How to build a sofa potato portfolio

So are they liquidwhich means you can (if you like) buy and sell investments on your own schedule (compared to guaranteed investment certificates and private assets). At the same time, the biggest benefit comes from Long-term, buying strategy. Your returns vary every year, but all you have to do is return 7% on average over 10 years to double your money, which is more than most consultants and actively managed mutual funds do for their clients.

Finally, the sofa potato portfolio should be High cost-effective. By taking responsibility for asset allocation, you can save on the cost of portfolio management. Even with affordable robotic consultants, the cost of an asset is usually 0.5% per year. By sticking to index funds, the administrative expense ratio (MER) of your investment should be averaged 0.1% to 0.4%. Consider now that the average active mutual fund holder in Canada pays close to 2%!

Within this extensive framework, there are three basic vehicles that can be built with a sofa potato portfolio:

• Index mutual funds. Some investors feel most comfortable with co-funding, or are uncomfortable with the idea of ​​setting up a brokerage account that charges every time they purchase a fundraising unit. Indexing mutual funds can usually charge any fees. However, MERS using mutual funds still tends to be higher than ETFs.
• ETF. These are the top choices for most Couch-Potato investors. All you need is a brokerage account (may be taxable or set up as a registered account, such as RRSP or TFSA). You then buy a few index funds to fill it up, add money when available, and rebalance regularly.
• Asset allocation ETF. This has been the easiest way to surf on sofas since the asset allocation ETF appeared in Canada in 2019. Simply buy a single ETF that owns other ETFs to reach bonds and stocks covering various geographical areas. Rebalancing is done for you. So, why doesn’t everyone use these? There are two reasons: Some investors would rather customize their impact on different assets to suit their situation and/or beliefs, and because buying index ETFs separately is slightly cheaper – the MERS of asset allocation ETFs accounts for 0.17% of your annual holdings annually, while the index ETFs hold 0.05%.

In our Core Sofa Potato Portfolio Guide, you will find recommendations for these three types of investment tools. To build a premium sofa potato portfolio, you must stick with indexed ETFs.

Asset Allocation: Crash Course

Asset Allocation – Choose the amount of your portfolio for stocks, bonds, and other assets and where to start, as the single most important determinant of the ROI. If you have 100% of your stock and a market crash, you may lose half of your savings (or more!) in a short period of time. If you only hold fixed income, you may retain your capital, but it may be difficult to keep up with inflation.

Don’t sweat too much about this decision, though. Most portfolios use both. Although it has experienced a historic year in 2022, both the stock and bond markets have declined, with the classic 60% stock/40% fixed income portfolio serving many investors over the years. Distribute your stock holdings in the stock allocation between us, Canada and International Index Fund and Bob is your uncle – you have been completely diversified.

However, how you separate the shares you hold depends on you. Remember that Canadian stocks account for less than 3% of global market capitalization, while the U.S. market accounts for more than 50%. Meanwhile, Canadian Equity Index Funds may be relatively taxed in taxable accounts and will now generate more income.

Important: Have a goal allocation that matches the purpose, time frame and risk tolerance of the portfolio. Get it in writing (you can change it over time). If you think this is worth it, get a second opinion from a knowledgeable friend or relative or investment professional. Then, rebalance the portfolio once or twice a year – acknowledge more underperforming funds and sell some that outperforms them until your allocation returns to your goal. (Usually, you can achieve the same result by simply making new contributions.)

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This may sound counterintuitive and it’s hard to do it – discipline is required, but research shows that this is the best way to keep gains.

Options and alternatives

When choosing the funds to fill your portfolio, you will face sometimes confusing choices. Our annual update guide to the best ETFs can help you narrow down your choices if you choose indexing and asset allocation ETF routes.

There are other considerations.

Different versions of foreign equity and fixed income funds can usually be purchased at Canadian or US dollars. Typically, investors who retire for Canada will have to stick to the Canadian dollar. However, in this format, you may have the option to purchase the Canadian dollar hedge or unreduced version of the same fund. It depends on you. Some investors believe it is important to diversify their currency exposure and diversify through asset classes and geography. They choose to be unrestricted, while others use hedging funds to reduce potential volatility.

Similarly, some investors choose equal-weighted index funds, which have roughly equal proportions rather than the more common weighted (caps) weighted formats, so a few large stocks can dominate the index. However, the MER of equal weight funds tends to be higher than that of CAP-weighted funds. We do not recommend using these funds unless you have strong beliefs that support equal weighting.

With ETFs, your broker will ask you if you want to apply a dividend reinvestment plan (DRIP) to your account. This will take the ETF income distribution from the qualified funds and apply it to purchasing more ETF units (no commission). This is the easiest way to make your money work for you, but some investors prefer to put this cash on hold for their income or purchases at their disposable ETF units.

If you don’t feel the depth to answer these questions, consider having a fee-based investment advisor or planner view your portfolio. Depending on the level of service they provide, this can cost hundreds to thousands of dollars. Sounds a lot, and it is. However, payments can be a small price compared to alternatives (such as using a commission consultant or wealth manager), especially when your savings grow to hundreds of thousands of dollars.
For intermediate options, consider opening an account with a robo-advisor. Most of these online-based advisers use Couch-Potato investor approach and use index funds to build a passive portfolio, at 0.5% of the asset value per year.

About Michael McCullough

Michael is a financial writer and editor at Duncan, British Columbia. He was formerly a former director editor of Canadian Business and editorial director of Canadian broad media. He also writes for the earth and mail and bcbusiness.