his readers if they really want to spend thousands of hours doing what he does. Why not instead use a strategy that is simple, inexpensive, and proven to beat the vast majority of active managers? “The Gone Fishin’ Portfolio gives you an excellent opportunity to increase your wealth. But it guarantees you more time to devote to the people and pastimes you love.”
I’m confused. How does his portfolio allow us to beat the market? Or is he saying “If you want to beat the market, you need to spend 1000s of hours stock picking. So just forget about that, use this portfolio, and go fishing.”?
My preference would be for a smaller number of ETFs, say 3-4 broad ETFs. Keep it even simpler. Rebalancing can be done, for example, with fewer trades.
@Marz: He’s advocating the latter: that is, don’t bother trying to beat the market, simply use this indexed portfolio and you’ll do very well. In his experience, it is possible to beat the market if you invest thousands of hours, but even then it’s no guarantee.
Hi Dan,
What’s your opinion on EMH? Do you think that the advantages of index fund investing depends on having efficient markets?
So, does anyone have a list of ETFs or index funds that correlates with each of these asset classes listed by Green as part of his suggested portfolio? I think I have most of the classes covered off in my couch potato portfolio already but not high-yield corporate bonds or inflation-protected bonds. And how would you build in the Canadian equity that’s always recommended for a Canadian investor, in addition to the US equity? Split them 50/50? Can you tell I’m still learning and refining my approach to this?
@chantl01: Have a look at my ETFs page for a complete list. Both iShares and BMO have real-return bond ETFs; Claymore, iShares and BMO have high-yield bond funds.
Green’s portfolio is 30% US equity and 30% international. A Canadian could simply go with 20% each to Canada, US and international.
@Brian: I believe that markets are largely efficient, but clearly they are not perfectly so, or we would never have bubbles. In most cases, any inefficiencies in the markets cannot easily be exploited by active managers.
You might like the following article:
http://moneywatch.bnet.com/investing/blog/fund-watch/why-index-investors-shouldnt-care-whether-markets-are-efficient/412/?tag=content;col1
Nice review. Good reinforcement for many of us. Thanks Dan.
Marz,
“The market” is one of the major groupings of stocks like the Dow Jones, the S&P 500, or the NASDAQ. Each of those entities returns “x” percentage a year and one can invest in those through investing in, “index funds” that mirror what those markets do. What Green is saying is that very few people consistantly beat the returns of, “the market” by investing money in non-index funds or individual stocks. The Gone Fishin’ Portfolio beats, “the market” by not only investing in index funds that mirror “the market” (like VTI), but by also diversifying in other areas such as precious metals, REITS, and foreign funds. I use Green’s plan and am doing quite well.
Hope this made sense.
Hi CCP, question as we’re talking a little Canada/US here… looking at your model portfolios, wondering what the benefit would be to investing in say an rbc US index vs a vanguard index for the US equity portion of my portfolio if the rate is lower on a vanguard? Is it related to currency exchange? (I am Canadian)
@Newbie: The RBC fund is a traditional mutual fund, bought and sold in Canadian dollars with no commissions. The Vanguard funds are ETFs bought and and sold in US dollars, with a trading commission on each purchase and sale. So the former makes more sense for small portfolios and people who make monthly contributions. ETFs are a better choice for large portfolios and less frequent transactions.
https://canadiancouchpotato.com/couch-potato-faq/
Got it…so sticking in the index fund world then, what are the major differences between something like an iShares index vs one of the bank indexes? Knowing that MERs seem to generally be lower with iShares, why would one opt for a higher fee TD or RBC index instead? Thank you!
@Newbie: The iShares products are all ETFs, not index mutual funds. So they have the same drawbacks—namely trading costs every time you buy and sell. As for TD versus RBC mutual funds: the TD funds are only available to TD customers. If you happen to have a brokerage account anywhere else, then then the RBC funds are the next best choice.
Green’s recommended Vanguard ETFs are very attractive because their extremely low management fees are lower than several of the equivalent iShare or BMO funds. Does this cost saving outweigh the currency fluctuation risk if held in a Canadian dollar RRSP?
How does the following look for a Canadian with more than $50,000 to invest?
10% — TD CDN Bond Index-e (TDB909)
10% — iShares DEX Real Return Bond Index Fund (XRB)
10% — iShares High Yield Corporate Bond ETF ( HYG)
20% — TD CDN Index-e (TDB900)
8% — TD US Index-e (TDB902)
8% — Vanguard Small-Cap Index Fund (VB)
8% — TD International Index-e (TDB911)
8% — Pacific equity Vanguard MSCI Pacific ETF (VPL)
8% — Vanguard MSCI Emerging Markets ETF (VWO)
5% — Ishares S&P/ TSX Capped REIT Index Fund (ZRE)
5% — Vanguard Precious Metals and Mining Fund (VGPMX)
@KLF: Diversification is important, but In my opinion your suggested portfolio is way too complicated for $50K. The cost of maintaining a portfolio like this would almost surely overwhelm any diversification benefit one might get. People seem deeply resistant to simple solutions, but the Global Couch Potato is more than adequate for any portfolio under $100K, and the Complete Couch Potato is likely to be adequate for almost any portfolio size.
Hi CCP,
I am Canadian, 59 years old, will retire in 2 years (as will my wife), and have a $140K portfolio (RRSP) with a financial advisor with whom I am dissatisfied (poor performance for the last 5 years).
We have sufficient other assets (and a reasonable govt pension plan thanks to my wife) so that we will retire comfortably. In other words, the $140K is not ultra-critical to our financial planning, and I do not expect to draw down this RRSP until age 71, when I have to.
I am interested therefore in trying out the CCP strategy. Given that I have a relatively short time-horizon, does this make sense? And if so, what risk-tolerance level would typically be recommended given my situation? What asset mix would make sense?
Thanks for any advice or comments!
@Jean: Indexing is appropriate for investors of any age, time horizon or goal. The issue is finding the appropriate asset allocation, and there is no way to do that without a thorough financial assessment. My book is probably a good start: The MoneySense Guide to the Perfect Portfolio.
Ok, thanks, I will get the book and start there.
Dan,
I loved this book and the concept, however I am contemplating on investing with a company called WealthBar which is a online brokerage charging 0.60 % MER for managing your portfolio and diversifying with Index ETFS. They take care of all the fees and the rebalancing and i was wondering if you see any drawbacks to this method.
Thank you!