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.”
I can totally relate to this. I’ve been there with the books, technical analysis, and dabbled with trading stocks. Dan, I’ve been reading your blog for about a year and implemented the Couch Potato strategy after reading your Guide to the Perfect Portfolio cover-to-cover last summer.
Now that I have my allocation sorted out, the only “rule” I really need to follow is to rebalance when money goes in. There are no decisions to be made and I’m not worried about what’s happening with the markets. If there’s a market crash it even creates opportunity to be excited about. :)
Keep up the great work!
@Tim: Thanks for sharing. I enjoy hearing from people who have left behind strategies like technical analysis, which are an enormous waste of an investor’s time and energy.
My experience was similar. One thing I’ll add is that during my years of second guessing my mutual funds and scratching my head over their poor performance, I found it hard to motivate myself to increase my contributions. With the clarity of the CCP approach, I don’t have that problem anymore.
The benefits of being free to get on with your life and not obsess about one’s investment choices is a huge, understated benefit of indexing. Doubly so given its strong empirical underpinning. Not is one more likely to accomplish one’s investment goals and avoid many of the common behavioural pitfalls, but doing so with much less time wasted on the process. To me that’s a huge win.
I transitioned into indexing a few years ago, and I haven’t looked back. I do occasionally read about what’s going on in the market, particularly in the domain in which I work, but it ends up being more to keep up with what’s going on in the industry. I very much value having that noise out of my life along with a solid, long-term investment methodology.
What the single balanced fund Steve use?
@ Tim: One of the nice things is that you can also rebalance on the way out! I did a little TFSA->RRSP->tax refund->TFSA thing earlier this year, and it worked beautifully on all sides. Although I rarely need to, I find I’m much less anxious about taking money out of an account since I don’t have to worry about the state of the market at the time.
To provide a counter point, the peace of mind experienced between 2010 to 2014 can also be attributed to the secular bull market.
The real test on whether there is peace of mind is when market crashes 25%.
” The best part is I spend maybe an hour or two a month reading the odd article or blog”
..but the blogs are so addictive.
@Francis: I think you missed the whole point. It doesn’t matter which specific funds Steve is using. Realizing that was one of Steve’s most important insights.
@Slacker: That’s a fair point. Certainly it has been easy to be an index investor over the last few years. However, 2011 provided a test for people who were squeamish about Europe, and bonds have been testing the resolve of passive investors for several years now, so we haven’t been without challenges. But you’re right that the true test will come during the next bear market!
I find it challenging to convince people of the futility of watching markets closely. Maybe your story here will help. I now spend more time tinkering with spreadsheets to automate all my decisions than I spend watching markets. The cell I like to look at is the one that estimates what percentage of my current spending could be covered by my savings for the rest of my life.
This is my experience exactly. I am in my mid-40s and have run the gamut.
1. Mid-1990s – worked with an advisor who put me in a lot of mediocre, high fee funds. Didn’t make money.
2. Early-2000s – tried individual stock picking using Cdn Shareowner Software. Couldn’t keep my rosy projections/emotions in check. Didn’t make money, but at least I was doing it on my own.
3. Mid-2000s – using MoneySense All-Star recommendations, built a portfolio of lower cost mutual funds (1.72% according to Morningstar), some of which did okay, others did not (and some of which became higher-cost funds when acquired by other firms). I would say I market-performed, which is probably not too bad compared to other fund owners.
4. 2010s – Clouds part, sun shines down, discover ETFs and research fundamentals on portfolio construction, spent 2 years debating/second-guessing/overthinking product choices (e.g. Fundamental ETFs) and ultimately built a simple Global Couch Potato portfolio. Now making money.
I have also experienced the same peace of mind epiphany. I still keep wanting to overthink/tinker, but keep coming back to the same solution as being best for my needs. I have finally found investors contentment. No more concerns about hot funds/styles/sectors – just annual rebalancing as planned.
I used to say how investing with a couch potato ETF portfolio was the optimal way, but never had the discipline to select an appropriate allocation for my portfolio and follow through.
My portfolio consisted of over 10 ETFs, with way too much exposure to emerging markets and REITS, not enough fixed income. No real strategy.
I spent lots of time comparing ETFs, doing spreadsheet, thinking about bonds interest rates and their impact, etc… analysis paralysis.
I’ll no longer advise my friends and family to follow a strategy I could not follow myself.
Now I sold everything and bought a single low-cost balanced fund (Mawer), and I feel relieved.
This was probably one of the best posts you’ve ever written Dan. Many may not think so but it is because it drives home the point that if you don’t execute the strategy you will not gain the benefits of it.
As for your comment to @Francis, I think you were too quick to jump on him. I didn’t miss the point at all, having done index investing for quite some time, and I doubt very much that Francis did. I too realize that the point was Steve’s realization and not which fund he was using. But I was also curious, as an aside, in which balanced fund Steve is using. Do you know?
I’ve successfully advised 3 different friends now on moving from active management to a passive indexed portfolio. Another friend hasn’t been able to even pull out the statements of his active manager to show me, so I gave up on him 5 years ago after asking him multiple times for the information. 2 of the 3 friends spend about 2 hours a year on their portfolio. The 3rd pays an inordinate amount of attention to his portfolio, reading blog articles and books, changing allocations adding funds, adding value ’tilts’ etc. and sometimes not taking my advice. He has kept investing regularly (easy to do in a rising market) but now is second-guessing whether an investment should be made in equity because the markets might be over-valued. I totally disagree with that kind of approach and second-guessing as it puts ones mind into a space that suggests not investing regularly and trying to predict the market is a better approach. Doing that results in winning some, losing some and breaking even in the end. The first two friends will likely get similar returns to the 3rd with a far simpler portfolio and much less effort. As far as the 3rd being interesting in the markets and reading for intellectual exercise and stimulation I have no quarrel with that, as long as it does not affect his investment strategy.
One of the friends is in Australia. He actually spends absolutely no time on his portfolio as he uses Vanguard Australia’s Vanguard® LifeStrategy® Balanced Fund which is a fund of funds made up of individual Vanguard funds – 50% fixed/50% equity (there are similar Vanguard Australia funds with other mix ratios). The MER is a mere 34 basis points. I look at his portfolio once a year just to see he is investing regularly. Even better are Vanguard US’s Target Retirement Funds (also known as their LifeCycle Funds) where the fixed/equity mix is adjusted as you age in 5-year steps according to the typical rule of age in fixed, 100-age in equity. The MER’s on these is even lower at 18 basis points.
I wonder when Vanguard Canada will introduce these types of fund vehicles. Vanguard has actually been in operation in Australia longer than in Canada so maybe that’s why they have them there before us. With funds like these you don’t even have to do as much thinking or work as with a 4 or 5 fund passive index portfolio and the fees are still insanely low. The most important aspect of them is that it makes passive index investing as simple as possible and results in one paying little or no attention to the portfolio but realizing things are being taken are of. Why you don’t even have to write a cheque with a monthly pre-authorized deduction from your bank account!
Reading comments above is like walking down memory lane, I too spent too much time in high fee mutual funds which greatly benefited my advisor but not me. Stressing about how I would be able to retire with the meagre returns I was getting after a decade of saving. Decided to become a DIY investor, read everything I could and took the plunge. 18 months later, I am very happy with my decision and I am slowly weaning off checking my portfolio daily. Still, thinking about adding this or that but not as frequently.
This seems easy, too easy given the work that is involved in analysing, selecting and monitoring individual stocks and keeping on top of the “wisdom” of all the business media. But I can enjoy the summer now and sleep a lot easier, and I’m on track to financial freedom in 7 years :)
I have to admit I was thinking the other day if I really needed to follow this blog anymore. I have not managed to break that addiction yet… it’s too difficult with the pearls of wisdom which come up on a regular basis. My thanks to Dan and the regular contributors who bring up great issues and considerations.
It sounds nice in theory, but for it to be truly stress-free, we need something completely automatic (and not as expensive as the ING/Tangerine index funds). It’s really nice to say that I’m going to set up the Global Couch Potato portfolio … but then I get bogged down with trying to find a broker, and I realize that I would have to go to all sorts of trouble just to set up and manage the thing. I’d really love to be able to just select that portfolio and have $1000 come out of my savings account every month, ignoring the balance for years to come; but that’s just not possible right now (at least, not with ETFs and at a reasonable price). The Vanguard LifeStrategy funds mentioned by Noel sound like precisely what we need in Canada.
I agree with Noel that Francis was curious about which balanced fund Steve chose to invest in not that he missed the point. I would like to know as well. I currently have a Complete Couch Potato portfolio in my RRSP but am wondering how to start to withdraw funds for retirement. It seems to me that withdrawing from a balanced fund would be so much easier and considerably less costly. Please correct me if my thinking is wrong – currently I don’t need to use my RRSP money but would still like to start to move some of it out into either an unregistered account or a TFSA account to lower the RRSP balance and avoid OAS clawback in the future. If the RRSP was invested in a balanced fund I should be able to move some of it ‘in kind’ to whichever account I specify and cash out some of it to pay the taxes. I am thinking that that would save me the fees of selling units of my ETFs in my RRSP and repurchasing them in the accounts outside my RRSP. John Smith mentioned that he uses a single low-cost balanced fund (Mawer) – is that the one Steve used as well. Can you tell us which balanced fund you would recommend?
@Francis, Noel and Darby: I’m honestly not trying to be difficult, but I do want push back a little and ask how anything would be different whether Steve used one of the Tangerine funds, the TD Balanced Index Fund, the DFA Global Balanced Fund, the Mawer Balanced Fund or something similar. I just feel like I shared a story about how an out-of-shape guy worked his way up to being a marathon runner and the first question we have for him is, “What kind of shoes did he wear?”
Darby, your questions are all about financial planning and don’t really have anything to do with investment products. You can “de-register” almost any security, i.e. move it in kind from an RRSP to a non-registered account and pay the associated taxes. Making early withdrawals from an RRSP is an important decision, but the details about products and trading commissions aren’t likely to be a significant factor.
Nothing would be different. I think you are placing undue emphasis on the question rather than just answering if you know.
We do all get the point of your post! We do!
Great article! I started DIY investing about six months ago when I started to realize just how much those 2.5% mutual fund fees were costing me. The Couch Potato strategy was the first strategy I learned about so I started with a pretty simple balanced portfolio of ETFs.
Then I got curious, started researching stocks like crazy and made a whole bunch of trades. My balance got all out of whack. I made some money here, lost some there. But what I learned was that if I were to keep that up I would have to spend a ton of time researching stocks, waking up in the morning to check them first thing and hoping for good luck.
In these short few months I’ve realized that a simple Couch Potato strategy is the best way for me to go forward. In a way I’m glad I poked around a bit with stocks just to see for myself how much work and stress goes along with that.
This blog is a great place to come back to to regain sanity after listening to all the noise about the markets and what’s going to take off next, etc. Keep it coming Dan!
Agree with the article. The only problem is rebalancing when markets fall dramatically like back in 1987, 2003, & 2009. I sat out the rally after ’87 and learned my lesson. Having 1/2 of one’s money in something safe like short term bonds certainly helps too.
I still like to tinker but my tinkering is less dangerous now, like diversifying into short term corporate bonds, or moving funds around between registered and non-registered accounts for tax efficiency, holding bank preferred shares in non-registered accounts to boost after tax returns.
I haven’t looked at my portfolio since… ever. Mother takes care of that and I’ve got plenty of time for other stuff, like making fun of people trying to beat the market. It’s like watching people try to outsmart a computer. That only worked on Star Trek… the original series. Which, while representative of my own version of a utopian society in many ways, was clearly a fantasy world.
Plus now I have lots of time to tend to my ocelot.
“Inner Peace”: the term captures nicely the true value of what the CCP philosophy of investing can give you. Thank you. (In contrast, yesterday’s Globe had about 10 articles each promoting a different stock, sector, strategy, approach, etc. Made me think of Martin Luther King Jr.: “Free at last, free at last, thank God Almighty, free at last!”)
Definitely a different topic than what you usually cover Dan, but I 100% agree with you that the importance peace of mind and time freed up to live life cannot be understated. I was in the same boat as most of the above commenters (analysis paralysis, overtinkering with funds) and had dabbled in stockpicking too.
During these times, I found that I was not confident that I was making the right moves. Stock X dropped 5%, what should my stoploss be? How do I calculate that, how do I factor in Y news, etc. Too much noise, too much time consuming doubt.
Since starting the couch potato strategy I’ve not only found direction with my portfolio as a whole (rather than as a series of disjointed investments) but also that confidence and resolve that was lacking before. Now the only discipline I must follow is regular re-investing of cash and rebalancing to target once yearly. The emotional decisions are gone and it’s just crunching numbers now, which brings about a huge sense of relief for me.
Dan, you’ve done and continue to do some remarkable work for Canadian investors. I can’t thank you enough for your contributions!
@KISS: OMG your post made me howl out laughing! So true.
@FrankW39: Many thanks for the kind words. Much appreciated!
@Sterling Archer: Perhaps you should just get Woodhouse to check your portfolio for you. :)
I wasn’t in too deep in Mutual Funds when I moved to ETFs and a Couch Potato strategy. My “advisor” had 7 young kids yet still drove a nice car, so I figured something was up and started looking into it… the rest is history.
One thing I’ll add is I like to read blogs and other articles to remind myself of the benefits of this strategy, but I also read other blogs on other strategies as I find it helps strengthen my resolve. For me, this works well for a couple reasons: for one, when I see the amount of research these guys put in to come up with a single stock pick, I realize that I won’t want or have time to do that; secondly, I see first hand that they’re not doing any better than I am, and in some cases, I’m sure they’re doing worse, so why bother? I’m hopeful this helps me stick to it when the markets tank, which as a long-term investor, is something I’m eagerly looking forward to.
I think Dan (or maybe Canadian Capitalist) indicated that many indexers still used 5% of their portfolio to scratch the stock picking itch. It’s funny, I have no itch. I have no ego. You will never find me bragging about the stock that I picked that took off.
I am at peace with the fact that I know nothing about the markets. I will never have privledged information. Any article, Crammer insider strategy or Globe tip as already been acted upon, priced accordingly, and is largely irrelevent by the time it would ever come to my or any other individual investor’s attention.
It is freeing knowing you have a simple plan that you can follow forever (rebalancing to a bit more fixed income as you age) and market timing, prices, economic predictions, the colour of Warren Buffet’s tie is data that you can ignore.
Thank you for sharing Dan. The piece of mind is definitely overlooked – all that time, stress, “analysis”, emotions, and luck involved with active management! I am still learning the hard way…
*peace of mind.
The stock picking / sector picking itch is hard to resist … I’m attempting to wean myself off with sector-specific ETFs… still so far from inner peace!
Woodhouse? Are you serious? He’s like 115 years old and insists on holding the percentage of fixed income as his age. So what did Mr. Genius do? He borrowed to invest to get a 115% allocation.
Plus, he like can’t even poach an egg.
Great story Dan, even though you know I like mixing my ETFs with a healthy dose of CDN and US dividend paying stocks. :)
Your point regardless of the strategy you pick should be taken to heart by more investors: “It’s about freeing yourself from the idea that to succeed as an investor you need to be glued to BNN.”
I’ve heard you say this before as well and it rings true, the best investment plan is one that allows you to consistently save money for your financial future and stick to.
Keep the testimonials coming.
I count myself as among the reformed, or at least “semi-reformed”. I still watch the markets almost daily – not a day goes by that I usually haven’t looked at the prices of a few indices, read a few bits of financial news. I still check my spreadsheets all the time, read sites like this and a few others weekly, etc. The difference between then and now, is that now I don’t ACT on any of the daily stuff I read. I hold only 6 index ETF and I transact once/year (sometimes twice if I have new money). In fact, almost the opposite, a lot of the time I’ll read some prognostication from “famous” analyst claiming the market is going this way or that, and just sort of shake my head and walk away. Not sure why I’m still addicted to reading it … some sort of weird inverse-therapy? :)
I have a similar story to many others. I am in my mid 40’s and had my share of ‘advisors’. My early ones were not terrible – as they got me investing regularly by “paying myself first” when I was in my early 20s. This set up a pattern of saving that I still have. My portfolio was small, and so even though my MERs were high, they were not huge $ wise. I was also in no-load funds, so did not have the dreaded DSCs. This advisor though became very keen on Labour sponsored funds, and said I could not lose because the tax benefits in the RRSP were so large. Well, guess what – I lost! I eventually sold my $5000 investment for $1000. But this advisor left for greener pastures, and the replacement did not work for us in the same way. After a few mediocre advisors with a couple of firms – they were really only caretakers of our money and getting paid well for doing so, we moved our money once again. This guy got us into funds with large DSCs, without advising us this arrangement and its ramifications. Further, in the market crash of 2008, his only advise was “to do what we think best”. Thanks for coming out! At that point I started researching, reading, and studying about my investments. I first decided that I would “couch potato” my bonds and international holdings, but would buy solid dividend payers for my Canadian portfolio. I bought Fortis, the banks, the telecoms, Timmies. I read the annual reports and tried to figure out where the price was going. I had winners (Manulife, Magna) and losers. I eventually realized that I was trailing the market by a significant portion, and my non-Canadian equities (VTI, VXUS) were no stress and doing much better than I could have hoped to achieve. So I sold most of my Canadian holdings and have not looked back.
Now, I am finding that rebalancing with cash-flows works wonders. Once a quarter (once a month in my RESP) I make a trade to invest the cash that has accumulated from dividends and incoming money. I just buy which ever of my 5 ETFs is furthest from the target. Setting these targets, particularly in the RESP, was by far my biggest concern. It is just so liberating!
This is from yesterday and backs up the point of this blog:
Listen to Buffett and Schwab: Be an indexer Keeping it easy, cheap and simple
At the risk of missing the whole point of this blog, I also point to this from Monday:
Based on the above links, and at the risk of both getting the point and not getting the point, these two ETFs look interesting:
(Note: Often Value Stocks = Dividend Paying Stocks)
CDZ – S&P/TSX Canadian Dividend Aristocrats Index Fund (100% Canadian)
– tracks the S&P/TSX Canadian Dividend Aristocrats Index
CYH – Global Monthly Dividend Index ETF (47% US / 53% Rest of the World)
– tracks the Dow Jones Global Select Dividend Composite Index
If you look at ALL Equity ETFs listed on the Canadian market, CDZ and CYH have almost the best returns for 1 year and 5 year total returns, and they pay a nice yield for people who want some monthly income. (Note CYH is foreign income so would not be treated as well as Canadian dividends by the tax man)
I know these are short term numbers, but but they do match up with the numbers from the Value info mentioned in the above link. And the Value Premium has worked for decades.
I agree with the main point of this blog – indexing is great and being free of all of all of the other noise is awesome!
I also agree with those that have pointed out that sticking with a strategy for the last 5 years has been easy, because the markets have done so well. Sticking with it during a down turn is where your behavior can break down the whole system.
I retired at age 49 two years ago.
One of main reasons I was able retire is, I stayed invested during the down turn and I continued to invest my salary and my dividends back into the market during the down turn and during the ride back up. Seeing the dividends continue to come in during the down turn really helped me believe that the world was not falling apart and that the plan was going to work.
Stick with some kind of indexing strategy, but choose an index strategy that you can truly believe in during good times and the bad times. The bad times will put you to the test and make you question whether the strategy is going to work and it will tempt you to leave the market at the worst possible time. I saw a few friends draw all of their money out of the market in early 2009 – just before it all hit bottom and turned around – and they missed all of the ride up during 2009.
The market is risky and staying in it also means you must not risk more than you can afford to, don’t risk more than you need to, and don’t risk more than you are willing to really risk, because a bad market can rip it all away from you if you are not prepared.
OK – start throwing tomatoes!!
I am sitting at home in my PJ’s having my second coffee of the morning, and it is almost afternoon !!
The old aphorism that “investing is simple but not easy” is proven wrong by this blog! The latter part of it for sure. Dan’s model portfolios make it simple and his encouraging posts (during market unrest) help mitigate the “not easy” part calming us to stay invested and avoid the BNN panic headlines!
As I read this constant flow of glowing reports about people’s DIY success with indexing I keep thinking how different it would be if if people started indexing around 2006-2007 and it was now 2008-2009. Active managers tend to do better over the short term than a passive indexed portfolio. In the face of seeing the market continue to drop and their portfolio tracking it almost exactly I bet the number of people that would revert back to active management would be greater than 1/2. This would also be bolstered by hearing their friends say their active manager assured them their strategies have been able to avoid losses as great as the market. Some of them would even have short-term proof. It’s a lonely world when you are a DIYer and lonelier when the world is collapsing around you.
As such, financial advisors such a PWL (the company Dan is affiliated with now) who do passive indexing for a fee for clients provide great value in hand-holding during more turbulent times and helping them to avoid cashing in and reverting back to an active strategy. But still, some do and will as Rick Ferri, a US-based index portfolio manager reports.
I know how one’s mood and view changes when the tide goes back out to sea. This hasn’t happened for anyone reading this blog who is a DIY indexer. People lose conviction in a strategy very quickly when it doesn’t seem to work anymore and there is no social proof that it is working regardless of the theory being sound. What is actually happening at the time affects people 1000x more than any previous firm belief in a strategy that supposedly works over the long-term.
I guess we’ll see because there is certainly another crash coming…eventually. Then we’ll see how ‘easy’ this simple strategy is for some people.
@Noel : I’ve weathered downturns before during my previous investing habits, and was able to do so without panicking. (That includes individual stocks and some less general, higher-fee mutual funds over the years). I’ve watched the value of my holdings decline significantly before, I’m sure I can manage that again.
The nice thing about indexing and a balanced portfolio is that it’s always the right time to contribute. If the market plunges 50%, then I get a deal on the money I put in. It’s especially nice if certain parts of the portfolio go down while others do less so, e.g. if the asset classes remain uncorrelated or negatively correlated.
Finally, one of the nice things about broad indexing during a downturn is that you’re much less likely to experience a catastrophic loss comparable to a handpicked stock tanking precipitously or even going under entirely. While Nortel hurt, BlackBerry’s implosion leaves me unbothered since it’s just a piece of the broader index.
@ Noel – Of course only time will tell if you are right. However, in my case, I lived through 2008/9 with the funds my adviser had recommended (large DSCs) and small bond holdings, and saw that active management is NOT a saviour in tough times. Now that I have implemented the passive strategy, with short term bond holdings of 40%, I expect to see significantly less volitility than the overall market. When it comes, I plan to rebalance! In 2006, I had not considered what I would do when (not if) a correction occured. In fact, it was in 2006/7 that advisors (salesmen) were actively courting me to borrow to invest. So glad I dodged that bullet.
@Mike D: The only certainty is that the market will go up and go down. As you say, it’s “when”, not if, so having a strategy that functions during downturns is crucial.
Of course we’d never hear from the people who stopped following their indexing strategy when the market crashed and that’s precisely because they moved away from it and aren’t spending time reading this blog. I know so many people who either cashed totally out of the market near the low or stopped investing to wait it out. Many of those did well before the market crashed and most of those were with active managers. My opinion is that it would not have made much of a difference why they were doing well before, ie because they had active managers or because they indexed. It was the drop that spooked them whatever strategy was that they were executing.
Proof will be in the pudding as we all know. What everyone is saying of course makes sense: stay the course, keep investing no matter what, rebalance, pay no attention to what the market is doing, don’t try to time the market and stray from your regular investing by delaying it, etc. But, unfortunately, the animal instincts that developed our short-term asymmetric risk profile while we were on the savannah in Africa 50,000 years ago takes over in tough times and we do what we inherently know is not logical with long-term investing because to not do so is unbearable for some of us.
More about that in ‘Your Money and Your Brain’ by Jason Zweig. Great book.
@Noel: I agree this is one of the best posts, possibly the best post ever, unlikely as it may seem, considering it doesn’t present any highly useful investing tool as some of the past posts have done. But it’s true: the greatest benefit is not the 1 or 2 percent (or whatever) net improvement we enjoy over the mean of all active investors; it is the supreme confidence (I hope) we carry in the belief of our strategy, and the freedom that this strategy gives us from worrying whether this or that tactical response after parsing all the available information is the best one on this or that occasion, etc.
@HarveyM: I disagree that the “investing is simple but not easy” aphorism is proven wrong by this blog. I don’t mean to put us all on a pedestal, but don’t forget that the continuing followers of this blog and of this simple Passive Index Investing principle are all survivors of a much larger crowd, most of which has fallen by the wayside, either because they (the defectors) never “got it” in the first place, or only “sort of got it”, because it was the latest fad that they read about, but not because the mathematics and the logic of it resonated with them in a fundamental sense. So when the most current investment guru spouts off in the financial pages about the coming economic apocalypse, or whatever, they dutifully follow him off on his tangent, forgetting that there has never been any quantitative evidence to support the notion that any of the past forecasters of doom or of instant fortune, for that matter, have ever been able to present any analytical information in a specific format that translated into a profit or escape from loss compared to the mean of the market.
Intuition is a seductive temptress, and for most humans it is exquisitely difficult to overcome. It is still a little difficult for me, but it does get easier as time goes by. It definitely wasn’t easy at first.
@Oldie : This is part of the reason I still follow this and a couple other blogs. It helps to be reminded now and then why I’m doing the indexing thing and what the advantages are. I also found reading a couple books on the topic really helped understand and hammer home the empirical underpinnings of indexing. I particularly enjoyed Bogle’s “Little book of common sense investing” since it makes the argument well but is relatively concise.
@Oldie What you say is true. The dedicated DIY crowd is likely small and Dan has pointed that out. Few have the interest or stomach to trust themselves or this blog. However, those perhaps the majority will one day awaken to see their ‘advisor’ drive off in a 7-series BMW and then retire early leaving their portfolio in the hands of a youngster while they work into their late 60’s or beyond! Some of us (me), have been amongst that crowd and realized that if you don’t learn and do it yourself trusting someone else who is in a conflict of interest is crazy! They too will return.
@Elliott – Yes, that’s the reason you follow these blogs – to get reminded, etc. and that is a very good thing IF you are staying with the indexing strategy. But, that misses one of the points I am trying to make. People who switch strategies away from indexing in a market crash won’t be coming back to these blogs to be ‘reminded’. It’s not like people who are not religious yet go to church at Christmas and Easter. Once you switch away from indexing you likely won’t come back until you’ve spent enough time testing a different strategy and then become unhappy with it because either it didn’t perform or another extreme market event like a crash happens which causes you to again question your strategy. That could take years to happen.
@Noel: I think you’re wise to remind us pilgrims that we are not justified to consider ourselves True Believers until we’ve weathered at least one real market crash! I know the true test of my commitment is still ahead, and that’s why I prefaced my self-description with “I hope”! But at least I console myself with the belief that if I’m anticipating some self doubt during the pain that is surely to come, then I’m better prepared for this emotional roller-coaster, and less likely to lose faith (and market share) in the process.
I have been following this blog for a few years now and have been an advocate of indexing but I must admit that I remain only partly converted as I have a handful of stocks that I haven’t had the heart to part with. It is completely irrational, and in fact I have been gradually selling them, generally to help with my semiannual rebalancing exercise. There remains somewhere in my brain the belief I made a good pick and don’t want to let the stock go….yes, irrational but I am working on it. This is what we are all up against.
My main beef is with ETFs you get dividends in cash. I end up parking them into mutual funds until I accumulate enough to make a trade, unlike my high MER mutual funds with automatic re-investing. I love the low fees I pay with ETFs but by its very nature it ends up making me think more about my portfolio than I would like. I am too addicted to low fees to go back mutual funds. This is another problem which I think scares people of from DIY investing.
@Chris: “My main beef is with ETFs you get dividends in cash.”
If you hold ETFs in an RRSP or TFSA it makes sense to request your broker to enrol you in a Dividend Re-Investment Plan (DRIP), and this will save you a lot of hassle outside of your re-balancing chores. Unfortunately, in a non-Registered account this causes the calculation of your Adjusted Cost Base to become pretty tangled up. For this reason, I likely wouldn’t use DRIPs in my non-Registered account, even if I wasn’t withdrawing the dividends as cash (for personal spending). I may be mistaken on this last point — maybe the calculation of the ACB is easier than I fear even if it is done in retrospect, but I haven’t yet had to consider this choice, so I haven’t thought about it much.
This post, along with all the comments, go a long way in reassuring me that index investing is the way to go…I’ve been lucky that I never dabbled in high-fee actively-managed mutual funds, or stock picking. I started investing a few years back and got into couch potato investing right off the bat.
But I constantly find myself wondering if maybe I should branch out. Especially when I hear other people (either online or in real life) go on about how their active strategies beat the market by significant amounts, or people who scoff at my passive investing, I start to doubt my initial choice and wonder if I should allocate some portion of my money to more active strategies..
Anyways, long story short: after reading this page I’ve renewed my belief in index investing. I definitely value the “inner peace” I have now and wouldn’t trade that in!
@Oldie: I use DRIPs in my non-registered account but still find it relatively easy to track my ACB using http://www.adjustedcostbase.ca (which I heard about thanks to this site). But then, I only have three different funds in my non-registered account to keep track of, and they only pay dividends annually or quarterly. I can see how, with many different funds/stocks that pay dividends monthly, it might be more of a chore.
But that’s the great thing about index investing–it really minimizes how many things you have to keep track of!
Another benefit of the Couch Potato Portfolio is that when I login to check the status of my portfolio in my Waterhouse account, I just stop at the overall summary page to see how the overall portfolio is doing. I rarely click through to see how the individual holdings are doing in my SDRSP (self-directed RRSP) account, or my TFSA.
Why is that good? Well, it keeps me oblivious to whether the TSX went up, the SP500 went down or something blew up in emerging markets. Instead, the portfolio moves more slowly, and is in fact, rather boring. Helps to keep my emotions in check and keep me from wanting to tinker.