Your Complete Guide to Index Investing with Dan Bortolotti

How One Investor Found Inner Peace

2014-05-27T08:56:28+00:00May 27th, 2014|Categories: Behavioral Finance, Indexing Basics|84 Comments

Most people who embrace index investing are attracted to the low fees and the proven performance compared with a majority of active strategies. But another advantage sometimes gets overlooked, and that’s the peace of mind that comes from a long-term plan that allows you to ignore the distractions of daily market movements.

I recently received an email from a long-time reader named Steve, who described his investing journey. “I’m curious if my experience of ‘inner investing peace’ is unique or typical,” he says, so with his permission I’ll share some of the details.

“I’m in my mid-40s and I was already familiar with the theory behind passive investing when your blog was becoming popular back in 2010,” Steve writes. “I’d already had run-ins with expensive mutual funds, and I had already done a fair amount of (unsuccessful) investing in individual stocks as well. I had a friend who traded options, and I even dabbled in that. I then moved on to dividend growth investing for a while. My problem was I was never patient enough: I wanted results immediately.”

Shortly after the crash of 2008–09, Steve began reading about indexing and the evidence won him over, but he still couldn’t bring himself to turn theory into practice. “I remember having arguments with people about how Couch Potato investing was the only option that had a chance of long-term success, and then I would go home and buy options on gold shares in my own portfolio!”

Steve was also getting bogged down in details. “I would create spreadsheets, check stock prices, check account balances. I’d obsess about whether I should add real estate, and if so, which ETF was best. I’d wonder what percentage I should devote to bonds, and if I should stick to short-term bond ETFs because interest rates are obviously going up. I was probably spending seven to 10 hours a week on these activities.”

“A plan I can stick to”

Sometime in 2011, after several years of failed experiments, it finally dawned on Steve that he’d had enough. “I’ve tried to think of the trigger, but I’m not sure I can tell you. A couple of things played a part. First, I got busier: I started to coach my kids in sports and my business took off—I simply didn’t have time to follow the markets. Second, I finally started to honestly accept my weaknesses as an investor. What was I doing playing the gold markets? How on earth could I possibly hope to win at that game?”

So Steve rebuilt his wife’s RRSP using a simple five-ETF portfolio, and in his own account he replaced everything with a single balanced fund. “I’m now into year three of this investing plan and I haven’t deviated once. The best part is I spend maybe an hour or two a month reading the odd article or blog, and maybe an hour a year managing my accounts. I just buy the balanced fund when I add new money to my account, and each January I rebalance my wife’s RRSP by making five trades. It really couldn’t be easier.”

Others may arrive at a similar state of peace using different strategies—indexing is not the only one investors will stick with over the long term. But I would argue there’s no other strategy that is quite as liberating. As Steve discovered, it’s not about the specific nuts and bolts in the portfolio. It’s about freeing yourself from the idea that to succeed as an investor you need to be glued to BNN. “Before, I would say I didn’t care about the movement of the markets, but my behaviour proved that was a lie. Now I know I really don’t care. I’ve gained a lot over the past few years: peace of mind, extra time to spend on more productive pursuits, and importantly, an investing plan I believe in and can stick to.”


  1. david toyne May 28, 2014 at 9:49 pm

    Hi Dan, why did Steve choose different strategies for his wife and his accounts? I think it would be helpful to understand what motivated this decision and some transparency into the differences between the portfolios. No need to name fund or ETF company names, but why the differences would be helpful. Thanks.

  2. Canadian Couch Potato May 28, 2014 at 10:55 pm

    @david: I’m not sure why Steve chose slightly different strategies. I believe he is monitoring these comments, so I’ll invite him to chime in and share.

  3. Noel May 28, 2014 at 11:19 pm

    Maybe then Steve can chime in about what balanced fund he invested in since you won’t tell us. ;)

  4. Jas May 29, 2014 at 7:40 am


    I hope your blog will still be active when the next bear market happens…
    It is very reassuring to follow your blog when you choose to follow the DIY index investing route :) Thank. you for your hard work!

    I find that DIY index investing isn’t talk about enough in tradditional medias, as it should considering the increasing number of people without defined benefit pension plans in Canada who would benefit from learning about low cost passive investing strategies..

  5. Canadian Couch Potato May 29, 2014 at 9:14 am

    @Jas: Let’s not forget we did have a bear market in 2011, with a significant crisis in Europe and a downgrading of the US credit rating. A lot of people questioned the strategy at that time. And I am still getting almost daily emails about how only fools invest in bond index funds.

    I always find it interesting that people lose faith in indexing during a downturn. The assumption is that active strategies are somehow more likely to succeed during difficult markets, but I think it’s more common to see how badly they fail. How many people predicted how Europe and the US would emerge from 2011? How many people have made the right call on interest rates? It’s the difficult times that truly reveal how terrible people are at predicting where markets are headed.

  6. Noel May 29, 2014 at 11:13 am

    @CCP: Interesting yes. Surprising no.

    You are an index investor and you invest dutifully every month and you are doing very well. With a few small hiccups the market keeps going up on a gradual incline. Your switch from active management appears to be working out and has so for many months or a few years. You feel good. Then the market goes the other way and starts to for a while. You have never experienced it since you’ve been an index investor. Every month you contribute and every month you see the money you just invested evaporate just a bit, along with the value of your portfolio. You keep investing regularly but the same thing happens. You start to question your strategy more and more. You are bombarded by the marketing of active management which indexing cannot compete with, newspaper articles on how to prepare your portfolio for a downturn through active management, anecdotal ‘evidence’ from friends who are not indexing but doing well with stock picking on their own or active management (whether or not that is true is besides the point) and your resolve slowly gets whittled away. Nothing is feeding the intense need we as human beings have for validation in the short-term. Few of us want long term gain if that will require us to suffer short-term pain. Eventually we can’t bear watching our portfolio decline and the money we keep investing dwindle shortly after we invested it. So, we decide then to hold off investing, because why do so if the market is declining? Friends start to do the same (more social proof). We think we’re just going to buy it later at an even lower price and avoid the pain of the monetary loss. We stop reading CCP. And then eventually we decide to dump our indexing strategy because ‘it’s just not working’. Friends are doing the same (more social proof). And,that’s precisely when it’s the wrong time.

  7. Sixtyplus May 29, 2014 at 11:59 am

    The other point to bear in mind is that when the market goes down, which of course it will, we will not be paying 1.5 – 3% to someone else as it goes down!

  8. Noel May 29, 2014 at 12:07 pm

    @Sixtyplus – But small solace when you see your portfolio going down multiples of that and your friends ‘appear’ to be doing better with active managers.

  9. BruceMcK May 29, 2014 at 12:56 pm

    I started a Couch Potato portfolio in 2011 with 4 ETFs. largely based on this blog and a few other resources. For a long time I had felt that my actively managed investments with a bank brokerage were not doing as well as they should and the adviser was not adding much value. I looked at low cost mutual fund families, but they have high minimum investments, and previous mutual fund purchases tended get hit with reversion to the mean, buying high performing funds and watching them become mediocre or worse. 2011 was not a great time to invest, but I understand bear markets and stuck with it.

    Then I started reading books like The Four Pillars of Investing and Winning the Loser’s Game, which validated my decision to choose index investments. In 2013 I moved my TFSA and other non-registered investments to ETFs as well, but still only have 4 ETFs. Later this year I will move my RRSP and LIRA to a CP portfolio in my discount broker too.

    I wish our government would just let us save as much as we want in a tax free account, but alas, I am stuck with trying to decide how to set-up a complete couch potato portfolio of 6 asset classes across 4 accounts (non-registered, TFSA, LIRA and RRSP). So I have replaced obsessing over mutual fund performance with obsessing over tax efficient investing, asset location, minimizing foreign withholding taxes, while still having a portfolio that is flexible enough to allow me to re-balance in the event of a market crash without selling non-registered investments so as to avoid incurring capital gains.

    But that is a one time exercise and by the end of this year I will be totally converted to index investing, and be a happy relaxed spud. Thanks Dan and all the other CCP contributors!

  10. will May 29, 2014 at 1:23 pm

    I think the biggest challenge right now for indexing is the various fears that it won’t work the way its supposed to going forward. The bond situation is a big part of that, justified or not.

    It’s not so much that bonds are going to crash and lose a bunch of money… the bigger issue is that bonds are already high and provide low yields. If we see another stock crash the safety net of bonds is a lot weaker than it usually is. Their ability to rise and offset stock losses is muted compared to 5 years ago.

    Add to this the perception that the various stock markets (can, US, global) are becoming more and more correlated, its easy to see why so many are afraid that a drop in stock markets combined with rising rates will hurt all parts of the indexing portfolio, negating the softening aspect of diversification.

    Of course the counter to this is, where and how else are you going to invest? Sticking it in the mattress or buying shiny coins isn’t exactly a reasonable alternative.

  11. Paul G May 29, 2014 at 2:41 pm

    Well, my story on this would be a tad different.

    I started investing with a bit of a dividend tilt, though aware of indexing. After a short while I found myself going all-in for indexing for all new money, but I’ve held on to my dividend stocks. (and managed to avoid to most frequent pitfall: sell winners and keep losers)

    Those individual stocks are a great reminder of how clueless the individual is in all of this: one has done incredibly well, another pretty well, and two others are below average. Overall, it thankfully works out to (roughly) the same as indexing, but a lot more bumps and worries. While I’m tempted to sell them, they’re terrific reminders that I shouldn’t let myself get tempted by all the noise about specific investments I should be going for.

    So that handful of specific stocks are a great reminder of my own ignorance – and since I actually own them, it’s hard to lie to myself and think “yeah, I knew that one was going to go through a rough patch” – since if I’d really thought that I would’ve acted.

  12. Andrew May 29, 2014 at 2:57 pm

    This article reminds me of the factors where I have some control (without kidding myself): cash flow, savings rate, time in the market, asset allocation, fees to some extent, asset location across accounts (esp. taxes) and rebalancing procedure.

    Noels note at 11:13 reminds me of my bottom line with respect to risk which is scenario based and expressed as absolutes in dollars rather than percentages.

  13. Canadian Couch Potato May 29, 2014 at 3:24 pm

    Lots of great comments here!

    For the record, I started indexing in the summer of 2008, which might have been the worst timing in all of history (except maybe mid-October 1929). I remember looking at my ETF holdings and seeing a big red “-42.6%” beside them. :)

    I think there’s a danger here of losing some of the subtly of the original argument. Many of the concerns people have about not being able to stick with their strategy are in no way specific to indexing. It’s absolutely true that indexing is very difficult during a bear market, but that’s true of any equity strategy. (It wasn’t hard to be a bond indexer in 2008.) Every investor gets jittery during these times: I don’t think being a dividend investor, or a tactical asset allocator or a value investor is any easier. And if you’re the type to listen to people boast about their brilliant investing moves, then that will lead you into temptation no matter what strategy you happen to use yourself. I don’t think indexers are more vulnerable to this kind of bad behaviour.

    That’s part why I was at such pains to avoid getting into Steve’s portfolio details. Even if an investor uses a low-cost, broadly diversified, disciplined active strategy (perhaps with a balanced fund or a low-turnover dividend stock portfolio) they can arrive at the same “inner peace.” It’s really about letting go of the idea that you have to follow the markets every day to be a smart investor, when the evidence seems clearly the opposite is more likely to be true.

  14. Noel May 29, 2014 at 3:42 pm

    @CCP – You are right in that not being able to stick with a strategy is independent of what strategy you are following but that misses another subtly if I may.

    Most people who are indexing switched away from another strategy, that strategy most likely being some form active management (stock picking by themselves or by a financial advisor or through mutual funds). And, I would say in most cases this was the first switch they ever made and for many the first switch in which they DIY’d. I would say most people, especially the ones reading this blog, were with active management far longer than they have now been with index investing. So, it would be natural during a prolonged downtown when they see ‘losses’ mount month-by-month that they would get frustrated with this ‘new-fangled’ way of investing and want to go back to what they always knew, even if they know on some level that maybe it’s not the best for the long term. It becomes desperate times for them and in such times one does not always do what is logical but what is emotional.

  15. Arthur May 29, 2014 at 4:56 pm

    Thanks for your story Paul G. I am in a similar situation and I’ve found that you might be able to pick a few winners but you’ll inevitably end up picking up a similar number of losers along the way, if not more… and I was definitely lucky to match the index performance…

  16. Steve May 29, 2014 at 8:22 pm

    Ok, I guess it’s time for me to chime in and offer a couple of thoughts/answers. First of all, thanks for all the comments. I found it interesting that many others went through the same investing trials and tribulations that I did. In looking back, I would have been way way better off by just buying into passive investing right away and being done with it. But I couldn’t. Whether it was greed or lack of discipline or both, I was looking for ways to make money quickly without much regard for the risk I was taking. And all the research and reading and following the markets I did at the time fed into that behaviour.

    As to why my RRSP and my wife’s RRSP portfolio’s are differently structured, it’s probably more accident than anything. In the fall of 2011, I started the process of getting my wife’s RRSP moved to a self-directed plan. For the previous decade, her investments were managed by a financial planner who worked for one of the insurance companies, and she was in the standard high fee mutual funds. I had wanted to move her investments over for years, but we had a personal relationship with the person managing it and I avoided the conversation as long as I could. When my wife’s funds were finally moved over, I needed to decide what to do with them.

    This prompted me to really evaluate my own situation. As Dan mentioned in the blog, I started to get really busy with other things (better things – family and work) and I couldn’t devote the hours I had been previously. Plus, I wasn’t good at investing. You could say I sucked. My personality (part obsessive, part gambler, part impulsive) was not well suited to active investing and for some reason, I just realized I had to give it up. In my RRSP, I was in the midst of a core and explore type of set up and my core was Mawer Balanced. So, when I decided to get away from active investing completely, I just moved all proceeds to the fund I already had. Other than adding money, I haven’t touched it since.

    However, since my wife’s portfolio was starting from scratch, I went with a straight ETF portfolio using Vanguard Canada funds, which is probably what I would have put in mine too if I didn’t already have Mawer Balanced. So, that’s why I have the set up I have now.

    Hope that makes sense and answers some of your concerns.

    So, just a couple of other things. First, I completely understand that Mawer Balanced is not a passive, index product. For me though, it functions that way. Other than buying more, I have no decisions to make.

    Second, many have raised the point that it’s much easier to stick to a passive portfolio (or as Dan has pointed out, any type of portfolio) when the markets are positive and that’s no doubt true. I started my investing life in 1997, a couple of years before the tech crash, so I’ve certainly lived through ups and downs. But the reason why I’m sure I will not deviate when the next market downturn comes is because I ‘truly’ believe I cannot beat the market. I have no chance, and I’ve got ample personal evidence to support that view. And since that’s the case, I don’t have any choice but being satisfied with market returns. In other words, I have 100% confidence that I will get what the market gives me and that will be enough. It has to be enough. And I have 100% confidence that the next market downturn will end the way they all do, with a rebound at some point that I’ll miss if I tried to time it.

    Bottom line for me is this: I have inner investing peace because I have (finally) accepted my weaknesses as an investor.

  17. Weekend reading: inner peace, travel insurance, and more | AAFS Insurance May 29, 2014 at 11:08 pm

    […] Dan, the Canadian Couch Potato, describes how one reader found inner peace with his investments. […]

  18. Jake May 30, 2014 at 12:26 am

    I have found my inner peace with the TD E Series fund lineup. Sleep so well at night not worrying about someone making a wrong investment in a managed fund. it’s clear that the fund managers can’t beat the market, it shows when there are big corrections. why did the managed funds lose so much in 2008/2009 when your advisor could easily have taken equity our and put it in cash. no point in paying someone extra to do no better than a simple index fund.
    being successful in investing isn’t just when beating the market, it starts with saving, even a 100% GIC portfolio is successful investing, success is in the eye of each person which sets there success level, making 5% or 25% on an investment are both sucesses even if the market went up 30%.
    you don’t need to beat the market to be successful

  19. Brian S May 30, 2014 at 2:18 am

    I tell myself that I won’t lose my resolve in the next bear market, but since I haven’t been tested yet (barely had any investments in 2008, and didn’t pay attention to them anyway) I can’t be sure.

    An interesting parallel to me is living in Vancouver and being bearish on real estate for several years, being in a position to buy but watching the market stubbornly refuse to come back down. It’s not easy to be “wrong” for so long without capitulating, but I’ve made it this far. If I can hold my convictions for several years despite constant temptations to cave, surely I can weather the next stock market downturn. That’s the hope anyway.

  20. Darren May 30, 2014 at 7:27 am

    There have been a lot of comments about the challenges of being an index investor during market downturns. However, we shouldn’t completely discount the discipline required to maintain a target asset allocation throughout bull markets. It hasn’t been easy to continue selling equities and putting money into bonds the last few years. I could think of lots of rational reasons why my US equity allocation was too low last year.

  21. david toyne May 30, 2014 at 8:55 am

    @Darren – great comment. This might actually be the more challenging discipline.
    @Brian S – I live in Toronto and feel the same way. Especially tough when those around you (family and friends) don’t share your conviction!

  22. BruceMcK May 30, 2014 at 10:14 am

    Re: Jake’s comment: “you don’t need to beat the market to be successful” +1

    Saying you need to beat the market to be a successful investor is like saying you need to beat the traffic to get home in time for dinner. In investing, like driving, success depends on planing ahead, starting with enough time, and avoiding unnecessary risk.

  23. Oldie May 30, 2014 at 12:08 pm

    @Brian S: “being bearish on real estate for several years”
    From the context of you living in Vancouver, I take it you mean the opportunity to purchase property there, rather than the opportunity to purchase REIT ETFs at a price below your own evaluation estimate, which of course our mantra would remind us, would be a Couch Potato no-no.

    I wonder if a true Couch Potato would reason that, if we are unwise to think we can time the markets in stock and bond investments, should we not then be similarly skeptical of our ability to intelligently time the local real estate market, and thus stay away from tactical local real estate plays (apart from quasi-pragmatic decisions regarding needing a place to live, etc.)?

    Expanding the Couch Potato model of investing to include actual real estate, would it be rational to allocate a given percentage of one’s “portfolio” to actual real estate? The trouble would be that during the swings of local real estate value it would be difficult if not impossible to “re-balance” owing to the inability to sell off or buy fractional portions of our real estate holdings. For this reason, I suppose, the strict Couch Potato should not consider using actual real estate as one of the asset allocations in an investment portfolio. There are probably other good (i.e. in investment principles) reasons why not — and one that jumps to mind is that the local real estate market is such a small proportion of the national real estate market that the risks are inordinately high, even if you plan to “buy and hold”. Besides, by buying a property, this is the equivalent of buying an actual stock, rather than an Index ETF. Hmm, it seems that our Couch Potato education actually gives us the answer to many of our own questions, even if we have to think a little to answer them.

  24. Oldie May 30, 2014 at 1:31 pm

    @Noel: You have been banging away at all the emotional forces that will assail us during bad times and even good times to turn us away from our disciplined plodding approach. It is pretty scary to put ourselves in the place where you put us, Noel, because it’s true — those emotional forces can be overwhelming; but it’s good to anticipate these irrational thoughts and to practice thinking rationally while we still have our wits about us.

    So, what’s a Couch Potato to do? What does he have to remember in panic time that will help him weather the crisis and not do something stupid?

    Over the course of the past 2 years of intense intake of (initially counterintuitive) Couch Potato lore, it’s hard to distil out the essence of what actually is the Couch Potato Principle. But thinking back, I’m informed by the many times that Dan has subtly guided and in some cases gently chided some proposed investment proposal; in his answers, he has given specific reasons for his differences of opinion. It is this reasoning, usually based upon some fundamental CP principle, given on repeated occasions that has been so valuable. Of course, the many other knowledgable contributors to this blog have added their valuable insights, and the interplay between commentators has been very instructive, as has their sometimes unresolved differences of approach.

    So, faced with a catastrophic scenario, say a huge drop in the equity portion of my portfolio, and all the experts screaming to get out because there are surely further huge drops ahead, what should I, as a Couch Potato disciple, fixate on to firm my resolve as I sell my Bond portion and purchase more Equities to bring my portfolio back to the predetermined balance?

    1) What do I know ?: Over the past 100 or so years of stock markets in Canada, USA and the rest of the world, each individual market has fluctuated markedly and unpredictably, but whose return has always reverted to a pattern that over the course of analysis has measured a healthy gain (say 9% with inflation, compounded annually, but the actual value is not important); the catch is that this gain is only consistently seen over the long term, say over a 20-year span. Bond index returns can be similarly evaluated to be consistent over the long term (when inflation is factored out) but with a lower annually compounding number. I’m in this for the long term (but will reserve the right to amend my approach as my investment horizon gradually shortens, which it will).

    2) What do I NOT know?: I don’t know what’s going to happen in the next 10-15 years. I don’t know which market sector is overpriced or underpriced, or more importantly, poised for a down turn or upturn. I don’t know which world region has reached it’s peak or nadir in its current economic cycle. I don’t know where interest rates are headed or where they will end up. I don’t know when the next Bull or Bear market will start, or more exactly, I don’t know with any useful precision when is the right time to sell most of my equities and to buy more bonds or to revert to cash (or vice versa); moreover, I have no good data to tell me to what proportion I should deviate from my previously decided acceptable asset allocation quotas. It is this professed agnosticism, this peaceful acceptance that I DON’T KNOW ANYTHING, that is the source of the peace in my soul that this post is all about.

    So when the latest Guru tells me what he knows that I don’t know, particularly when this “insight” morphs into “foresight” and prescribes deviating from my predetermined strategy…

    3) I DON’T BELIEVE HIM: because he has not presented any rational, time-tested evidence that contradicts my 2 years of hard (intellectual and emotional) work.

    End of story.

  25. Oldie May 30, 2014 at 1:45 pm

    @Noel: I didn’t address “Nothing is feeding the intense need we as human beings have for validation in the short-term” which is a very valid point…

    Hopefully the Canadian Couch Potato blog will still be here during the bad times for Dan and all the other battle scarred veterans to hold our hands, and for us novices to off-load our fears. I’m being jocular here, but I really think our little community would derive emotional sustenance from a familiar and consistent source of reassurance. It’s amazing, now that I’m visualising this sure-to-come future, how the metaphor of soldiers during a war becomes apt.

  26. Brian S May 30, 2014 at 2:12 pm

    @Oldie: This isn’t a real estate blog, so I’ll try to keep it brief.

    Yes of course I meant bearish in the sense that it’s overvalued and therefore a bad time to buy. My only exposure to residential real estate is through VCN which has trivial holdings of apartment REITs. We’re talking fractions of one percent of my portfolio, so it’s pretty inconsequential. Not to mention that apartment REITs don’t face the incredible headwinds that individual property buyers do.

    It’s absolutely possible and wise to time the local real estate market in broad terms. Real estate markets are trivial to value compared to the stock market, and right now real estate (where I live) is dramatically overvalued. I’m not even looking for the absolute bottom, just an entry point where ownership costs are similar to renting (as opposed to 50% to 150% more, as they are now). Overpaying (over-borrowing) to such an extent for such a big purchase is like an anchor on your overall finances, and I’m taking no part in that.

    You’re right that owning physical real estate is incompatible with passive investing. It’s illiquid and has very expensive transaction costs, not to mention requires time and money to maintain. Actually, even at normal valuations I think residential real estate is a poor investment in general, compared to equities. Not enough return for the time, money and risk involved.

    The worst mistake most people make today is thinking their principal residence is an investment. It’s an expense! The whole point of buying a principal residence is to reduce expenses, not to get rich (in the long run, the real return of real estate is close to zero).

  27. john d May 30, 2014 at 8:36 pm

    I have been indexing for about several years now, after finally firing my so-called “financial advisor”. She was a very nice older lady, very convincing and reassuring, but really a wolf in sheep’s clothing. She sold me every bullshit DSC and LSIF mutual fund in the book….of course all to her benefit, not mine! I still regret my naivety and stupidity! Since switching to an ETF indexing strategy I have never looked back!

  28. Steve (not that one) May 30, 2014 at 11:30 pm


    “Over the past 100 or so years of stock markets in Canada, USA and the rest of the world, each individual market has fluctuated markedly and unpredictably, but whose return has always reverted to a pattern that over the course of analysis has measured a healthy gain … over a 20-year span.

    What do I NOT know?”

    Actually, unpredictable and marked market fluctuations are the least of it – you do not know for certain that markets you have invested in will even continue to exist over your investing life, never mind having absolutely no assurance whatsoever that their returns will “always [revert] to … a healthy gain … over a 20-year span”.

    Think I’m exaggerating?

    Russia had one of the hottest stock markets in Europe prior to WW I – as a thought experiment, discuss the return earned by holders of Russian equity in the 75 years from 1917 – 1992? (hint: there was no stock market during that period) …

    What about German equities in the period 1920-1945? (hint: in real terms over 25 years, the return was rather negative) …

    Any guesses on how the Japanese stock market did in the 1940s? (hint: over 90% loss in real terms, only recovering its 1940 value in real terms over 30 years later in the 1970s) …

    And Chinese equity after the Communist victory in 1949? (hint: See Russia above) …

    And one needn’t refer to war or revolution – as an exercise, calculate the annualized return of the Nikkei Index in the 25 years from its peak in 1989 to present (and this in a modern, politically stable, highly advanced country that suffered nothing more during that period than the range of natural disasters that it has always been exposed to) – then ponder the fate of Japanese investors counting on their equity holdings to fund their retirement …

    How much are you prepared to bet that something similar could never happen here?

    The point is: there are NO guarantees of the sort you asserted. NONE. Not that equity market real returns will always and inevitably revert to a long term positive mean in your lifetime, nor that you will not lose 100% due to market disappearance. There is a great deal more (unrecognized) risk out there than us extraordinarily lucky (so far at least) North Americans usually realize.

    See for example: “Triumph of the Optimists: 101 Years of Global Investment Returns” (Dimson, Marsh and Staunton (2002))

    Also: “Global Investing: The Professional’s Guide to the World Capital Markets” (Ibbotson and Brinson (1992))

    And William Bernstein’s humorous take on this problem:

  29. Ross May 31, 2014 at 12:58 am

    @Brian S, interesting.

    I recently read the book Boomerang by Michael Lewis … great book (Flash Boys is a super read too). In any case, Boomerang includes an interesting case study of Ireland’s economic challenges caused largely by inflated real estate valuations … people selling property to each other, round and round, at ever higher prices. Kind of like a game of musical chairs, until the music ran out … and the bailiffs arrived to repossess the chairs. When markets lose touch from underlying common sense (such as rental yields or income multiples in this case) or require atypical financial products (40-year mortgage anyone?) then it may be noteworthy. Rental yields in Ireland seemingly fell to approx. 1.5%. Vancouver is a curious property market, to put it politely. We all make choices. I relish simplicity, diversification and frankly low-time/stress (like topic of above article) – thanks CPP, keep up the fabulous work. Brian, if you know of a way to short Vancouver real estate then let me know :). Kidding.

    For any folks generically interested in buy-vs-rent economics then the New York Times recently published an intuitive web-based calculator tool with slider-based variables …

  30. Oldie May 31, 2014 at 2:05 pm

    @Steve (not that one): While you’re correct that we have no certainty that the aggregate of national and world markets will in the long term continue to revert to a similar geometric mean as before, it would take a calamitous disruption in the world of commerce, banking and communication to fundamentally change our human propensity to trade perceived value with currency. If all markets cease to exist, I doubt that any other current long term active strategy would fare any better. The past scenarios you describe were certainly catastrophic for those individual nations involved, but for those who were still able to invest globally in a prudent and diversified manner (war and revolution would certainly be a huge impediment to this) they would have come out ok, or at least way better than if they had invested solely in their own economies.

    The topic is about peace of mind and finding an acceptable long term investment plan that achieves this serenity. I’ve thought long and hard about this on my way to arriving at this point. I’m not issuing guarantees by any means; but for me, the Couch Potato Principle is the most rational long term blueprint to manage my financial future, and that’s where and how I will direct my efforts and funds. I suppose, if it really came down to it, regarding human capital, I know how to deliver babies, and if I really had to, I could do appendectomies with a penknife in my bunker, but at this point I’m not stocking up on gold bars, guns and water. If you try to plan for every conceivable event, you’re not going to have a life.

    However, I will continue to listen to divergent opinions and strategies and evaluate them on the basis of probability and practicality. In the face of all your fears, I take it that the Couch Potato strategy is not for you. What’s your plan?

  31. Steve (not that one) May 31, 2014 at 5:03 pm

    @ Oldie:

    “In the face of all your fears, I take it that the Couch Potato strategy is not for you. What’s your plan?”

    I’m exclusively a low-cost, non-trading DIY indexer, and have been for 14 years (started in 2000) – in effect I’ve been a Couch Potato, with a portfolio quite similar to the model “Complete Couch Potato” on this site, since long before I ever heard the term “Couch Potato” …

    But I’m curious: what assumptions do you make about investing that you would see my post as a list of fears, and take from it that I must necessarily not be a DIY indexer?

    My comment was precisely about “peace of mind and finding an acceptable long term investment plan that achieves this serenity”! As knowledgeable and experienced indexing advocates have noted many, many times, finding investing zen – the mental “game” as it’s sometimes called – is absolutely crucial to staying the course long term. The first order obstacles to that zen are well reviewed here.

    What I find very interesting in many of the comments above (and in many other defences of indexing elsewhere) – and which was most explicitly stated in your comment, thus my reply – is the way faith in the long-term orderliness and stability of markets returns appears to be used as a self-comforting mechanism, a way to reassure oneself that indexing is a good choice because after all, in the end it will come closest to capturing the full long-term (implicitly assumed) mean-reverting market return.

    It is absolutely true that the “Arithmetic of Active Management”, to use Sharpe’s term, is inexorable – but it’s probably not a great deal of comfort to a Japanese index investor, facing 25 years of negative real returns on their domestic equity holdings, that they outperformed most active managers! And if one wishes to plead the value of diversification: what percentage of your portfolio is in CAD equity? How long could you continue to lose capital rebalancing into a long term (!) losing position in CAD equity before you are insolvent, or just give up on diversified indexing? 25 years?

    (On the other hand, any Japanese investor holding long term government bonds in 1989 did very, very well, as interest rates collapsed and deflation set in – but again, how long could one last burning capital by rebalancing away from bonds into equity before giving up?)

    I’m not picking on you, most North American index investors probably have the same faith that long-term market returns are more or less mean-reverting to some baseline, you just stated that faith more explicitly and articulately than usual! The point, though, is that as important as first order zen is – realizing that predicting or timing the market consistently is impossible, and so on – true index investing zen is only possible by fully accepting that there are no guarantees at all. Low cost indexing only increases the probability of investing success, it doesn’t guarantee it.

    To put the point another way: if the 2008 crash had persisted longer (like after 1929 for example) … how popular would this blog and others like it be (if they even existed)?

  32. Oldie May 31, 2014 at 6:05 pm

    @Steve (not that one): My apologies — I jumped the gun, reading into your objections to my supposed optimism the notion that you espoused a different, superior strategy that would bypass the pain of such catastrophic conditions.

    For the record, now that I know you and I share essentially the same long term strategy, my (admittedly not-too-well-thought-out) opinion is that most likely “most” world markets will continue to fluctuate unpredictably more or less as they did in the past. However, I acknowledge that one very reasonable possibility is that some, or even all of them may suffer significant losses in long term geometric mean annual return. If this change is restricted to one or two of my Equity portions (Canadian, US, Rest of World-Developed, Emerging Markets), then, hopefully, some of the losses will balance out. If all markets slump permanently over the next 30 years, really, everyone else will be in the same boat, and there is still no better strategy to choose, from where we’re standing here and now. The point is, I am confident enough in my belief in having arrived at the best (using the best information available) reasonably manageable strategy possible that I can accept whatever unknowns lie ahead.

    I don’t feel at all picked upon. I appreciate your feedback, and I am encouraged by the fact that you, despite pointing out that I may be displaying unreasonable optimism about future returns or even about future market existence, have made your peace using essentially the same (Couch Potato-like) long-term strategy for the past fourteen years, and have stuck to it. We can all benefit from mentors like you.

  33. Dave Evans October 15, 2014 at 11:32 am

    I have been meaning to comment on this article for months now but now is a great time to post. I was a mutual funds industry executive throughout the glory years of the 1990’s and early 2000’s – please don’t throw anything at me. I converted my portfolio into the Fama French ETF approach after the crash to simply my life. I am thrilled to see fellow readers that have found peace. I used to wake up at 3 am to see what was going on in Asia, check the futures before market and was stressed about my portfolio when I woke up on morning and said enough is enough. I went back to the basics of pension fund management, came up with an asset mix that I can live with, DRIP the coupons and account is on auto pilot. I even went so far as to disconnect my brokerage account from my bank account and suspended paper statements so I never look at the value as I don’t need to draw the $$ for another 15- 20 years which will be higher than here. Friends of mine ask me when the next crash will be and I tell them I have no idea but OTPP invests for teachers not even born yet so safe to say markets will be higher when we need income in our even more silver years. Now that I look at the account every December to re balance, invest residual coupon and make sure those sneaky bankers haven’t charged me for any petty fees, I sleep better, lost 20 lbs and am an avid cyclist. Congratulations to all that have found true investing freedom and therefore mental health.

  34. Canadian Couch Potato October 15, 2014 at 11:37 am

    @Dave: This as great story: thanks for sharing! There is still a tendency among some investors to think that this kind of approach is naive, and that index investors are like ostriches who hide their heads in the sand. It’s nonsense, but it takes time to come around to seeing things they way you do. Best wishes.

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