What Is Couch Potato Portfolio And How You Can Implement It
- 4 Comment
Everybody likes to have great return on their investment. However, Many of us just do not have time and knowledge to follow the market. Thankfully, there is one simple method to construct your portfolio to gain great return in a lazy easy way. Couch potato portfolio was first introduced by MoneySense magazine in Canada. It is the simplest way to achieve good performance with relatively low risk for your investment. For the past 30 years, if you have constructed your investment by following the couch potato method, you would have realized more than 11% annual return. According to MoneySense, couch potato portfolio is based on three ideas:
- Keep your investment cost low. Every investment comes with some sort of cost and fee. If you buy stocks directly, you need to pay commission. If you buy mutual funds, there is management fee. By following the couch potato portfolio, it allows you to keep your investment cost in a very low level.
- Diversify among different types of assets. It is a portfolio. Therefore, you are not just buying one stock or stocks in just one market. Your investment will be spread among different industries and countries to keep your risk at minimum.
- Rebalance once a year to get back to your original asset allocation. This is the control part in couch potato portfolio. Although it is a pretty much auto pilot investment type, it still require some attention from you. But do not worry. There is not much work, probably 15 minutes per year.
Sounds interesting and think you can handle this? Alright, the following is a step-by-step guide on how to implement it:
- Firstly, you should realize that the implementation of couch potato portfolio is done through buying index funds or ETFs.
- Determine your assets allocation and what industries and countries you want to put your money into. For example, I have decided to put 20% of my money in fixed income and 80% in equities/stocks. Moreover, all of the 20% will be put into a ETF tracking bond index. For the 80%, I want to invest in countries in US, Canada, Australia/Europe and real estate market in Canada with the same amount of money in each. Assuming I have $10,000 in hand and using ETFs from iShares Canada as an example, I should construct my couch potato porfolio as follows:
XBB(iShares™ CDN Bond Index Fund): $2000 ($10,000*20%)
XSP(iShares™ CDN S&P 500 Index Fund): $2000($10000*80%*25%)
XIC(iShares™ CDN Composite Index Fund): $2000($10000*80%*25%)
XIN(iShares™ CDN EAFE International Index Fund): $2000($10000*80%*25%)
XRE(iShares™ CDN REIT Sector Index Fund): $2000($10000*80%*25%)
The above is an example. How you would like to pick your assets allocation should be based on your long term goal and your risk tolerance level.
- After you bought the investments and sometimes later, since market is always changing, you will see some of your holdings going up and some goes down. For example, let’s assume the following changes have happened to our original investments:
XBB down 10% to $1800,
XSP down 15% to$1700 ,
XIC up 5% to $2100,
XIN down 20% to $1600 ,
XRE down 10% to $1800.
As you can see now, compared with your original goal and assets allocation, the amounts of investment in each ETFs are off the target. Now it is the time to rebalance them so all of them can be on the right track again. There are two ways to do this. If you have new money waiting to be invested, you can buy according amount of each ETF/index fund to bring them to the correct track. If not, you can sell some of the ETFs which have gone up in value to buy those which are recently down. The biggest mistake in investment is to buy high and sell low. By rebalancing your couch potato portfolio, you are buying low and selling high even without your notice.
Couch potato is very easy to implement. Every body can do it. It is all about to set your goal, draft a plan and then stick to it. If you have any questions, please leave me a comment. If you like this article, please share it by clicking the “Share This” button. Good luck being a couch potato. 
4 Comments on this post
Trackbacks
-
Hamilton said:
“Now it is the time to rebalance them so all of them can be on the right track again. There are two ways to do this. If you have new money waiting to be invested, you can buy according amount of each ETF/index fund to bring them to the correct track. If not, you can sell some of the ETFs which have gone up in value to buy those which are recently down.”
Wouldn’t the buy and hold strategy be more profitable? The initial cost of purchasing an ETF/index funds could be higher then the earnings.
Also, how would you rebalance the portfolio if you had an additional 10,000 to contribute each year?Note: The figures are incorrect. (ex. XBB up 10% to $1800) on a $2000 investment?! I’ve corrected the numbers for my example.
Example: the following changes have happened to our original investments.
XBB up 10% to $2200,XSP down 15% to $1700 ,
XIC up 5% to $2100,
XIN down 20% to $1600 ,
XRE down 10% to $1800.
Note: These changes amounted to -$3000 (-30%) return OUCH
*A rebalanced portfolio while contributing (cont.) 10,000 would look like this
Portfolio Amount = $17,000 ($7000 + $10,000 cont.)XBB(iShares™ CDN Bond Index Fund): $3400 ($2200+1200 cont.)
XSP(iShares™ CDN S&P 500 Index Fund): $3400($1700+1700 cont.)
XIC(iShares™ CDN Composite Index Fund): $3400($2100+1300 cont.)
XIN(iShares™ CDN EAFE International Index Fund): $3400($1600+1800 cont.)
XRE(iShares™ CDN REIT Sector Index Fund): $3400($1800+1600 cont.)
My question is, is this a buying low and selling high strategy? OR am I just confused?! I hope this a proper example of a Couch Potato Portfolio. Any reply would be greatly appreciated and I hope my questions are on the minds of other new investors. Great Post though littlemoneylab, thank you!
August 5th, 2008 at 10:28 pm -
littlemoneylab said:
Hi, Hamilton
Thank you for your comment. First of all, I am sorry for the incorrect figure. For XBB, I meant to say 10% down instead of UP. I have corrected it in the post.As for the buy and hold strategy vs. re balancing each year: If you have new contribution added each year, you are actually excising the buy and hold strategy and re balancing at the same time. Without new contribution, re balancing will avoid some unnecessary risks to your portfolio. You sell the ETFs that went up in a short time to avoid the risk that they might drop and buy the ones which went down to add shares and to seek the opportunities to future growth. I have yet to compare the results from pure buy and hold strategy and re balancing. I think it is a great idea for a post and will do it later.
In your example, you are not down 30%, but 6% (10,000-9400)/10000=6%. The re balancing is set up correctly in your example. You basically buy the one went down the most (XIN) with the largest amount of the money and follow by XSP, XRE,XIC,and XBB. With new contribution, re balancing is to put the most amount of money into the one went down sharpest and least amount of money into the one went down the lowest. “Buy low and sell high” might sound confusing for this. But you get the idea.
I hope that has answered your question.August 6th, 2008 at 12:55 pm -
Hamilton said:
Thank you so much for your quick response. You did answer my question and I’m going to invest real money using the Couch Potato strategy. I’ll be sure to keep in touch, goodnight!
August 7th, 2008 at 2:00 am -
littlemoneylab said:
No problem, Hamilton. I am glad that you enjoy reading my post.
August 7th, 2008 at 4:34 pm
