Welcome to Canadian Couch Potato, a blog designed for Canadians who want to learn more about investing using index mutual funds and exchange-traded funds.

The Couch Potato strategy—also called index investing, or passive investing—is growing in popularity as more people become disillusioned with overpriced, actively managed mutual funds and stock-picking strategies that try, usually in vain, to beat the market. For an introduction to the strategy, read our most frequently asked questions below.

The Couch Potato strategy is a way of building a diversified, low-maintenance portfolio designed to deliver the returns of the overall stock and bond markets at minimal cost. It can reduce your fees by as much as 90%, while at the same time beating the majority of mutual funds and professionally managed accounts.

While most investing strategies are based on picking individual stocks, making economic forecasts, and timing the markets, Couch Potato investors recognize most of these activities are counterproductive. They understand that investors give themselves a greater chance of success by simply accepting the returns of the broad stock and bond markets.

The strategy—also called index investing, or passive investing—has been around for decades, though it has become far more popular in recent years, as new products and online brokerages have made it easier and cheaper to implement. Anyone can now build and maintain an extremely well diversified portfolio using index mutual funds or exchange-traded funds (ETFs).

First it’s important to understand what an index is: it’s a group of stocks or bonds used to measure the performance of a particular market. For instance, the S&P/TSX Composite Index includes about 240 companies traded on the Toronto Stock Exchange, and it’s considered a barometer of the entire Canadian equity market.

Similarly, the S&P 500 is a well-known index that measures the U.S. market by tracking 500 of the largest companies. The MSCI EAFE Index is a popular benchmark for stocks in Europe, Australia, Japan and other developed countries overseas. Indexes can also track the fixed-income market, such as the widely used FTSE Canada Universe Bond Index, which covers both government and corporate bonds in Canada.

An index fund simply holds all (or almost all) of the stocks or bonds in a particular index. The idea is to deliver a return extremely close to that of the overall market. That’s different from the goal of “actively managed” mutual funds, which try (usually unsuccessfully) to choose individual securities that will outperform the market.

To use a favourite phrase of the late John Bogle, the father of index investing, instead of looking for the needle in the haystack, index funds just buy the haystack.

Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a portfolio of stocks or bonds. However, unlike mutual funds, ETFs are bought and sold on an exchange, like stocks.

ETFs have become the most popular product for Couch Potato investors, because many of them track well-known stock and bond indexes at extremely low cost. (In Canada, especially, index mutual funds tend to be much more expensive.) There is also a wide variety of ETF options in all of the major asset classes, such as Canadian stocks, U.S. stocks, international stocks, as well as Canadian and foreign bonds. 

The largest ETF providers in Canada are Vanguard, BlackRock (iShares) and BMO, all of whom offer excellent low-cost products for index investors.

In a 1991 article, Scott Burns, then a financial writer for the Dallas Morning News, suggested investors simply put half their money in an index fund that tracked the S&P 500, and the other half in a fund that tracked the US bond market. Every year, he said, you should rebalance the portfolio so it’s once again 50% stocks and 50% bonds.

“You need to pay attention to your investments only once a year,” he wrote. “Any time it’s convenient. Any time you can muster the capacity to divide by the number two.” He called his ultra-simple investment idea the “Couch Potato portfolio.”

When MoneySense magazine was launched in 1999, founding editor Ian McGugan brought the Couch Potato to Canada. The MoneySense website has remained a leading source of information about index investing, especially through the features and columns of Dan Bortolotti.

To many investors, the idea that the Couch Potato strategy can beat most professional money managers seems ridiculous—as though someone were selling a golf strategy that could beat most players on the PGA Tour. The difference, however, is that pro golfers routinely shoot under par, while most mutual fund managers underperform the overall market once you account for fees.

Even the greatest investor of our time has been saying so for more than two decades. As far back as his 1996 letter to Berkshire Hathaway shareholders, Warren Buffett wrote: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results delivered by the great majority of investment professionals.”

The index provider S&P produces a regular scorecard that compares the performance of actively managed mutual funds around the world to appropriate indexes. Over almost any meaningful period, only a small minority of funds outperform.

For example, according to the SPIVA Scorecard for June 30, 2019, only 12% of actively managed Canadian equity mutual funds delivered higher returns than their benchmark index over the previous 10 years, while the figure for U.S. equity funds was less than 2%, and for international equities it was under 13%. 

Moreover, while investment companies love to boast when their funds do beat the market, the evidence is clear that outperformance does not persist over time. The best predictor of future success is not past performance, but low fees. 

Rather than paying money managers high fees to try in vain to beat the market, Couch Potato investors simply aim for market returns at the lowest possible cost. After all, successful investing is not about outperforming an index: it’s about reaching your financial goals while taking only as much risk as you need to. The best way to do that is to save diligently, diversify broadly, and keep fees and taxes to a minimum.

Indexing strategies are used by the most sophisticated pension and endowment fund managers in the world, and many of its proponents are Nobel laureates. Yet many financial advisors are contemptuous of the whole idea.

There are several reasons for this. The most cynical is that advisors often make their money from commissions on the products they sell. Many don’t offer index funds simply because they’re not profitable enough. In other cases, advisors may be licensed only to sell mutual funds and not ETFs. Because they don’t sell them, these advisors often don’t even understand how ETFs work.

Advisors who advocate active strategies are typically not being dishonest: they have genuinely  convinced themselves they are among the tiny few who can earn market-beating returns for their clients. (This sort of overconfidence is rampant among DIY stock-pickers, too.)

There’s a growing number of advisors who build index portfolios for their clients, but many have high minimum account sizes (often $500,000 per household, or even more). For those with more modest portfolios, a better option is to build and maintain your own portfolio at an online brokerage.

If you’ll be managing your portfolio yourself, start by opening an account with an online brokerage, which allows you to buy investments directly, without an advisor. Depending on your situation, you might open a TFSA, an RRSP, a non-registered (taxable) account, or even all three. 

ETFs and index mutual funds are available through any online brokerage, and most offer similar features and pricing. It’s convenient to use the brokerage associated with the bank where you have your chequing account, though non-bank brokerages often charge lower fees and trading commissions.  To help you decide which is right for you, see Canada’s Best Online Brokerages in MoneySense, or the Globe and Mail‘s annual ranking.

If your assets are currently with an advisor or mutual fund dealer, you’ll need to transfer your current holdings—stocks, bonds, funds—to your new brokerage account. Don’t worry, transfers from one account to another of the same type (for example, from one RRSP to another RRSP) will have no tax consequences: they will not be considered a withdrawal and will not affect your contribution room.

If your investments are all in TFSAs and RRSPs, then selling your current holdings won’t have any tax consequences either. However, selling investments in a non-registered account will result in capital gains or losses, so make sure you understand this before making a switch.

It’s usually best to transfer your current holdings “in kind” and then sell them after they land in your new accounts. However, some mutual funds can’t be transferred in-kind: you may need to sell them first and then transfer the cash. Some illiquid investments (such as GICs) may not be eligible for transfer at all: you may have to wait until they mature.

Transferring your existing accounts will involve some paperwork and fees, and it usually takes a couple of weeks, sometimes longer. Your new brokerage can make sure you complete the right forms, and they may reimburse the transfer fees if you’re moving a large sum.

Once all the cash is in your new account, you can build your new Couch Potato portfolio with ETFs or index mutual funds.

It’s easy to get overwhelmed by the hundreds of ETF options available today. The good news is that building a broadly diversified portfolio is easy: you can even do it with a single fund. See the Model Portfolios page for suggestions.

Note that these model portfolios include several different targets for stocks and bonds. Conservative investors should allocate a greater to share to bonds (which are less risky) and less to stocks. Aggressive investors can take more risk by allocating a higher proportion to stocks. Most investors will be well-served by a balanced portfolio of somewhere between 30% and 80% stocks.

Choosing the right asset allocation is an important decision, so take time to consider it carefully. It’s common for new investors to overestimate their tolerance for losses. A good rule of thumb is that stocks can lose half their value during a brutal bear market: that’s what happened between September 2008 and March 2009. If you’re considering a portfolio of 80% stocks, you should be prepared for the possibility of a 40% loss. 

It’s more tangible if you think about potential losses in dollar terms. For example, if your portfolio is $100,000, a loss of 40% is $40,000. Could you stomach losing that much—the price of a new car—without panicking and abandoning your long-term plan?

The Couch Potato strategy is simple in many ways: you don’t need any stock-picking skill, you can get started with small amounts of money, and if you choose a one-fund portfolio there’s almost no maintenance involved. But as Warren Buffett famously said, “Investing is simple, but not easy.”

One of the most common obstacles for new investors is analysis paralysis: they become so overwhelmed with the decisions that they procrastinate, sometimes for years. A related problem is the tendency to tinker: some investors start off with a simple and elegant Couch Potato portfolio but can’t resist adding individual stocks or exotic ETFs. This is understandable when there are so many ETFs available today, and so much advice (ranging from wise to dreadful) in the mainstream media, blogs and online communities.

If you’re just getting started in investing, do your best do keep your portfolio as simple as possible. Don’t make the mistake of thinking that more holdings means better diversification: often it just means more complexity and greater frustration. The one-fund portfolios (also called asset allocation ETFs) now available from Vanguard, iShares and BMO have made index investing easier than it’s ever been, and they are the best solution for all but the most advanced DIY investors. 

Even if you manage to get started with a great portfolio and a solid investment plan, at some point you will be tempted to abandon it. The financial media is hyper-focused on short-term market news, economic forecasts, and self-interested gurus who will do their best to divert you from your long-term plan. Index investing, in particular, is often singled out as naïve, even foolish—most often by money managers who have spent years lagging those same index funds. Don’t underestimate how hard it will be to resist these distractions.

Lack of patience is also a problem for new investors. If you’ve recently moved from stock-picking or active mutual funds to a Couch Potato approach, you might think, “I’ll try this for a year and see how it goes.” That’s the wrong mindset: you can’t evaluate a long-term decision based on short-term results. If you’ve researched the strategy and you believe in its principles, give it time to work.

The information on this site is provided for educational purposes only and should not be considered investment advice nor a recommendation to buy or sell individual securities. Before browsing the site, please read the Disclaimer and Policies page.

The author

Dan Bortolotti, CFP, CIM, is a portfolio manager and financial planner with PWL Capital in Toronto. He is also a veteran journalist and author who has written about personal finance for many Canadian publications, including MoneySense, the Globe and Mail and Financial Post.

Read more

Welcome to Canadian Couch Potato, a blog designed for Canadians who want to learn more about investing using index mutual funds and exchange-traded funds.

The Couch Potato strategy—also called index investing, or passive investing—is growing in popularity as more people become disillusioned with overpriced, actively managed mutual funds and stock-picking strategies that try, usually in vain, to beat the market. For an introduction to the strategy, read our most frequently asked questions below.

The Couch Potato strategy is a way of building a diversified, low-maintenance portfolio designed to deliver the returns of the overall stock and bond markets at minimal cost. It can reduce your fees by as much as 90%, while at the same time beating the majority of mutual funds and professionally managed accounts.

While most investing strategies are based on picking individual stocks, making economic forecasts, and timing the markets, Couch Potato investors recognize most of these activities are counterproductive. They understand that investors give themselves a greater chance of success by simply accepting the returns of the broad stock and bond markets.

The strategy—also called index investing, or passive investing—has been around for decades, though it has become far more popular in recent years, as new products and online brokerages have made it easier and cheaper to implement. Anyone can now build and maintain an extremely well diversified portfolio using index mutual funds or exchange-traded funds (ETFs).

First it’s important to understand what an index is: it’s a group of stocks or bonds used to measure the performance of a particular market. For instance, the S&P/TSX Composite Index includes about 240 companies traded on the Toronto Stock Exchange, and it’s considered a barometer of the entire Canadian equity market.

Similarly, the S&P 500 is a well-known index that measures the U.S. market by tracking 500 of the largest companies. The MSCI EAFE Index is a popular benchmark for stocks in Europe, Australia, Japan and other developed countries overseas. Indexes can also track the fixed-income market, such as the widely used FTSE Canada Universe Bond Index, which covers both government and corporate bonds in Canada.

An index fund simply holds all (or almost all) of the stocks or bonds in a particular index. The idea is to deliver a return extremely close to that of the overall market. That’s different from the goal of “actively managed” mutual funds, which try (usually unsuccessfully) to choose individual securities that will outperform the market.

To use a favourite phrase of the late John Bogle, the father of index investing, instead of looking for the needle in the haystack, index funds just buy the haystack.

Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a portfolio of stocks or bonds. However, unlike mutual funds, ETFs are bought and sold on an exchange, like stocks.

ETFs have become the most popular product for Couch Potato investors, because many of them track well-known stock and bond indexes at extremely low cost. (In Canada, especially, index mutual funds tend to be much more expensive.) There is also a wide variety of ETF options in all of the major asset classes, such as Canadian stocks, U.S. stocks, international stocks, as well as Canadian and foreign bonds. 

The largest ETF providers in Canada are Vanguard, BlackRock (iShares) and BMO, all of whom offer excellent low-cost products for index investors.

In a 1991 article, Scott Burns, then a financial writer for the Dallas Morning News, suggested investors simply put half their money in an index fund that tracked the S&P 500, and the other half in a fund that tracked the US bond market. Every year, he said, you should rebalance the portfolio so it’s once again 50% stocks and 50% bonds.

“You need to pay attention to your investments only once a year,” he wrote. “Any time it’s convenient. Any time you can muster the capacity to divide by the number two.” He called his ultra-simple investment idea the “Couch Potato portfolio.”

When MoneySense magazine was launched in 1999, founding editor Ian McGugan brought the Couch Potato to Canada. The MoneySense website has remained a leading source of information about index investing, especially through the features and columns of Dan Bortolotti.

To many investors, the idea that the Couch Potato strategy can beat most professional money managers seems ridiculous—as though someone were selling a golf strategy that could beat most players on the PGA Tour. The difference, however, is that pro golfers routinely shoot under par, while most mutual fund managers underperform the overall market once you account for fees.

Even the greatest investor of our time has been saying so for more than two decades. As far back as his 1996 letter to Berkshire Hathaway shareholders, Warren Buffett wrote: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results delivered by the great majority of investment professionals.”

The index provider S&P produces a regular scorecard that compares the performance of actively managed mutual funds around the world to appropriate indexes. Over almost any meaningful period, only a small minority of funds outperform.

For example, according to the SPIVA Scorecard for June 30, 2019, only 12% of actively managed Canadian equity mutual funds delivered higher returns than their benchmark index over the previous 10 years, while the figure for U.S. equity funds was less than 2%, and for international equities it was under 13%. 

Moreover, while investment companies love to boast when their funds do beat the market, the evidence is clear that outperformance does not persist over time. The best predictor of future success is not past performance, but low fees. 

Rather than paying money managers high fees to try in vain to beat the market, Couch Potato investors simply aim for market returns at the lowest possible cost. After all, successful investing is not about outperforming an index: it’s about reaching your financial goals while taking only as much risk as you need to. The best way to do that is to save diligently, diversify broadly, and keep fees and taxes to a minimum.

Indexing strategies are used by the most sophisticated pension and endowment fund managers in the world, and many of its proponents are Nobel laureates. Yet many financial advisors are contemptuous of the whole idea.

There are several reasons for this. The most cynical is that advisors often make their money from commissions on the products they sell. Many don’t offer index funds simply because they’re not profitable enough. In other cases, advisors may be licensed only to sell mutual funds and not ETFs. Because they don’t sell them, these advisors often don’t even understand how ETFs work.

Advisors who advocate active strategies are typically not being dishonest: they have genuinely  convinced themselves they are among the tiny few who can earn market-beating returns for their clients. (This sort of overconfidence is rampant among DIY stock-pickers, too.)

There’s a growing number of advisors who build index portfolios for their clients, but many have high minimum account sizes (often $500,000 per household, or even more). For those with more modest portfolios, a better option is to build and maintain your own portfolio at an online brokerage.

If you’ll be managing your portfolio yourself, start by opening an account with an online brokerage, which allows you to buy investments directly, without an advisor. Depending on your situation, you might open a TFSA, an RRSP, a non-registered (taxable) account, or even all three. 

ETFs and index mutual funds are available through any online brokerage, and most offer similar features and pricing. It’s convenient to use the brokerage associated with the bank where you have your chequing account, though non-bank brokerages often charge lower fees and trading commissions.  To help you decide which is right for you, see Canada’s Best Online Brokerages in MoneySense, or the Globe and Mail‘s annual ranking.

If your assets are currently with an advisor or mutual fund dealer, you’ll need to transfer your current holdings—stocks, bonds, funds—to your new brokerage account. Don’t worry, transfers from one account to another of the same type (for example, from one RRSP to another RRSP) will have no tax consequences: they will not be considered a withdrawal and will not affect your contribution room.

If your investments are all in TFSAs and RRSPs, then selling your current holdings won’t have an