What is Canadian Couch Potato investing?

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by Brendan Lee Young March 8, 2021 / No Comments

The Canadian Couch Potato (CCP) is a blog created by Dan Bortolotti to help Canadians implement the Couch Potato investing strategy.

The Couch Potato strategy began in the US in the 90s. It’s a super simple passive strategy that doesn’t require a lot of time to manage, hence the name. Instead of investing your money in stocks, it suggests splitting your money between US stocks indices and US bond indices 50/50. Then, you just have to rebalance yearly to maintain the same allocation over time.

The CCP adopted this strategy for Canadians to also take advantage of its benefits. Their blog includes Canadian Couch Potato model portfolios and helpful information on how to implement them.

Canadian Couch Potato Portfolios

The CCP recommends a few different portfolios that are a blend of stock and bonds. They provide multiple allocations (i.e. the portion of stock vs. bonds) for the investor to choose from. All of their portfolios are made of broad market securities in Canada, the US, and internationally. For each of their recommendations, they provide historical returns and Management Expense Ratio (MER).

Their recommendations include two types of portfolios:

Asset Allocation ETF portfolios

Asset allocation or one-fund ETFs are essentially ETFs of ETFs that are rebalanced automatically. They are made up of both stock and bond ETFs and come in multiple stocks to bond allocations (20/80, 40/60, 60/40, 80/20), so they are suitable for all types of investors risk-tolerances.

The one-fund ETFs recommended by the CCP give investors exposure to both Canadian and international markets, so it is an effortless way to have a diversified portfolio.

These one-fund ETFs are straightforward to manage since you don’t have to rebalance. All you have to do is buy them regularly to build your portfolio. It’s commission-free at most online brokerages.

They’re also a low-cost option compared to mutual funds. For example, there is a 0.20% MER for iShares’ asset allocation ETFs and 0.25% for Vanguards’.

However, they do come with a few inconveniences. Namely, they are not as flexible and more expensive compared to buying their underlying ETFs. The CCP blog provides a breakdown of each recommended asset allocation ETF, so purchasing the underlying ETFs is also an option.

Asset Allocation ETFs didn’t exist until 2018. In the past, the CCP recommended a 3 ETF fund that needed to be rebalanced regularly: Canadian stocks (VCN), Canadian bonds (ZAG), and international stocks (XAW) exposure. This new recommendation is easier to implement and is a little more diversified (exposure to global bonds). However, it’s not as flexible since you can’t change the allocation of each ETF in a one-fund ETF.

Index funds portfolios

TD e-series index funds are another option provided by the CCP. It’s only available for TD clients and more expensive than the asset allocation ETFs. However, like a mutual fund, it has the benefit of letting you invest a given amount of money (instead of several shares) at any time. It’s available even when the markets are closed, and it’s all commission-free. These index funds are also available in multiple stock/bond allocations, ranging from 70% bonds/30% equities to 10% bonds/90% equities.

Both options are relatively similar in terms of performance, so it’s really up to individual investors to choose between a more cost-efficient approach and a more user-friendly one.

Why is Canadian Couch Potato investing so popular?

There are a few reasons why the CCP strategy is popular:

  1. It is a low-cost option. As mentioned above, the options proposed on the CCP blog are between 0.12% and 0.41% in terms of MER.

You can even recreate one-fund ETF allocations by investing in their underlying ETFs instead and save a little more on fees. For example, with VGRO, you’d save 0.09% per year, which can add up with a growing portfolio.

  1. It offers broad diversification. The CCP portfolios have broad diversification across industries and internationally, limiting the risk exposure of your investments.
  2. It is easy to implement. All you have to do is invest regularly in an all-in-one fund.
  3. It outperforms most actively managed funds. According to this SPIVA report, in 2019, only 8% of Canadian Equity funds beat their benchmark, and 14% over the decade.
  4. Most banks in Canada charge you 2% to 2.5% MER for mutual funds invested exclusively in ETFs, just like the CCP. Why not just invest it yourself for less than 0.5% and save yourself a lot of fees? Such a difference in MER can cost you hundreds of thousands throughout your investment life.

How to get started with Canadian Couch Potato investing  

Starting investing using CCP is simple.

First, you will need to open a brokerage account to be able to trade ETFs. The most important feature to look for in a brokerage to implement this strategy is free ETF buys.

The type of account you hold your investment in also matters. Registered accounts allow you to not pay taxes on capital gains. Make sure to use all your contribution room before you start investing in non-registered accounts.

Then, you can automate your Canadian Couch Potato portfolio, so you never forget to pay yourself first. You’ll want to set up regular contributions to your brokerage account and invest these contributions.

For example, suppose you’re going to invest about $5,000 per year. In that case, you’d set up contributions of $200 every paycheck and buy the equivalent of $200 worth of your fund each time. Since ETFs are free to buy at most online brokerages, you can do it as often as you want.

The bottom line

The CCP is a low-cost, diversified, and simple way to DIY invest. It is followed by many Canadians who want to take control of their finances without spending endless amounts of time and energy managing their investments. If you want to get started, open a brokerage account and start building your CCP portfolio.

This article is a guest contribution from Brendan Lee Young of Passiv. Passiv is portfolio management software that makes DIY investing easier. It integrates with your brokerage account and you automate your portfolio management. With Passiv users can invest and rebalance their portfolios in one-click.

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