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.
Interesting that the further one goes back in the data, the less difference between a conservative and an aggressive portfolio–less than 1% at 10 and 20 years. Sadly, I don’t think this evidence will deter the reckless gunslingers who say they can stomach 100% equities and then inevitably later sell at the bottom when there’s a crash. I do love the new format, but that would be my one concern–not for me, but for the 7 out of 10 people lately who suffer from recency bias and will automatically think, “Wow, look at that–I’m going ‘aggressive’ for sure!” But anyway, I don’t care–that’s them, not me. Cheers for this!
@Edward: Glad you like the new format!
I would be wary of drawing the wrong conclusion from the returns since 1995. Over the last 20 years, Canadian bonds returned over 7% annually, compared with just under 9% for Canadian and US stocks, and less than 5% for international stocks measured in Canadian dollars. That’s pretty unusual for a 20-year period. I think it’s fair to say one should not expect 7% annualized returns on bonds for the foreseeable future. (That’s not a forecast, it’s just math.) So while I agree completely that few investors should be all in equities, those who take a more balanced approach should be prepared to accept lower returns.
Well written, concise and practical advice as always. Thanks Dan!
We got a letter in the mail from our bank telling us that starting in March there will be a $75 charge to transfer registered accounts. So, we now have a deadline to getting our investments to lower cost funds and having this direction is very helpful. Thank you for the update.
Hi,
I presently own the funds: XEF, XEC and VUN.
Other than simplicity, would it any other any advantages to switch to VXC?
Any disadvantages?
I’m surprised that you took off REITS, but I understand the reason.
Thanks!
I like that you are constantly updating your recommended ETFs and model portfolios, however changes always leave me with the same question: what should those of us already invested in one of your previous portfolios do? Do we carry on with, for example, the complete couch potato (as I am invested in)? Should we sell our current holdings and reconfigure based on your current portfolios? Do we start directing all new investment funds to your current recommended ETFs while leaving funds currently invested where they are (would seem to defeat the stated purpose of simplicity!)?
I would also question your limit of $50,000 for ETF investing. I started investing in ETFs with $1000 using a discount broker that does not charge a commission for purchases (I believe there are several options). I contribute cash whenever I have some available and rebalance by buying funds where I am deficient. As long as you are in the accumulation phase of your investment lifetime there should be no disadvantage to using ETFs.
Thanks for the great site!
@Bettrave: It’s mainly simplicity. In an RRSP, your three-fund combination might be a wee bit more tax-efficient and the MER would be a few basis points lower.
@Kevin: If a more complex portfolio is already working for you I see no reason to change what you’re doing. The model portfolios are really designed for people who are starting from scratch.
As for using ETFs with smaller portfolios, again, if you’re already doing that successfully I would not talk you out of it. However, I wouldn’t send a novice to Questrade or Virtual Brokers, where they would have to learn how to place ETF orders on relatively hard-to-navigate platforms. Those who are comfortable trading ETFs at discount brokerages often underestimate how intimidating it is for less experienced investors. The disadvantage is that the investor will open the account, find it too confusing, and then not carry out their plan. I’ve seen it many times!
Thanks for doing these updates!
So the elephant-in-the-room question for those of us who’ve been using one of your older portfolios is: is there an advantage to shifting over to one of these newer ones? For example, my portfolio is pretty close to the old Complete Couch Potato. Would there be any advantage (apart from increased simplicity, which is in fact an advantage) to me switching over to the Vanguard ETF portfolio instead? That would mean, for example, selling my REITs and real-return bonds.
Or should I just stay the course with what I have?
What about GICs? I did my own version of a monte carlo analysis based on returns from the last 40 years. For my portfolio, which is 40% equities and 60% bonds/fixed including about 20% GICs seemed to reduce the volatility. In particular in 1974 both equities and bonds took a beating and holding some GICs seemed to help.
Thanks for the update.
Besides the very small amount of emerging market exposure in VXC, is there a reason you did not include anything specific to emerging markets? Something like VEE or VWO? Even in the most aggressive portfolio, Brazil, China and India would only make up ~2.58% of the portfolio.
Alex
Hmmm I am looking some input. I am 30 years old, good job that is stable with a defined benefit pension plan. So I am quite risk tolerant. However, looking at the model portfolios, I am now wondering if I am over exposed to the Canadian market and perhaps I should move some of my exposure to the international markets.
My allocation is as follows:
* 35% XIC – Canadian Equities
* 25% XUS – US Equities
* 5% XEC – Developing International Market Equities
* 10% XEF – Developed International Market Equities
* 10% ZRE – Canadian REITs
* 15% VAB – Canadian Bonds
So my portfolios has 60% exposure to the Canadian market and only 40% exposure to the international market (with 25% coming from the US). In comparison with the model portfolios that are aggressive, the exposure tends to lean more in favour of the US/International markets.
So wondering if I am overexposed to Canada and should shift some of my equity allocation to the US or International markets?
So I am using something close to complete couch potato, VTI, VAB and VXUS but I do have a 10% allocation to ZRE. I don’t want to invest in real estate beyond my current equity holdings. That is, I have no desire to buy a home. So wondering what you would suggest for someone who does not own real estate as a hard asset. Is the exposure one gets from equities which own real estate themselves sufficient or are companies selling their real estate to REITs in order to concentrate on their core business?
Hi,
I get paid in USD so I was wondering what the most efficient way to invest would be. Should I invest the US in VTI instead of VUN and then keep it in my RRSP (as opposed to TFSA). Also would it be more efficient to invest the US Global Vanguard ETF? The rest I would convert to Canadian and put in VCN and keep in TFSA.
I am looking at US exposure in a non registered account. I think VUN is the way to go for me for the sake of simplicity of bookkeeping.
However when I look at VUN or VFV and compare them to VTI there was dramatic price take off in October 2014. The curves separated and have stayed separated by about 10% with VUN or VFV having the much higher return. Is the reason for this based on currency – the relative weakness of the Canadian dollar vs the USD? Or is there some other reason VUN would seem relatively “overpriced” compared to VTI?
Thanks!
Love the new simplicity, Dan! Explicitly breaking out a few levels of bond/stock mixes should also help clarify what I think was the #1 FAQ from the old model portfolios. Great job!
@ccp
more information on gic’s would be huge. gic’s seem to get thrown under the bus so to speak. i see a 5 yr gic at 2.55% available today on investorline. i’m guessing in 5 years if i invested in a short term bond index and gic today the values of both would be fairly close, maybe the gic would be worth more.
As usual Dan, you have a way with words: “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.”
Great stuff.
Mark
For portfolio #2, why is a TD Direct Investing account preferred to a TD Canada Trust online account? I am under the impression the TD Direct Investing account charges fees for RRSP de-registrations whereas the TD Canada Trust online account does not. Am I wrong? Are there other reasons for that preference?
“Option 3, built from Vanguard ETFs, is the cheapest option, but also the most difficult to manage for new investors.”
Also, for investments inside taxable accounts, keeping track of the adjusted cost base with these ETF is quite complicated compared to the TD e serie portfolio (option 2), even for experienced investors.
I love the simplification to the model portfolios. Option 1, with Tangerine, is my pick. I love the simplicity, the low fees and the no account minimum.
I was wondering, however, what would be your opinion of the Mawer Tax Effective Balanced Fund for a 10K non-registered account? Is it really better for taxable accounts? I am debating between this, the Mawer Balanced Fund and the Tangerine Balanced Fund. I can get the Mawer funds through BMO InvestorLine I believe.
I currently have 15K recently invested in TD Mutual Funds, with the market as it is right now, they are underperforming.
I intend on waiting to at least recover my principal, how would you suggest proceeding?
Bravo Dan.
Your portfolio simplification makes perfect sense and brings to mind this Voltaire quote:
“The perfect is the enemy of the good.”
Disclosure: I use a slight variant of the “balanced” e-Series portfolio, 40% Canadian bonds, 25% US, 25% EAFE, 10% Canadian equity.
Nice work, Dan! Now they’ll finally shut up about this over on Reddit.
Any reason iShares were dropped?
Right on! Seems to be a mature direction for the blog, I do hope to continue to learn about how other ideas(options) can be utilized and how tax issues are affected. I have used the global couch potato for 4 years now with a 5% holding in emerging markets and am very pleased with the outcome and the accompanying peace of mind.
Thanks Dan for walking us to this point and look forward to your 2015 posts!
Thanks for the update. I found out about the couch potato model a while ago but has only just gotten around to implementing something similar earlier this week. I decided to apply the model to my RRSP account over the next 12 months (i.e. spend 1/12th of my current assets every month for a year) I started off with the following break down:
20% VAB
30% VCN
30% VUN
10% VEE
10% VDU
I’m completely new to ETF investment – how does VUN+VEE+VDU compare to VXC? I’m not even sure if VUN/VEE/VDU has any overlaps.
Thanks!
I recently helped two of my kids set up their investment accounts using these same three ETFs in the same proportions (for 60-40). Very funny!
I made one very minor modification which I think is helpful. I purchased $500 of RBF2010 in their RBC Direct account. RBF2010 is a savings account fund that pays 1.25% interest. I counted this towards fixed income and purchased $500 less of VAB. $500 is the minimum purchase amount for RBF2010. The fund is then used to mop up any cash dividends thrown off by the three ETFs. The cash then gets to be put to work right away instead of earning nothing.
@Dennis Cloutier:
>> “For my portfolio, which is 40% equities and 60% bonds/fixed including about 20% GICs seemed to reduce the volatility. In particular in 1974 both equities and bonds took a beating and holding some GICs seemed to help.”
The value of GICs fluctuates just like bonds do, but since GICs are not marketable you do not see the volatility in monthly brokerage statements. A CDIC insured GIC should roughly match the price volatility of a Canada bond of equivalent duration. Whether you want to mark your GICs to market every month in your records is another story.
@kulvir:
>> “However when I look at VUN or VFV and compare them to VTI there was dramatic price take off in October 2014. The curves separated and have stayed separated by about 10% with VUN or VFV having the much higher return.”
VTI is priced and traded in USD, while VUN is priced and traded in CAD, so you are comparing apples and oranges. If you converted the VTI market prices to CAD, you would find the resulting curve almost exactly matches that of VUN.
@Santana:
>> “I intend on waiting to at least recover my principal, how would you suggest proceeding?”
Why would recovering your principal matter?
Thanks to everyone for the feedback on the new portfolios. It’s not possible for me to address every comment specifically, but I’ll do my best to comment on the questions that are likely to interest the greatest number of readers.
@Sky: VXC covers the same asset classes as VUN+VEE+VDU. The indexes are not identical (VXC has more large caps), but they are close enough. Note that your suggested allocation uses a different weighting than VXC, which is roughly 50% US, 40% developed markets and 10% emerging markets.
@Efren: De-registering an RRSP is a pretty uncommon situation (most people will never do this), so I don’t think it’s an important factor in the decision. I much prefer TD Direct Investing to a TD Mutual Funds account because of the flexibility. A TD Direct account can also hold ETFs and GICs as well as e-Series funds, for example. It’s also generally easier to open an account at TD Direct, where you don’t have to convert to an e-Series account or jump through hoops at the bank:
https://canadiancouchpotato.com/2010/09/23/more-fun-with-the-e-series-funds/
@Matt: I guess the short answer is, yes, your portfolio seems to be overexposed to Canada (just under 50% of the equity portion). All of the model portfolios I suggest allocate roughly one-third each to Canada, the US and international equities.
@Alex: As you point out, emerging markets are already included in the ETF portfolio. They make up about 10% of VXC. There is no way to add emerging markets in the Tangerine or e-Series models.
@Jake and Dennis: Regarding GICs, these can be an excellent alternative to bonds on the fixed income side, especially in taxable accounts. But it they are essentially impossible to include in a model portfolio if you want performance data. (How would one track past GIC returns in any meaningful way?) GICs also create a few practical obstacles for those with smaller portfolios: they may not be available in small amounts (some brokerages have $5 minimums), and they are illiquid, which makes things difficult when it comes to rebalancing.
Great move. There is certainly a huge value in simplicity. Dan, you are now a true Boglehead!
@CCP: Firstly, I’m a big fan of your site and you’re the main reason I took the time to learn and begin investing on my own (bought my first ETFs yesterday in Questrade!), so thank you for doing what you do.
I’m confused regarding one comment you made that “few investors should be all in equities”, since I am planning for now to invest 100% in equities (~30 year time frame until retirement), then transition gradually into more balanced (increasing bonds) over the next 30 years. Is it a psychological factor that you think few investors should be all in equities, time frame, or other reason?
Also, I’m taking the route of using NG to exchange to USD for US-listed ETFs (in RRSP). I’m not deterred by the extra work. Again, I think you’re recommending in general to not use US-listed ETFs, not because it’s a poor investment choice but because of the simplicity factor. Is that right?
I really like the blog, I’ve been following for a few years now. I agree that Uber-Tuber had to go, but I’m struggling with the decision to drop the Complete Couch Potato (what my portfolio is based on). I don’t understand how real return bonds and REITs can go from being important to not important. (I have 10% REITs and 5% real return bonds in my portfolio).
I also noticed that Real return bonds aren’t even on the list of recommended funds anymore. To be clear, are you just saying that the benefit from the extra complexity isn’t worth the hassle, or is there any other reasons that you don’t think one should be investing in REITs or real return bonds. Is it wrong for me to stay the course if it’s working for me?
I think people should stop stressing about making drastic changes to their existing portfolios based on former advice. The new recommendations are geared to people starting out that stumble on the site but don’t want to pull the trigger because of the (former) complexity.
Personally I won’t be changing my portfolio that is also based on the Complete. It is growing in size and I think the complexity and added flexibility works for me since I’m juggling between Margin/RRSP/TFSA.
@TJ: I think for all the folks worried about the Complete Couch Potato and lack of REITs/RRBs, I think you have to read carefully what the author is suggesting. I don’t think this is suggesting that REITs and RRBs can’t offer some benefit in some cases, just that they may not be necessary for a “beginner” or “beginner portfolio”, as I believe these are intended. If you are an “intermediate” level investor (both in terms of skill/comfort and probably plain dollar size of your portfolio) and want to have a small allocation to REITs/RRBs, I don’t think anyone here is arguing with that. Especially if you do already, and are happy, I don’t think this is a suggestion to change anything. Merely suggesting that for a beginner, it’s not necessary.
(I hold REITs and RRBs myself, something close to the prior Complete Couch Potato, and am also sad to see it go. And certainly would appreciate still seeing discussion of REITs/RRBs, etc., but I can’t really fault the logic.)
I already had a great advise from you for the Complete Couch Potato related to distribution its funds between RRSP and non-registered accounts (the Rainy Day Fund).
What about these new portfolios, as the funds are pretty broad? Which funds need to be sheltered in RRSP and which ones are tax-safe outside of registered accounts?
@TJ: I think Mike’s comment captures my feelings nicely. If you are already managing a more complex portfolio successfully, just carry on. It’s not that real-return bonds or REITs are unimportant, just non-essential.
@Michael: I would not hold the bond funds in a taxable account: GICs would likely be a better choice. But other than that, the portfolios are just fine in an RRSP, TFSA or taxable account.
@Cam: Very few people have the stomach to tolerate a portfolio of 100% equities, regardless of their time horizon. In the last three years or so it’s been very common for people to say they are comfortable with equity risk, but that’s easy in a relentless bull market. It was a little less common in 2000, 2001 and 2008!
https://canadiancouchpotato.com/2014/07/28/do-you-really-know-your-risk-tolerance/
The performance of both the TD e-series balanced and the vanguard ETF balanced are so similar it makes it a difficult decision on which way to invest. Go the TD e-series route or set up the Questrade ETF route? Considering the performance similarities on the balanced portfolios is there a benefit cost wise going one way or the other? Ease of use or set up benefit from one to the other? I would be investing the full TFSA limit. Thanks for this blog, excellent.
I completely understand the rationale of simplifying the portfolios for those starting out with a Couch Potato Portfolio but I am disappointed that more complex options for those who have experience and larger portfolios will no longer be tracked on the site. I have no intention of jettisonning my REIT ETFs as my portfolio is now over $250K and I feel I need the added diversification. The change I do really like is the range of asset mixes in the new guidance for different risk profiles. Dan I hope you will continue to include the occasional article on REIT and Real Return Bonds on the site even if they are no longer in the portfolios. Dan I love your blog and am still a big fan Great Work.
I got to say it is pretty frustrating/disappointing how many people are panicking about the model portfolio changes. Guys, just because CCP simplified the portfolios doesn’t mean you HAVE to sell everything and re-think your life. Stop blindly following advice and think about what is going on. Actually look up these ETF’s and understand them.
VXC is great, but a combo of VUN, XEF, and XEC is just as good with some advantages (withholding tax benefits, re-balancing benefits) and some disadvantages (more complex).
It really bothers me how many people are in shock about this. Makes you realize how un-prepared most people are to handle their own investments.
/rant
Thanks for this! I am excited to get started because it is simple and I do understand. I have been following the site for about a year but have done nothing (costly I know). But the truth is I found the portfolios too daunting! Obviously I could have done the Tangerine one, but I’m smarter than that right?! Perhaps not, since I did nothing. But this I can do! 3 funds and reallocate them without doing too much math.
One question that keeps coming to mind – is there a “best” way to allocate them into RRSP vs TFSA vs non-registered? I have plenty of room in all of them so would like to start it right. Does it matter? Should the bond fund go into the RRSP and the equity fund in the TFSA or ??
@Scotty: Saying that people are panicking is being alarmist. I think that people are just looking for some discussion on the matter. It’s the most significant change to the portfolios in a long time.
I also think it’s totally off the mark to say that people questioning the changes aren’t prepared to handle their investments.
I agree with @Tim D, it’s disapointing that the more complex portfolios will no longer be tracked by the site.
I agree, no use stressing over (what I consider) minor changes. Three years ago I took the leap but created my own “complete” couch potato portfolio (based on the “complete” couch potato portfolio Dan suggested back in the day), and haven’t changed a thing since, other than to re-balance once per year. For me, it is simple, gives me the right risk tolerance I can accept and fortunately has done well since I created it.
Dan’s blog is a valuable resource that we should be thankful for as I expect the majority of his readers are couch potato converts to some degree, otherwise we wouldn’t be regular readers. Keep up the good work Dan!
The issue of GICs vs gov’t bonds/bond funds in a portfolio is interesting. The novice investor is often very concerned with volatility and mostly equates it with risk. The advantage of a bond/equity portfolio is that combination reduces overall portfolio volatility in the short term whereas a GIC/equity portfolio does not. So, if you look at your portfolio on a daily basis I think a bond/equity portfolio is less volatile and is better for the novice investor. However, this assumes a negative correlation between gov’t bonds and equities which unfortunately isn’t always so.
While I appreciate the new model portfolios, I would like to point out that some Canadian investors (myself included) have substantial USD savings for one reason for another. It would be nice if there was a model portfolio that took into account Canadian tax concerns in choosing US-listed ETFs.
Canada is such a small market I would not even put it in these portfolios.
Too put 30 percent of ones wealth in Canadian index is not prudent. I would just go all in with VXC and be done with it.
Aggressive model of course.
Have you looked at the affect using fewer funds has on the ability to harvest tax losses?
For instance, suppose VXC has a year of zero returns, but its components had wildly different returns.
If using some combination of VUN and VDU and VEE also has zero returns, maybe VDU had a terrible year and VUN had a great year, balancing the total return out to zero.
Being able to sell VDU separately from the other ETFs, allows for harvesting the capital loss to use against future capital gains.
Is there some tax-loss advantage being lost by using just VXC instead of the other 3 funds?
What’s the point for using the VXC for global equities (0.25% expense ratio) vs. just using VT (0.18% expense ratio). Is it really worth 7 basis point in fees to have them peel out Canada? Couldn’t you just fudge the weights a little to account for the fact that there is some Canadian exposure in VT, and get a cheaper overall portfolio?
Hi Dan,
Late at night quite a few years ago, I came across an article about a journalist that asked to write about a financial bootcamp, learned about index investing, and took the plunge. If I’m not mistaken, that journalist was you. That article explained all the benefits of index investing and suggested to simply divide your portfolio into quarters and buy four TD e-Series funds.
I remember reading the article and thinking how much passive investing and low fees made sense, but it was the simplicity that really convinced me.
Cheers on getting back to simple!
Great work with many informative posts over the years. I bet this post will generate a record number of comments. Anyways there seems to be a subtle change in the Portfolios so that now there is 2 parts US and International content for every 1 part of Canadian equity content.
Is this correct and if so is the rationale tied to the lack of diversification in the Canadian Index?
@ Tim D:
“I have no intention of jettisonning my REIT ETFs as my portfolio is now over $250K and I feel I need the added diversification.”
I’m curious if you really mean that you really feel you need the added diversification.
My portfolio is pretty well finalised (fully maxed RRSP and TFSA, sizeable taxable account optimised for tax economy) except that I don’t have any REITs and there was no room in my RRSP for this. I was agonising over my proposed last tweak which would be to clear out my TFSA currently filled with a reasonably proportioned mix of Bonds ETF/World Equities ETF and replace w REIT and maybe retain a small amount of bond ETF for rebalancing.
After my initial shock at the radical house-cleaning of the Recommended Couch Potato Portfolios, I realised how little difference to the overall portfolio yield this would make, for all the extra effort and maybe stress this would entail. Maybe I am underestimating the value of any reasonable diversification as long as the logistics were not overwhelming. So in the context of my own situation I was wondering what was the basis for your stated “need”.