Your Complete Guide to Index Investing with Dan Bortolotti

The Second Coming of the Perfect Portfolio

2017-12-02T21:12:27+00:00August 9th, 2012|Categories: Book reviews, Indexing Basics, Research|Tags: |122 Comments

The anticipation has been palpable, I know, but the waiting is over. The second edition of The MoneySense Guide to the Perfect Portfolio is now available.

The first edition of my handbook for do-it-yourself index investors, published last October, sold out quickly as Couch Potatoes stampeded to their local newsstands to demand a copy. The revised second edition should now be available across Canada on magazine newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. It’s also available online, and if you order 51 copies or more, you get a hefty discount. Order 99 and you save even more. [Update: Perfect Portfolio is now available in Apple iPad, Kobo. and Kindle editions.]

While the second edition is very similar to the first, there have been a surprising number of developments since last fall. Vanguard arrived in Canada, Claymore was bought by BlackRock, and three brokerages now offer commission-free ETFs. The guide has been updated accordingly.

Now with improved performance!

I have long wanted to compile more complete historical performance data for my model portfolios, but the problem has always been that the ETFs have very short track records. In his excellent book The Smartest Portfolio You’ll Ever Own, Dan Solin gets around this idea by using a combination of real fund returns and index data. To account for costs, Solin subtracted each ETF’s management expense ratio from the index returns when doing his calculations. Since most well-run ETFs have low tracking errors, this is an imperfect but reasonable proxy, and I decided to do the same for the new edition of my own book.

Well, to be honest, I asked Justin Bender, CFA and portfolio manager at PWL Capital, to use his large brain and larger database to do the actual work in exchange for a pint of beer. It was a huge undertaking, but I think it will provide index investors with a reasonable idea of how the strategy performed over the last 15 years (from 1997 through 2011). The results and the description of how we compiled the data are available here, as well as on the Model Portfolios page. I will update the numbers annually—at least as long as Justin is still talking to me. Here’s a summary of the results (all figures are annualized percentages):

Global Complete
Couch Potato Couch Potato Über-Tuber
3 years 7.43 11.55 9.52
5 years 1.12 3.26 1.89
10 years 3.87 6.29 5.54
15 years 5.20 6.98 6.17
Standard deviation 8.02 8.21 7.92
Worst 12 months -19.02 -20.07 -19.89
Worst 36 months -6.68 -4.53 -4.91

Finally, I have made some changes to the Über-Tuber, my model portfolio with a tilt to value and small-cap stocks. Long-time readers will know this portfolio has evolved a few times over the years as I have struggled to keep it simple and inexpensive while still getting access to the value and small-cap premiums. With Justin’s help once again (that’s two pints I owe him now), we’ve come up with a version that it is 10 basis points cheaper. The main change was getting rid of the fundamental-weighted ETFs for the US and international exposure, and replacing these with cheaper value and small-cap funds from Vanguard and iShares. Another change is incorporating two BMO bond ETFs that approximate the maturities targeted by Dimensional Fund Advisors in their fixed income funds. The new version now appears on the Model Portfolios page.

I have three copies of the book holding up the short leg of my desk, and I’m giving them away to faithful readers. Enter the contest by using the nifty widget below. I need your email in order in to contact you if you win, but as always, I never share this information with third parties.

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  1. Jas August 11, 2012 at 7:15 am

    It’s interesting to compare the couch potato portfolio returns to low cost balanced mutual funds like Mawer:

    Mawer Balanced Fund
    3-Yr 3.2%
    5-Yr 8.9%
    10-Yr 6.1%

    Quite similar to the complete couch potato!

  2. Canadian Couch Potato August 11, 2012 at 9:31 am

    @Jas: The strategic asset mix of the Mawer fund is actually quite close to that of the Global Couch Potato. This from its annual report: “2.5% DEX 91-day Treasury Bill Index, 42.5% DEX Universe Bond Index, 25% S&P/TSX index of Canadian equities, 15% S&P 500 index of US equity returns ($Cdn) and 15% MSCI EAFE index returns for international equities ($Cdn).”

    So the fact that the Mawer fund significantly outperformed the Global Couch Potato is a credit to the fund manager’s ability and the fund’s low MER. It should be said that the fund was one of only a few to have such good 10-year results:

  3. CJ August 11, 2012 at 5:51 pm

    Thanks for your tireless work on this subject Dan. I’ll be heading to Chapters to pick up a copy of the revised guide.

    One suggestion: would you considering making an ebook version available? (it’s pouring rain outside as I type this, making an online purchase more likely than a trip to the nearest Chapters. ;)

  4. Stephen August 11, 2012 at 11:50 pm

    Looked at the newsstand today … didn’t see it.

  5. Canadian Couch Potato August 12, 2012 at 12:09 pm

    @CJ: The decision to publish an e-book is not mine. I know that Rogers is experimenting with e-book versions of some of the earlier books in the series, so it will likely happen at some point. Probably not with this edition.

    @Stephen: It may not be rolled out everywhere in the country yet. I have seen it here in the Toronto area. Whereabouts are you?

  6. Karim August 12, 2012 at 2:12 pm

    As someone just starting to get educated on investing, I’ve found this blog invaluable and picked up the Guide this weekend having read it cover to cover. Lots of great information for newbies like myself.

    One question I have is that I don’t meet the suggested $50k for ETFs although in the long-term, ETFs are my instrument of choice and I have several in mind. However, my discount brokerage is CIBC and with <$50k, I'm going to be charged $28.95 a trade. Should I wait until I have $50k to invest or take the hit (~$150) to get into the market. It will likely be 12-18 months before I reach $50k. Right now everything is just cash in a low-interest savings account. I use CIBC because it is conveniently linked to my chequing account and is easy to deposit share certificates I get from purchasing my employer's stock options. I don't really want to have to manage multiple brokerage accounts but have toyed with the idea.


  7. Profiteer August 12, 2012 at 4:04 pm

    I picked mine up at Shoppers Drug Mart. Definitely informative reading and an essential companion to the CCP blog. Well worth the money at $9.95, especially since I’ll be reading it over and again!

  8. Canadian Couch Potato August 12, 2012 at 4:36 pm

    @Karim: Why not just use Option 2 of the Global Couch Potato (RBC index funds) until you qualify for the cheaper ETF trades?

  9. Karim August 12, 2012 at 7:20 pm

    @CCP: I’ll take a closer look at indexed mutual funds. I guess I’m reluctant to eventually have to sell it all off to transfer to ETFs.

  10. Canadian Couch Potato August 12, 2012 at 8:41 pm

    @Karim: Remember there are no transaction costs for buying and selling index funds, so there’s no real downside here except potential capital gains taxes if you’re not investing inside an RRSP.

  11. ed August 14, 2012 at 4:51 pm

    Dan, I was just wondering what you think of VSB or VAB for a bond holding in my couch potatoe portfolio. They seem to have lower costs than XBB.

  12. Canadian Couch Potato August 14, 2012 at 6:56 pm

    @Ed: The Vanguard ETFs are excellent choices. They have no real track record yet, so I have not felt the need to add them to my model portfolios, but I have no doubt they will track their indexes as closely as their iShares counterparts.

  13. Ed August 14, 2012 at 6:59 pm

    So Dan would you use a shorter term bond ETF or go with the longer one?

  14. Canadian Couch Potato August 14, 2012 at 7:03 pm

    @Ed: That depends on your time horizon and outlook on interest rates. As a long-term core holding, my model portfolios recommend broad-based funds like XBB or VAB. But if you have a shorter horizon and think interest rates are poised to rise, then the short-term fund is more appropriate.

  15. dale August 16, 2012 at 9:31 am

    congrats agian you do a great service to investors. diy etfs is the only way to keep fees low.

  16. Shawn August 21, 2012 at 6:16 pm

    @Canadian Couch Potato – Was looking for some advice. Have 30K to invest, would like return to be greater than 3.1% per year as thats the rate of my mortgage (otherwise i could put it into mortgage). Was considering ETF global Couch potato portfolio, am using low cost online broker. Any suggestions?

  17. Canadian Couch Potato August 21, 2012 at 9:11 pm

    @Shawn: The Global Couch Potato has an expected return higher than 3.1% over the medium to long term, but of course, nothing is guaranteed. (Over the last five years it barely delivered 1%.) There are no risk-free investments paying over 3.1% today: even a five-year GIC is not likely to pay much more than 2.5%. You might get over 3% with a corporate bond, but of course that comes with some risk. If your mortgage gives you a risk-free, tax-free 3.1%, that’s never a bad option.

  18. Shawn August 22, 2012 at 8:36 am

    @Canadian Couch Potato – Thanks for the info. I am definitely torn whether to stick this money into mortgage or invest. In the current climate it seems like the mortgage might be best place, its actually 3.69% as I can put it towards my fixed portion only. Only issue is the money is gone and can’t be used again.

  19. chi August 26, 2012 at 2:23 am

    I started a TD e-series couch potato portfolio a number of years ago in my RRSP. Then fell into the financial advisor trap a couple of years ago. Now that I have smartened up I have decided to take my destiny into my own hands so I picked up your book last week and have read it cover to cover.

    What do you think is best for my situation as an investing newbie? I am self employed 33 year old looking for longterm investing (20ye years). I will be investing all of the money through a taxable account in my corporation. I have a lump sum of $100k and am hoping to make monthly contributions of $10-$20k. I am currently banking with Scotia so was thinking of opening a iTrade account and doing ETF’s (hopefully taking advantage of some of the no commission ETFs). My other option, which is slightly more inconvenient, is to open a TD account and simply do the e-series Global Potato portfolio.

    As you mentioned in your blog post, it’s pretty slim pickings with the no commission ETFs so is it worth it to go the ETF route or am I better off with a simple e-series portfolio? If you think the ETFs are a better route can you suggest some good ones for my situation?

  20. Howie August 29, 2012 at 5:12 pm

    I’ve had a chance to browse through the book and this website is a great thing for investors compared to what’s out there. I’ve turned down financial sales…er advisor jobs with Investors Group and Desjardins because they wouldn’t allow me to go the ETF route.

    I’ve been working on an asset allocation model using 3 ETFs (stocks, govt bonds and 3X leveraged bonds). Essentially it rebalances yearly based on stock valuations (Shiller CAPE) and the leveraged bonds is to make the volatility equal between stocks and bonds. A 7 year Treasury duration has about the same volatility as stocks going back 80 years.

    Chopping off 1% from returns this is what my model comes up with.
    3 yr: 16.54
    5 yr: 18.61
    10 yr: 14.41
    15 yr: 15.56
    standard devition: 9.18
    worst 1 yr: .2 in 1999
    worst 3 yr: 5.55 from 2004-06

    Right now I’m trying to land a job at a large investment firm to develop actively managed ETFs. I’ve tried adding other asset classes, but given the correlation between stocks and bonds (I used 5 year returns time 3 for the above), other assets just don’t justify the added costs. Using leveraged bonds that are available (TYD) reults in low tracking error, but it’s only been out a short while. Not to mention the liquidity is way too low. I’d be scared to tell someone to implement it using a low liquidity leveraged ETF.

    Essentially I’ve borrowed from the knowledge of Benjamin Graham (valuations) and Ray Dalio of Bridgewater Associates (leveraging up low volatility assets). Maybe something to look at for the future as ETFs and strategies continue to evolve.

  21. Que October 3, 2012 at 6:51 pm


    Any chance of getting a follow up post from you, to describe the reasonings behind the selection and allocation of your Über–Tuber choices? I’ve wondered from you previous posts & comments why you changed your mind and decided not to use CIE.


  22. Canadian Couch Potato October 3, 2012 at 10:21 pm

    @Que: Basically I tried to get exposure to the small and value factors as cheaply as possible, while also keeping the portfolio relatively easy to manage. The analysis was done with software that examined several combinations of of ETFs with that in mind, and this was the best way we could accomplish those goals. But it is certainly not set in stone. If you want to make your own substitutions, you should fee free to do so.

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