Call off the hounds: I have finally updated my model Couch Potato portfolios for 2015. Full details appear on the permanent Model Portfolios page, but here are the new versions in downloadable PDF format:
Option 1 — Tangerine Investment Funds
Option 2 — TD e-Series Funds
Option 3 — Vanguard ETFs
You’ll notice some significant changes this year:
- I have dropped the Complete Couch Potato and Über-Tuber from the lineup. All of the model portfolios now include only traditional index funds tracking the major asset classes: no REITs, real-return bonds, value stocks or small-cap stocks.
- The new lineup presents three options, with the key difference being the type of product. Option 1, from Tangerine, is a one-fund solution that’s ideal for investors who value simplicity. Option 2, the TD e-Series funds, offers more flexibility and lower cost. Option 3, built from Vanguard ETFs, is the cheapest option, but also the most difficult to manage for new investors.
- None of the options include ETFs traded on US exchanges.
- Each option now includes several different asset allocations, ranging from conservative (70% bonds and 30% stocks) to aggressive (10% bonds and 90% stocks). The older model portfolios were all 40% bonds and 60% stocks, the traditional mix in a balanced portfolio.
- For each option and asset mix, we present performance data going back 20 years (1995 through 2014), compiled by Justin Bender. Since none of the funds has a track record that long, we have filled in the gaps using index data minus the MER of the fund in question. This is an imperfect but reasonable proxy for how an index fund would have performed.
Why the changes?
I thought long and hard about these changes, because I know many readers currently use one of the older model ETF portfolios. But it has now been more than five years since I launched this blog, and I have corresponded with hundreds of investors during that time. I’ve also worked directly with dozens more through PWL Capital’s DIY Investor Service. That depth of experience has given me a few insights.
First, simple is usually better than complex. You can now build a portfolio that includes hundreds of bonds and thousands of stocks in some 40 countries using just three ETFs, all for a cost of less than 0.20%. No one needs to diversify more broadly than that. A skilled portfolio manager may be able to boost returns slightly by moving beyond traditional index funds in the core asset classes. But many DIYers make costly mistakes when they try to juggle too many funds. Meanwhile, there are exactly zero investors in the universe who failed to meet their financial goals because they did not hold global REITs or small-cap value stocks.
Using US-listed ETFs is a another example: the management fees and withholding taxes may be lower, but the steps involved in currency conversion can be complicated and it’s easy to make errors that wipe out any potential savings. If you don’t believe me, try explaining Norbert’s gambit to your mom.
These model portfolios are not intended to reduce MERs and taxes to an absolute minimum. The suggested asset allocations were not created using Markowitz’s efficient frontier or portfolio optimization software. They are simply designed to provide broad diversification and low cost while remaining easy to manage on your own.
So try not to agonize over the small details: just choose one of the model portfolios with an appropriate amount of risk and get started. It’s OK if convenience trumps cost, especially for young investors with small portfolios: remember, an additional cost of 0.10% works out to $0.83 a month for every $10,000 in your account. The cost of sitting in cash and scratching your head is much higher. And the peace of mind that comes with a simple investing strategy is priceless.
New to the ETF couch potato strategy and was trying to understand a couple of things. First, what is the difference between XUS and XSP? The returns of XUS appear to be better for coverage of he same stocks? Secondly, do the quoted rates of return on the i shares website include dividends plus equity? Any help would be greatly appreciated!
@Mike: XSP uses currency hedging, which means that it is not affected by changes in the USD-CAD exchange rate. XUS does not use hedging, so it has benefited from the recent strength of the US dollar. That is why it has outperformed.
All reported fund returns include reinvested dividends as well as price increases/decreases. Returns are also reported net of fees.
@CharlieF: There is currently no swap-based ETF for international equities.
Hi Dan…. I have been investing in your UBERTUBER portfolio for 2 to 3 years now . I have a $2 million+ portfolio and still want to be DIY for now . Would your newest Option 3 portfolio be a suitable replacement for the old Uber tuber for someone with a portfolio this size going forward or should I stay with Uber tuber or would you recommend professional
help would be best .
I enjoy being DIY and I am very disciplined and stays the course , but worry that professional help would give me much better returns than DIY .
Any insight from you would be greatly appreciated. Thanks!
Is there a reason why this year you dropped the option that’s for people who don’t own a TD brokerage account and portfolio is too small to get into ETFs? I remember you recommended these 4 alternate funds besides the TDs: NBC839, RBF556, TDB661 & TDB966. Are they still good to hold?
@andrewL.DIY: How successful have you been at managing a complex portfolio on your own? If you have found the Uber-Tuber hard to maintain, then a simpler portfolio is almost certainly a better choice, regardless of its size.
As for whether an advisor is worthwhile, what makes you think a professional would help get you better returns? If you’re using the Uber-Tuber there may be nothing wrong with your investment choices. But an advisor might be able to add value when it comes to asset location, currency conversion, tax management and disciplined rebalancing. Mistakes in this area can easily cost more than 1%. An advisor who also offers planning services can also add value of you need this: very young investors often do not, though those closer to retirement frequently do.
@Alex: If you have no other option, then it is reasonable to continue holding index funds from RBC, National Bank or TD’s I-series. But I would argue there are really aren’t many situations when you truly have no other option. I would encourage investors to take the time to open an account with TD Direct or Tangerine and use one of these two options. (Of course, if you have already set up a portfolio at a different brokerage using these bank funds, then it makes little sense to change now.)
Thanka so much for your insight. I began commitment to Passive /index investing since 2006 after some reading & so moved bulk of assets to a boutique investment firm who fully believes in passive index invsting, charged 1% only to find I had to hound them to rebalance , give performance reports, attain better diversification , locate assets for best tax advantage , etc… Then I discovered your articles & CCP & realized that I was basically paying him 1% to manage a porrfolio of 1.5 M+ that was inferior to your models and advice that was not even close to being as helpful as yours. AND…. You taught me so much that I realized I would truly enjoy DIY /CCP investing ON MY OWN ! And i am enjoying thanks primarily to you, Bogle ,Bernstein& C. Ellis.
Re..Uber tuber…I find it fun but takes lot of time to manage . So when I saw your latest option 3 , I thought i’d ask you if it would suit me. It would certainly simplify my life . Glad to find you believe that option 3 would be suitable even for a sizable portfolio. I thought same , but valued your thoughts.
Re..Use of professional help….Not sure if i can accurately quantify how much value they’ d add for me , seeing that I follow Ccp’s guidance re: asset location across my family s 10 accts , withholding tax mgmnt and only add new money to rebalance . Currency conversion issues too complex for me so I just try to make sure portfolio is < 30%in USD etf's like VBR EFV SCZ RWO….. But if I use CCP newest option 3 , it is all TSX listed . I know a professional can probably save more $ than me , but routinely more than their 1%fee /yr? I m not so sure .
Eventually I'll probably hire someone like you or Justin Bender as i near early retirement , but, for now I just wanted your take on whether I am absolutely silly to try & manage a 2M portfolio all on my own …..
Your CCP site is the best thing to happen to my investing life . Thank you so much , Dan .
“I know a professional can probably save more $ than me , but routinely more than their 1%fee /yr? I m not so sure .”
Don’t be so sure that he can even save more than you can, let alone 1%. I know the perils of being too arrogant are high, but IMHO (based on some personal experience) there are a lot of professionals out there who are either somewhat sketchy on a lot of the details and principles that have been drummed into our heads on the regular posts of this website, or else the work required to make full use of this expertise to save you money is too much effort to be worth their while. Or maybe the sad simple answer is that whether it is due to ignorance or laziness, omitting the work and expertise to effect this saving has not triggered any complaints form prior clients because they weren’t in a position to know any better.
1% of 1.5M is $15,000 a year. It’s hard to see how an “expert” can justify this ongoing cost and improve on your investment expectation (i.e. risk/reward), given your discipline, your present knowledge and the resources available to you. Perhaps closer to retirement, rational strategies for maximising and optimising the funds you have already accumulated, which have been less of a focus of of this website might be something you might seek from a knowledgable consultant. But by then you likely would have increased your knowledge in this area too.
About the safest course you can steer is to really scratch your head and translate your safety/profit comfort zone into an investment plan, as you have already done; and then pay an hourly fee for a consultant to offer advice how to do better, and evaluate his advice based on its merits. That would be way cheaper than $15,000 and, depending on the consultant, would be protection against some possible forgotten flaw in your plans.
A follow up question, if the cdn fx goes up 10% does that mean XUS will have an additional 10% return relative to XSP? Is it recommended to utilize the unhedged ETF’s CPP and if so why and what advantages does it provide? Do these advantages also apply to international ETF’s?
Thanks for the insight, cheers.
Thanks for those very useful thoughts. I agree with your humble opinion…… My distinct impression with the investment firms I had used was that it was too much effort to be worth their while to continually help me maximize returns & efficiencies or save money/taxes . They only acted when I made suggestions to implement something that I read from Dan’ s Cdn Moneysaver or CCP articles .
I was working ; they were just collecting the 1%/yr. !!
I’m curious, do you keep track of your Adjusted Cost Base correctly?
With a 2 million portfolio, a big portion of the portfolio must be kept inside taxable accounts.
Keeping track of the ACB with ETFs is one reason I have considered working with an advisor… but eventually I decided to stay with TD e-series mutuals fund since tracking the ACB is easier. I also use HXS /HXT/HBB for the same reason (+ better tax efficiency)
@andrewL.DIY: It was obvious that your prior investment firms were not giving any value on your 1%. My opinion was attempting to be conservative regarding the possibility of finding other professionals in the future who would be worth the 1%.
The more I think about it, and the more you describe your experiences regarding what you had learned elsewhere that they had failed to implement, the more pessimistic my expectation becomes.
The first criterion for any new prospective advisor would be that he has to be someone that advocates passive index investing. One might argue that he might be worth the 1% cost if he had to convince you that this was a reasonable strategy, and then had to keep on holding your hand to stop you abandoning this strategy. But you are way beyond that in terms of sophistication, so that service would be of no value to you. What passive index strategy could he offer you that would be better than the plain Couch Potato Portfolio offered here, or make more sense in any way that we have not hashed over one way or another in these pages? It’s truly hard for me to imagine, but I suppose I would be willing to be convinced if you gave me reasons that made sense — hence my hedging in the last paragraph. (BTW, I’m not merely pontificating for your benefit — every time I go over arguments like this in my mind, it forces me to examine my own grasp of the fundamentals and to look for any flaws I might have missed before. It’s essentially part of my continuing education.)
I give all T3 T5 slips etc. to my accountant and I keep track of any profit or losses from etf’s sold and report that to him, too and let him figure all that cap gain/loss & ACB stuff out.
@Jas; @andrewL.DIY: I had totally missed the implication of the required back calculations that 1.5M would be way more than the accumulated RRSP allowance of someone early in their investment career. Perhaps you might want to reconsider how reliable my opinion might be after all:-) The requirement to keep track of your ACB is certainly a service that might be worth considering, although 1% seems a high price to pay for just that. In my case I get the accounting services of the financial arm of my Professional Association for free, so it’s not an issue for me (although I am careful not to use DRIPs in my non-registered investments to make the ACB easier for me to double check, as has been advised here by CCP.)
@Jas: I have HXS, HBB in my largish non-registered account, for all the same reasons you mention, but not HXT; my reasoning is that the preferential tax treatment on Canadian dividends makes using HXT hard to justify. (My taxable income currently is very low.) My assumption is that you must be already taxed at a considerable marginal rate; even at high marginal rates, I would have thought that the effective tax rate on the approximately 2% or so dividend generated by your Canadian equities if held in conventional ETFs would have been acceptable, compared to deferring the taxation on this portion (by using HXT) to a time when a lot of other deferred taxes become due on capital gains, even if those gains are discounted to an income equivalent of 50% (we hope) to be taxed at the marginal rate at that time. Have I missed a trick here?
I use HXT because my marginal tax rate is high (https://canadiancouchpotato.com/2012/01/23/dividends-not-as-tax-friendly-as-you-may-think/), and hopefully I will benefit from deferring the taxation until retirement, but mainly because the calculation of the ACB is so much easier, since there a no distributions at all.
Are you 100% sure that MD management use the CDS innovation database, as recommended by CCP, to correctly calculate the ACB of your ETFs, including hidden re-invested distributions (not showing up onT3,T5 slips) ?
Same question than for oldie, do you trust your accountant to correctly keeping track of the ACB using the CDSinnovation data base to track phantom re-invested distributions?
@Mike: Yes, if you hold an unhedged US equity fund it will get a boost in return from a rising US dollar. I generally recommend using unhedged funds for both US an international equities because foreign currency exposure is a good diversifier in a portfolio: