I mentioned in an earlier post my first investment was in an actively managed, high fee, wrapped mutual fund. It was about 5 or 6 years after holding my wrap mutual funds that I made an investment strategy switch. I became an index investor.
I was looking at my investments one day and thought, “Geez, these funds aren’t doing too great.” I wondered if I was investing in the right product.” Maybe I needed to invest in a different mutual fund?
I jumped online and started reading internet forums about mutual funds other people were investing in. I came across recommendations for different funds, but I also came across discussions on “Couch Potato” investing. I thought, “What a strange name for investing?”
Doing more digging, I found a series of articles on Canadian Business Online (I believe the personal finance articles were moved to MoneySense.ca) about the Couch Potato portfolio.
Three Main Principles of Couch Potato Investing
The articles detailed three main principles for a Couch Potato investing strategy:
Keep your costs low - the lower your fees are, the more money you get to keep. The more money you have to work for you over time, the more money you can accumulate. To keep these fees low, you build a couch potato portfolio with low cost index funds.
Diversify across asset types to smooth out the up and downs of the stock market. The article recommended a typical balanced allocaton (60% equities and 40% bonds allocation), but the allocation can be tweaked depending on your tolerance for risk.
Rebalance the portfolio once a year or twice a year back to the initial asset allocation. Rebalancing once a year forces you to sell you winners and buy more of your losers - you buy low and sell high. If you’re not selling any assets, just add the appropriate percentage of new money to get back to your initial asset allocation.
Could it be that simple? Seems too good to be true.
It took a few more late nights of researching but I was eventually convinced the Couch Potato strategy is for me.
A couple of days later I built my global Couch Potato portfolio and said goodbye to the high fee wrap mutual fund.