Your Complete Guide to Index Investing with Dan Bortolotti

Why Simple Is Still a Hard Sell

2018-05-29T22:03:32-05:00January 25th, 2016|Categories: Behavioral Finance, Book reviews|Tags: |130 Comments

Wealth Of Common SenseLast January, I overhauled my model portfolios to make them simpler. Some of the older options included small-cap stocks, preferred shares, and real estate investment trusts (REITs), but I switched to recommending a three-ETF portfolio covering only the core asset classes. While many readers welcomed the change, several others criticized the new streamlined portfolios as too simplistic. I still get emails from beginners who want to add more ETFs to my recommended model. Simplicity, it seems, is a hard sell.

In his recent book, A Wealth of Common Sense, asset manager Ben Carlson (who writes an excellent blog with the same title) reveals that he’s made the same discovery: investors resist simplicity. Yet Carlson believes it’s the right solution for most of us. “I’ve spent my entire career working in portfolio management,” he writes. “This experience has taught me that less is always more when making investment decisions. Simplicity trumps complexity. Conventional gives you much better odds than exotic.”

A Wealth of Common Sense is one of the wisest investing books I’ve read in the last several years. Some of its arguments are not particularly novel: for example, he spends a lot of time discussing the familiar obstacles active investors face in their attempts to beat the market. But Carlson also has some refreshing insights to share:

A lot of complexity is just BS. “Complexity tends to be the default option that gets used to persuade investors to buy unnecessary investment products,” Carlson writes, “while the vast majority of people really just need to understand more conventional options to succeed.” When fund companies, media gurus and advisors peddle clever-sounding strategies, they’re creating “an illusion of intelligence and control.”

One of the ways advisors do this is by spinning narratives to make their strategies sound appealing. To illustrate this power, Carlson uses the wonderful example of The Significant Objects Project, in which researchers were able to sell worthless baubles on eBay for surprising amounts because they linked each one with a compelling story. “The problem with narratives is that they often fail as investment ideas,” he writes. “This is because those ideas are usually baked into the price.”

It’s hard to let go of the dream. Carlson quotes Benjamin Graham, who said, “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” One of the most difficult obstacles investors face is the nagging feeling that there’s something better out there. Market returns can now be had for less than 10 basis points, and these are almost certainly enough to allow investors to reach any realistic financial goal. Yet we sabotage ourselves by rejecting an easy A-minus and instead wind up with a C or D.  “It’s amazing how easy it is to do worse by trying to do better.”

Ironically, it is often the most hands-on investors who are at greater risk. “In most areas of our lives, trying harder is great advice,” writes Carlson. “But trying harder does not mean doing better in the financial markets. In fact, trying harder is probably one of the easiest ways to achieve below average performance.” He advises that the first step in improving your results is to accept your limitations. “You first have to give up on the dream of superior performance and realize only a small fraction of investors ever actually get there.”

Create a buffer between your portfolio and your emotions. Carlson cites a study that found people ate three times as much chocolate when the treats were right in front of them, compared with when they had to walk a short distance to get one. In the same way, he says, “You have to force yourself to find a way to create that short distance between yourself and your investment decisions.” Maybe that means training yourself not to check your portfolio value every day, or even every week or month.

One of the benefits of using a simple strategy is that it doesn’t require you to constantly check your portfolio. When you do that, decision fatigue can set in quickly, which leads to flagging discipline and poorer choices. If major decisions—such as your asset allocation and your rebalancing threshold—are systematic, you don’t need to constantly agonize over what to do. “Most of the time the answer will be the same: do nothing.”

To underscore the beauty of simplicity, Carlson looks to one of the world’s greatest chefs, featured in the documentary Jiro Dreams of Sushi. According to Jiro’s son, the most sublime sushi is the product of a small number of high-quality ingredients and rigorous discipline. “The techniques we use are no big secret. It really comes down to making an effort and repeating the same thing every day.”



  1. C. Hull January 28, 2016 at 12:32 am

    Another newb question, where do I go to see historical returns of different indexes? Say I want to see how the S&P/TSX 60 performed for the period of January 1 – June 30 2015, where would I go to find this information? @CCP if I’m out of line with where these newb posts should be (as in not related to this article really) then please let me know.

  2. Willy January 28, 2016 at 8:04 am

    One of my favorite authors (outside of this blog, of course!) is Mebane Faber, who is at heart a quant/trends guy, but deeply understands the psychology of all this and, I think, would agree that for most, simple is better.

    He published a small book a while back called “Global Asset Allocation” in which he back-tested, for decades, some of the world’s most well-known portfolios (simple 60/40, Permanent Portfolio, All-Weather portfolio, etc). What is important to note is that these portfolios differ DRASTICALLY in their make-up. One is simple 60% US stocks, 40% US Bonds. The PP contains 25% Cash and 25% Gold(!!). Etc. Given that, one would expect their performance to be wildly different, no?

    The surprising result? Over 100 years, performance of these wildly different portfolios are all within ~1% CAGR.

    So I will say again: your allocation does not deserve as much attention as (I think) many readers here give it. You will not be defeated by a choice to hold 10% REITs or not. What is far more likely to defeat you, is constantly tinkering with it – chasing 10% REITs last year, but selling this year cause they’re down, lowering your allocation to Canada because oil is low, etc. etc. If you are changing your game plan once or twice per year, that’s a problem.

  3. Canadian Couch Potato January 28, 2016 at 8:10 am

    @C. Hull: Newb questions always welcome. Index data are often available at the index provider’s website but these are not always easy to read or interpret without experience:

    One simple workaround is to look at the published returns for ETFs that track the index you’re interested in. In the case of the S&P/TSX 60, you can look at the returns for XIU, since iShares publishes both the return of the fund and that of its index:

    You have limited ability to check specific periods this way, however. So you can look at one-year periods ending in any month, but you can’t look for six-month returns, etc.

  4. Canadian Couch Potato January 28, 2016 at 9:03 am

    @Willy: Great comment. Faber’s book is remarkable, and for those who are interested it’s available for a couple of bucks from Kindle. The key takeaway is that allocations will perform very differently over periods of even a decade or two, and all of them will look terrible at some point. But over the very long term the differences become small, and therefore almost any reasonably diversified portfolio should deliver decent results if maintained with discipline. Investors blow themselves up when they try one, abandon it as soon as it disappoints, and then move to another.

    If we need a reminder of the tendency to do this, go back and read some of the older articles and comments on this blog. In 2011, people would not hear of anything other than Canadian dividend stocks. Now I get daily emails from people aghast at the idea of allocating more than 3% to Canada. The Permanent Portfolio was hugely popular when gold was enjoying its good run. Now you barely hear about it. Over an investing lifetime, whether your portfolio has 30% Canada or 3% Canada (or 25% gold, or 10% REITs, or whatever) will probably make little difference. But once you start jumping to whatever seems hot, you are virtually guaranteed to get disappointing results.

    This is one of the underappreciated behavioural issues with factor investing. The small-cap and value premiums are real, but there have been extremely long periods (20 to 30 years) where they have been negative. How many investors have the discipline to stick to those tilts after multiple years of disappointing results? More often, they try it for a couple of years and abandon it at as soon as it seems to stop working.

  5. Chips January 28, 2016 at 10:23 am

    Hi Dan,
    Thank you for your answer. I feel that with the bid/ask difference that I would lose about $1000 when switching from the complete couch potato model to the newer one.

    My question is – am I calculating this wrong? I simply took the value of an ETF, divided it by the bid, multiplied it by the ask and subtracted the new value to find the loss. (Then repeated for each of the ETFs) I realize that I would be buying a new ETF but since it is in the same asset class, wouldn’t I have a similar loss?

    Thanks again,

  6. Nathan January 28, 2016 at 7:42 pm

    @Chips $1000 on a portfolio of $700,000 is 14bp (0.14%.) That seems like the right ballpark. In absolute dollar terms it may seem like a lot, but do keep in mind that your portfolio varies up and down by considerably more than that on any given day. You also mentioned there was a savings in MER. If the difference is, say, 0.1%, you’ll make up the cost of switching in a year and a half.

    If there were tax consequences that would be another matter of course.

  7. BruceMcK January 28, 2016 at 10:21 pm

    It’s amazing how many people consider changing their portfolio when CCP revises the models. He’s like a modern-day EF Hutton. (I am dating myself, but some readers may remember the eponymously named brokerage’s slogan “When EF Hutton talks, people listen.”)

    I have a Complete Couch Potato portfolio minus the RRBs. I don’t plan on changing to a 3 fund portfolio any time soon, but may do so years into the future if I find managing the 6 asset classes too hard. It’s miles ahead of my previous advisor recommended portfolio in terms of ease of benchmarking and diversification.

    @ C. Hull, you can find calendar year returns in C$ for major indices in an excel spreadsheet at Norm Rothery’s Stingy Investor Asset Mixer allows you to select a mix of indices and get average and annualized returns plus a whole bunch of other cool data.

    @ Chris, you asked “But I do wonder if it is a good idea to completely shut out an asset class, such as REITs. Doesn’t that reduce diversity by definition?” that I don’t think got answered. It’s a common misconception. If you hold a broad index ETF that follows the TSX Composite or FTSE Canada All Cap index, they already hold a market allocation of REITs. So adding REITs does not increase diversification. It increases concentration, with the resultant possibility of outperforming or underperforming the broader index. Similar with many other segments like small cap or value that are already in the broader indices.

  8. Paul G January 29, 2016 at 1:17 am

    “This is one of the underappreciated behavioural issues with factor investing. The small-cap and value premiums are real, but there have been extremely long periods (20 to 30 years) where they have been negative. How many investors have the discipline to stick to those tilts after multiple years of disappointing results? More often, they try it for a couple of years and abandon it at as soon as it seems to stop working.”

    That’s always been the strongest all-around argument for me to stick with vanilla ETFs – the fact that while there undoubtedly is something better out there, there’s no way for me to know ahead of time which way to go. It’s the only strategy where I can set the course and trust that in 3 (and 5 and 25) years I won’t be realising it’s a horrible approach. Stock picking ? Momentum investing ? Buying what I know ? Dividend ? Dividend growth ? Any of those might work, but would I stick with them when they weren’t ?

  9. Chips January 29, 2016 at 4:25 am

    @Nathan Thank you for that,Nathan – I didn’t realise I would make that up so quickly in MER savings. (I should have switched a year ago!

  10. Nathan January 29, 2016 at 5:08 am

    @Chips no problem. That’s why it’s usually easier to think in terms of percentages than dollars. IE, if you take a fund with a share price of $80 and a bid/ask spread of 10 cents, the spread is $0.10 / $80 = 0.125%. If the difference in MER also happened to be ~0.12%, then the MER savings over one year would equal the cost of the trades.

    By the way, a more straightforward way to do your calculation above, working out the dollar cost you’re paying due to the spread, would be to take the number of shares you owe, multiplied by the bid/ask spread. (The difference between bid and ask prices.) So if bid is $80.00 and ask is $80.10, the spread is 10 cents. If you own 10,000 shares, the cost of selling and immediately re-buying the same fund would be 10,000 times $0.10, or $1000 (plus ~$20 for commission :) ).

  11. Canadian Couch Potato January 29, 2016 at 8:42 am

    @Chips: I tend to measure the cost of trading an ETF as half the bid-ask spread. This is based on the theory that the NAV of the fund is likely to fall between the bid and ask price, and therefore each of the two parties (the buyer and the seller) incurs half the transaction cost. As Nathan describes in his example, you would only pay the $0.10 per share cost if you bought the ETF and then immediately sold it.

    @BruceMcK: I don’t get the EF Hutton reference, but thanks for the comment. :) I too worry that some readers take the model portfolios for more than what they were intended to be, which is simply a good default choice. The idea that an investor would switch from, say, XIC or ZCN to VCN because it’s in my model portfolios is a bit worrisome. This is one reason why I avoid changing the suggestions every time a new ETF drops its fee by two basis points.

    Regarding REITs, I think you are correct that adding an allocation to Canadian REITs increases concentration. The REIT market in this country is extremely small and dominated by a few large players. Overall, however, I do believe that adding a global allocation to REITs can increase the diversification in a portfolio. Rick Ferri does an excellent job of making this argument in his book All About Asset Allocation. However, adding a global REIT ETF increases costs, complexity and taxes and is not likely to be worth it for DIY investors.

  12. jamie January 29, 2016 at 10:55 am

    This is a really great debate and I feel compelled to throw in my two cents. I’ve been reading “The Incredible Shrinking Alpha” by Swedroe and Berkin. Lots of interesting arguments that alpha is becoming beta as more is understood and with more and more large pension funds opting for indexing. They conclude that something like the ‘uber potato’ pretty much captures all there is–not ‘average’ returns, but ‘market’ returns. But it seems to me they weaken their case for an ‘uber’ type approach when they cite a 2013 study by Barber and Wang which breaks down the legendary out performance of David Swensen and the Yale Endowment Fund. When the authors focused solely on the publicly traded portion of Yale portfolio,”the endowment appeared to under perform risk-adjusted benchmarks”. That seems amazing to me–they are among the worlds most respected teams of investors–if they can do no better than ‘market returns’, what are my chances out-performing the markets?? But here is the really astounding thing to me: “a simple factor model (which did not include the size and value factors) showing a 59 percent exposure to stocks (S&P 500 and MSCI) and a 41 percent exposure to bonds (Barclays Aggregate…) explains virtually all (99 percent) of the (Yale) returns.” (pg. 35) So if the blended benchmark had a yield something like 10% the combined genius of the Yale team managed something like 10.1%–very humbling! Futher, many of us are are all in awe of Warren Buffett’s savvy but the authurs point out (pg. 86) that Buffett’s instructions are that, following his death, his trustee place 90% of his fortune in the S&p 500 and 10% in short term bonds–the great investor thinks this is the most prudent course of action. I’m not advocating anything like this but perhaps a very strong case can be made for disciplined simplicity.

  13. Nathan January 29, 2016 at 4:12 pm

    @CCP, @Chips is talking about selling one fund and buying another though, so with the two transactions combined you’re paying the whole spread. (Technically half the spread on one fund and half on the other, but all of one is a reasonable approximation. He mentioned he was aware of that.)

  14. oldie January 29, 2016 at 5:24 pm

    @pjb: there have been a lot of wise comments on this topic, and I have weighed them all in evaluating in hindsight my own wisdom and sensibility in trying to tailor just the right blend of simplicity/specialty tweaking that I can live with. But your very pragmatic way (January 26) of looking at the precision that we think we need made so much sense that it now shapes how I view things too. Simple is sensible and rational.

    I think the opportunity for tax loss harvesting, if it is there, falls in a different category, though. I took the opportunity of purchasing extra Canadian equity as ZCN rather than adding more of my existing VCE when rejigging my taxable portfolio 18 months ago. As Canadian value has zig zagged downwards since then, rather than moan about the loss, I managed to switch between ZCN and VCN every time the values reached new lows, capturing real measurable tax savings, or at least deferral, hopefully for a decade or more. But this side-line is merely that — a sideline, and I will not allow it to distort my perspective on keeping it as simple as I can.

  15. Tristan January 30, 2016 at 8:27 am

    @CCP: With regard to your comment about REITS, if an investor were comfortable with the increased cost of owning a global REIT such as RWO, and kept it in a tax protected account to deal with the tax issues, would you say it’s better to not own a Canadian REIT, such as ZRE, (because of the small REIT market in Canada) and hold all of the REIT allocation in a global REIT?

  16. BruceMcK January 30, 2016 at 9:40 am

    Hi CCP. This YouTube video explains the EF Hutton reference better than I could:
    When CCP blogs, people listen.

    I agree completely with your comment on the diversification benefits of REITs, and how that may increase return and lower volatility, but with higher complexity and higher cost. The issue I was trying to highlight is that some investors think that if they don’t own REITs or REIT funds their portfolio has 0% exposure to real estate. Broadly based indices like TSX Composite or MSCI EAFE already hold a market allocation to REITS. XIC holds 15 REITs, about 2.5% of its total. XEF holds almost 50 global REITs.

    Contrast that to high yield bonds. Funds like XBB follow an index that only holds investment grade bonds. So if an investor wants high yield bonds they are not getting them in XBB or VAB.

    Maybe I am splitting hairs, but it is important that investors understand their investments, especially if they expand their holdings beyond basic asset classes and investment styles.

  17. Chris January 30, 2016 at 1:06 pm

    I hold VCE for my Canadian so it only has a tiny amount of one REIT, RioCan at 0.6% weighting, so for my portfolio there is minimal overlap. If I were to switch to VCN, well that would be a problem. I have my REIT exposure 50% ZRE for Canadian REIT, and 50% VNQI for international REIT. I suppose that deviated from the original Couch Potato Model. No US REIT ETF, seemed to be splitting a small pie one too many times.

    Thanks for all comments for helping me make a better informed decision. I will take the CCP approach and do nothing.

    I do believe that for many who read your blog are eager to follow you advice to the letter. I have shifted to being a little less stressed about it as it seems to me that from the returns I am seeing, even though my portfolio does not resemble your current model, it ends up having pretty similar returns. The big problem with having too many parts is just that, it is a headache when it is time to rebalance. From experience, I would suggest that anyone who likes to keep things neat and tidy and their allocations close to target, less is definitely more.

    On another note, it does seem like there is a lot more to consider going forward. My current savings are exclusively in RRSP and RESPs. I am planning on saving within a corporation and I understand tax implications come into play. Do you have any recommendations for fee only advisors in the Vancouver area?

  18. gsp January 30, 2016 at 11:15 pm

    @Tristan, instead of RWO, consider the significantly cheaper REET. Best to keep international REITs in RRSPs.

  19. Mickey January 31, 2016 at 8:04 pm

    Hi Dan,

    long-time reader here, first-time commenter. Have learned a great deal from this blog – in fact, more than from any other source. You are one of the very few voices of sanity in the noisy madhouse that passes for the financial media in this country.

    Thanks very much.


  20. Canadian Couch Potato January 31, 2016 at 9:13 pm

    @Mickey: Many thanks for the comment. I may wind up in the noisy madhouse one day. :)

  21. hat1811 February 1, 2016 at 9:59 am

    Could you provide most simplest effective CCP portfolio which covers most of markets and areas.

    Thanks in advance.

  22. Canadian Couch Potato February 1, 2016 at 1:11 pm

    @hat1811: The Tangerine funds (Option 1 in the model portfolios) are certainly the easiest. More here:

  23. Terry February 1, 2016 at 8:59 pm

    CCP I love the idea of simplicity and I’m wondering if it is time to simplify my portfolio. Since 2009 I have had my asset allocation fixed at 22% TD Canadian Equity e-series, 22% TD International Equity Index e, 33% US Equity VUN (switched from TD a year ago), 16% Canadian Bond fund VAB (switched from TD a year ago) and 7% Emerging Market VEE.

    To simplify would you suggest selling VEE and distributing the proceeds throughout the rest of my portfolio? Or perhaps just stop buying VEE and let it’s percentage of my portfolio slowly drop.

  24. Canadian Couch Potato February 1, 2016 at 9:13 pm

    @Terry: If you change your target asset allocation, then it makes sense to do it cleanly by dropping emerging markets. Otherwise you have one random holding without a target. I’d suggest waiting until the next time you add new money or need to rebalance the portfolio.

  25. Dean February 2, 2016 at 1:07 pm

    Any good suggestions for Apps or software that will track my ETF investments and tell me when and how much ai have to rebalance once I’ve entered my rebalancing parameters? Thanks Spud.

  26. CharlesB February 2, 2016 at 2:34 pm

    This is an excellent post. How many portfolios have I seen with combinations of mutual funds with advisor fees, bonds, reluctantly added ETFs and individual stocks clockwork like churning every 3 months and fees which seem low but really aren’t when everything is added up?

    I’ve often considered this portfolio hypothetically:

    VAB or VSB and (broad bond or short bond)
    VCN and (Canada)
    VXC or XWD (World)
    3 trades to rebalance. Diversified and extremely cheap to hold.

    Even the Tangerine funds with a higher MER might be better for most people because they can be set up and largely forgotten so the investor or her or his advisor don’t become their own worst enemy through tinkering with it.

    Question: Does the need for simplicity hold even with larger accounts (say over 500k)? There seems to be the idea that once an account gets larger it needs to be more complex as well out there.

  27. Canadian Couch Potato February 2, 2016 at 11:06 pm

    @CharlesB: I like your model portfolio suggestions. :)

    A larger portfolio (especially one spread across multiple accounts) is inevitably going to be more complex, and it makes more sense to pay attention to asset location, tax-efficiency, fee minimization and so on. Many investors will find that DIY gets harder at that stage. But in terms of diversification, you are not likely to improve significantly on a model that already includes global equity exposure with thousands of stocks. A large portfolio can still be simple.

  28. oldie February 3, 2016 at 2:27 pm

    @CharlesB: It’s not simply that a larger portfolio demands complexity. The simple allocation of VAB/VCN/VXC is convenient, but carries a 0.25% management fee for VXC, which, for a $50,000 portfolio, assuming 50% allocated to VXC will cost $62.50 a year, which is trivial. However, for a $1,000,000 portfolio, this cost would amount to $1250 a year.

    However if you split VXC into 2 equal parts of VFV (S&P500 Index ETF, management fee 0.08%) and VIU (FTSE Developed All Cap ex North America Index ETF, management fee 0.20%), you can get your annual fee cost for this component down to $200 + $500 = $700 plus the cost of an extra transaction fee $9.95 if you rebalance all once a year. I would argue that this is not arbitrary complexity but rather splitting out components to get better pricing, and you’re only doing it once, during the initial setting up. (Like buying frozen carrots and frozen peas in bulk, rather than getting a whole bunch of more expensive packages of mixed frozen peas and carrots). You are encountering the effects of this extra component again, yearly, in the extra calculation involved and the extra $9.95 transaction cost during rebalancing, I suppose, but that’s the sum total of the complexity, such as it is. For the $540 difference a year, I would do it.

    I agree, there remains the slippery slope towards more tinkering, but just sticking to this one saving by splitting the pricey component into cheaper parts, it seems to me an obvious thing to do.

  29. Tristan February 3, 2016 at 8:16 pm

    @oldie, CharlesB: I would argue that for the sake of simplicity, so to speak, in the context of a $1M portfolio even $1250 a year is trivial. I think that at, there are Bogleheads managing portfolios north of $10M with the American equivalent of the 3 Fund portfolio (+1 fund, a tax efficient municipal bond fund in a taxable account). Of course there are financial planning issues, too, but even at that level the portfolio can still be simple.

  30. oldie February 3, 2016 at 8:40 pm

    @Tristan: The $540 difference as a percentage of the $1M certainly is trivial. The $540 for free every year (or rather the $540 not being carved off of an amount that I spent a lifetime earning and saving, cent by cent) definitely is not. Maybe it’s a generational thing. I don’t toss loonies in the sea for fun, just because it’s cheap. If by doing a trivial bit of extra calculation every year, and taking the time to do one more trade (really, how un-simple is that?) I earn/save/protect $540 (guaranteed) every time I do it, what’s my payoff in $ per hour? Sorry, I just can’t pass that up. And I would think less of a financial advisor that I’d just paid $2000 for if he/she thought that was beneath his/her pay rate to mention. But you’re right, it is a choice.

  31. BeSmartRich February 4, 2016 at 10:04 am

    The longer I invest the more I feel that keeping investing simple is really hard to achieve. Picking individual undervalued stock seems to be an answer for many and yet the outcome does not seem to favor the stock picker than indexer.

    Thanks for sharing as always I learn a lot from your site.



  32. Doug February 4, 2016 at 8:29 pm

    Isn’t the periodic rebalancing of a couch potato type of portfolio is an important factor in the system’s success?

    Doesn’t reducing the number of asset class items limit the opportunities for buying low and selling high when rebalancing? Does rebalancing contribute to performance?

    Unless all equity markets are closely correlated (which seems to be the case recently), it seems to me that there would be more opportunities to take advantage of rebalancing by holding separate markets as asset classes (e.g. US, international, small-caps, emerging markets), than by holding these all in one asset class.

    If there is nothing to be gained by rebalancing equity markets when some are strong and some are weak, one might as well just buy two ETFs, one with bonds, and a whole world equity one. That’s one step away from just buying a balanced mutual fund.

  33. Jas February 5, 2016 at 6:35 am

    @Doug: If most of your investments are held in unregistered accounts, the MER is tax deductible. This is similar to mutual funds:

    This is because ETFs and mutual funds deduct their management fees before passing along distributions to the investors.

    For this reason, inside taxable accounts, the MER difference between two ETFs doesn’t affect as much your total “after tax” management fees as you would think.

  34. Mike February 5, 2016 at 4:33 pm

    What I don’t see often mentioned in these discussions about simplicity, is that the difficulty to re-balance and keep everything straight when you are also managing a spouse’s accounts at least doubles the effort, if not worse.

    You are tracking contribution limits for four separate registered accounts, perhaps also juggling one with US currency, maybe a spousal RSP or two, and all of these are kicking out dividends and you are playing the shell game to try to keep things as consolidated as possible within their respective accounts. Then add some taxable accounts into the mix.

    Then in theory you want to set up DRIPs for all these, but in reality you don’t get around to it because you’re just happy to have the pie chart looking approximately right after the smoke clears, pour yourself a scotch and forget about it for a long while. So then you have these dividends kicking out and cash sitting around and wonder why your portfolio didn’t perform as well it was supposed to last year.

    So yeah, less is more.

  35. Mike February 5, 2016 at 5:45 pm

    @Doug, consolidation of asset classes into a smaller set of ETFs is just downloading the rebalancing work onto the ETF managers. Or, ultimately, as you state, the end game of that argument is a single ETF or balanced fund that happens to reflect your target allocation and risk profile.

    The rebalancing is going to happen either way. The question is one of cost.

    The point of this post seems to be that the benefits of simplification are going to outweigh the myriad ways DIYers are going to blow it by trying to get granular with asset classes that are reasonably covered off in the broader ETFs anyway.

  36. Dave February 6, 2016 at 3:12 pm

    I am wondering if you are worried about a potential recovery to the CND dollar and how it will negatively affect VXC. I’ve been noticing the strong affect the dollar has on the stocks performance. On days when all global markets have been up, VXC has even been down a bit due to a gaining CND dollar. The dollars fall was obviously key to the success of VXC last year but it seems the dollar doesn’t have much lower to go. If it does recover, have you thought about investing in a currency hedged ETF instead of VXC? Or are you concerned at all about the CND dollar recovering? I’m sure VCN will go up as the dollar goes up but like a lot of people, I have a much higher percentage of my portfolio in VXC.

  37. […] to switch to a three-fund portfolio, but he got emails from his unconvinced readers. To explain why simple is still a hard sell, the Canadian Couch Potato cited some insights from Ben Carlson’s book, A Wealth of Common […]

  38. Canadian Couch Potato February 6, 2016 at 10:01 pm

    @Doug: First off, fewer funds does not necessarily mean fewer asset classes: whether you hold a fund like VXC or three individual ETFs covering US, international and emerging markets, your market exposure is essentially the same. Will there be more rebalancing opportunities with the three individual funds? Probably, but these are not likely to be very significant. Remember that rebalancing is primarily a risk management strategy: any boost in returns is a bonus.

  39. Alex February 8, 2016 at 9:50 pm

    at end of January 2016 I made RRSP transfer from Sunlife to TD
    Currently amount above 200K located in cash in TD investment account.
    Goal is place everything in e-Series Funds (balanced or Assertive model)

    In current market situation (everything is dropping..) and all money now in Cash
    I am considering several scenario
    1. buy funds on all 200k at once and see how market continue dropping or rise
    2. buy funds over period of time (3-6 months) 30-50K each time
    3. buy funds every week 1-10K each time and if market goes up use the rest of the cash all at once

    Would you advise to use any of the specified scenario, to get advantage of “average” price?

  40. Julio February 10, 2016 at 10:08 am

    any comment on Dave’s question above?

  41. Canadian Couch Potato February 10, 2016 at 10:23 am

    @Julio and Dave: I have been hearing this question frequently, but I can’t tell individual investors what to do. Please understand that concerns about currency fluctuations are no different from any other market timing question. Switching to currency hedged ETFs may indeed protect you if the CAD rises in value. But why not also switch to short-term bonds because interest rates are likely to go up, or get out of Canadian equities because our economy is in the doldrums, or make any number of other tactical decision that at some point will need to be reversed based on market conditions?

  42. Julio February 10, 2016 at 10:44 am

    Good point. Thanks Dan.

  43. CJBob February 10, 2016 at 1:19 pm

    On currency hedging, I sold approximately 25% of my SPY and at the same time bought VSP which is hedged as the CAD $ started to strengthen.

    Ironically this goes against the keep it simple argument, but it does help me sleep better at night knowing I’m not as affected by the exchange rate. Seeing the US market drop AND the CAD $ strengthen is tough to ignore even if you know it’s the right thing to do.

    I’m not planning on adjusting these percentages at any point in the future. I don’t know which was the currency is going and I’m not guessing. I’m just trying to smooth out the ups and downs a bit which I believe this approach will help with.

  44. Sue February 10, 2016 at 4:16 pm

    Thanks for a great article. I just started looking at all my hubby and I’s investments and we have 50% of our investments in mutual funds and the other half in stocks. I want to simplify our portfolio as I don’t see my husband and I being active investors. Its not our passion or interest. How would you recommend I go about moving these investments to index funds? Should I sell the the higher returning mutual funds and wait for the rest of them to increase in price? Thanks!

  45. Alex February 10, 2016 at 8:14 pm

    Hi ,
    any comments on my question (Alex February 8, 2016 at 9:50 pm )

    I apologise if I posted in wrong topic ( could not locate correct topic to post my question)

    I did some calculation (used one of the TD e funds as example)

    If on 2015/12/31 I invest 100000$ into fund at price 49.78 I would get 2008.839 units
    if I invest 10 times by 10000$ every few days between 2016/01/01 and 2016/02/01 I would own 2118.753 units at average price 47.195

    Any suggestion on what over what period of time (1 month – 1 year) would be beneficial to transfer 200K from cash to TD e-funds

    Thank you

  46. Canadian Couch Potato February 11, 2016 at 8:25 am

    @Alex: The answer to your question can only be known in hindsight. If markets go down over the next year or so, then you would have been better off investing gradually. If markets go up, then you would have been better off investing the lump sum all at once:

    @Sue: Once you have decided on an appropriate investment plan for the future, it does not make sense to hold on to poorly performing funds or stocks and wait for them to get back to even. They might never get back to even. If the concern is deferred sales charges or tax implications, then it might make sense to make a gradual transition. Otherwise doing everything at once is usually the best strategy:

  47. Nate February 11, 2016 at 4:25 pm

    How often to I need to rebalance my small portfolio? I have 3 index funds, Canadian Equity (50%), US Equity (25%) and International Equity (25%). I have fixed income elsewhere (Defined Benefits Pension Plan, Gov’t Job which is union, and some cdn bonds and managed mutual funds)

    Do I buy/sell each year within my index portfolio to make sure it’s still 50/25/25?


  48. Rik February 11, 2016 at 6:38 pm

    Hi Dan,
    I’m a long time reader, and now a 4 year passive investor. THANK YOU for this blog. It has really provided me the tools and information to feel like I’m in control of my investment finances.

    I have one quick question though. What if someone is nearing retirement (not me, but I’m sure some are). What would be your suggestion for a model portfolio? How would you advise people (the 99.9% mentioned earlier in the comments)?

    FYI…I subscribe to Moneysense and have read your article on “A better way to generate retirement income”. I think it is excellent! I assume this would be your take on the subject. Would you be interested in posting a blog post on this topic?

  49. Keyboardhero February 12, 2016 at 12:06 pm

    Long time reader, first time poster. Love the blog.
    @CCP, @Willy

    “Over 100 years, performance of these wildly different portfolios are all within ~1% CAGR.”

    “The key takeaway is that allocations will perform very differently over periods of even a decade or two, and all of them will look terrible at some point. But over the very long term the differences become small, and therefore almost any reasonably diversified portfolio should deliver decent results if maintained with discipline”

    I have to ask, who has a 100 year investment time frame available to them? I would expect that the idea of all or most investments is that at some point the individual will be taking said invested money back out for one reason or another. A 100 year (or even arguably a multi decade depending on the individuals situation) strategy doesn’t offer realistic expected returns for an individual. As such, I can’t see how a 100 year back test offer much evidence that one strategy is as effective as another to someone with, say, a 20 year time horizon. “A decade or two” makes all the difference in the world to them.

    I just find it difficult to argue a generic “disciplined and diversified strategy” will work for all (or most, or even any) because over an extraordinarily long period of time they always tend to work. It needs to be weighed against said persons expected time frame, and situation, does it not? As such, is a certain amount of complexity or change is always necessary, no?

    Or put another way… a 20 year old shouldn’t be investing the same as a 60 year old. And an individual on a 1 year contract job shouldn’t be investing the same as an individual with job security and a healthy pension. The most effective strategy for each will be unique, because the applicable risk to each is unique.

    Do we just tell the 45 year old oil worker in Alberta who is the sole provider for a family of 4, just tough it out, because your investment will be fine in 20+ years? Was it really in his best interests to maintain (or even reinvest further to capture “cheaper” market prices) when he loses his job and is forced to tap into that simple, diversified and disciplined investment that just fell another 10%?

    I don’t want to downplay the importance of the ideas being discussed here. Simplicity, diversification, discipline all are important. No question. Yet I don’t think the relative importance of time and situation to the individual shouldn’t be overlooked either. They matter a lot.

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