Often I’m asked by people what they should they invest in and I always have the same answer; Purchasing index funds and following the Canadian couch potato strategy (CCP) which was made famous by Dan B of Canadiancouchpotato.com is the easiest way to grow your wealth with minimal involvement.

The couch potato strategy does require some basic research, but once you’re set up it requires no more than an hour of your time once or twice a year. Hence the name couch potato. Even if you have no interest in investing, you’ll be amazed at how well this strategy can work for you.

What are index funds?

Index funds basically track an entire market; think the TSX (Canada) or the S&P500 (USA). So instead of buying individual stocks, you’re buying the entire market. By buying the entire market you’re diversifying your portfolio. You don’t need to worry about picking the right stocks since you’ll own a little bit of everything with index funds.

Most new investors are used to purchasing mutual funds which have a high management fee (MER), whereas index funds can be owned at a very low cost. A typical mutual fund will charge you anywhere between 2-3% but index investing can cost you less than .30%. This may not sound like a lot but imagine that 2% compounded over 30+ years. That could literally be hundreds of thousands of dollars you could be saving.

It has been proven many times that the majority of actively managed funds do not beat the returns of the index. Of course some mutual funds do beat the index but it’s a guessing game at best. Remember, past performance is not indicative of future results.

Equities and fixed income

I’m going to simplify things here but when it comes to investing the two main things that make up your portfolio are equities and fixed income.

Fixed income investments are things that are safe, so think bonds, GICs, and treasury bills. Since these investments aren’t very risky, the return on them is low.

Equities e.g. stocks offer higher returns, but they could also lose money. So with risk comes reward, or in other words there is no such thing as a safe investment that will give you high returns. When switching to index funds, beginners really need to understand this relationship.

Asset allocation

Asset allocation is the mix between your fixed income and equities. The balance depends on your age and risk tolerance, but as a general rule I suggest subtracting 10 from your age and that should be your fixed income portion.

So if you’re 25 you should have 15% (25-10) in fixed income and 85% in equities. The younger you are, the more risk you can take, hence the higher allocation towards equities. You won’t need this money for many years so you can afford to ride out any market corrections. On the other hand, as you approach retirement you need more fixed income investments since you’ll need that money to fund your retirement years.

Of course, if you’re the worrying type and you would freak out every time the markets swing, it might be a good idea to increase your fixed income portion just so you sleep better at night.

Implementing the strategy

Tangerine funds
Index funds for beginners is incredibly easy with Tangerine’s investment funds.

Equity Growth – 100% Equities, 0% Fixed Income
Balanced Growth – 75% Equities, 25% Fixed Income
Balanced – 60% Equities, 40% Fixed Income
Balanced Income – 30% Equities, 70% Fixed Income

Choose the fund that suits your your profile and start investing. The MER is reasonable at 1.07% and you don’t need to worry about anything since they automatically re-balance for you. This is a great solution for those who want to reduce their fees.

[icon name=”share”] Related: Tangerine investment funds review

TD e-Series
If you’re a client of TD you can purchase their e-Series index funds. The 4 main funds of the CCP are as follows.

TD Canadian Index E (TDB900)
TD US Index E (TDB902)
TD International Index E (TDB911)
TD Canadian Bond Index E (TDB909)

The main advantage of e-Series is the flexibility, since you buy and sell the funds yourself you can set your allocation however you want. The other advantage is the cost; the MER is .44% which is .63% below Tangerine. Remember, reducing your costs can save you big in the long run

TD doesn’t make it easy for you to buy these funds. In fact, most of the tellers / FSRs at the branch level probably lack much knowledge about the funds since it doesn’t earn them much of a “commission”.

These funds also don’t rebalance automatically so at least once a year you’ll need to buy/sell or switch around your funds to get back to your original target. Don’t be scared off by this, it literally takes a few minutes to do and there are spread sheets available to help you figure out how to rebalance.

You can ever further reduce your fees if you invest in ETFs but that’s a conversation for another day.

Rebalancing

Once a year you should review your portfolio and rebalance if your asset allocation is getting away from your original plan.

 Original AllocationCurrent Allocation
Canadian Index25%20%
US Index25%25%
International Index25%30%
Canadian Bond Index25%25%

As you can see in the above example, our original asset allocation was spread evenly 25% across the 4 major indexes. Over the year the international equity has increased by 5%, while the Canadian index has decreased by 5%. To rebalance we would simply “switch” 5% of our international equity into Canadian equity (you would have to sell and then buy if using ETFs). By sticking to this strategy we’re essentially selling high and buying low.

You can also rebalance by simply using any new money that you add to your account. To make things easy, Canadian Capitalist has a simple spreadsheet to help you rebalance your portfolio. This whole process shouldn’t take more than 30 minutes a year.

Final word

As complicated as this all sounds; index funds for beginners is easy once your accounts are set up. The fees you save in the long run will make a huge difference when it comes to your retirement years. This strategy can be implemented in any of our accounts e.g. RRSP, TFSA, RESP

25 Comments

  1. simplecheapmom on February 12, 2015 at 12:26 pm

    We’ll be switching to index funds soon (we’ve signed up for our new accounts already). Our investments are in high MER funds and it’s time!

    • Barry Choi on February 12, 2015 at 1:26 pm

      Simple Cheap Mom,

      Switching out of high MER funds was one of the best things I ever did. With index funds you don’t even need to be that knowledgeable, just learn the basics.and don’t wave from the plan.

  2. Tawcan on February 12, 2015 at 2:30 pm

    Index funds are a great way to get started with investing for sure. 🙂

    • Barry Choi on February 12, 2015 at 3:18 pm

      Tawcan,

      Yes with so many options available these days, indexing has never been easier.

  3. Neil Murphy on February 12, 2015 at 3:24 pm

    Low-cost index funds are the way to go for most regular investors. In fact it is the way to go for pension funds too as they invest the core of their portfolios predominantly in index funds. High-cost and MERs erode value and eat into retirement by s significant portion. All investors who have the savvy should consider doing it themselves in an index portfolio. And for the lazy do it your self investor i love tangent.

    • Barry Choi on February 12, 2015 at 3:37 pm

      Neil,

      Yes good point, I forgot that many pension plans also invest in indexes. There are so many ways to be an ultra lazy index investor.

  4. Virna on February 12, 2015 at 9:07 pm

    I look forward to reading about your future ETFs post. I’m interested to learn more about them.

    • Barry Choi on February 12, 2015 at 9:57 pm

      Virna,

      Heh ETF’s are basically the same thing but with even lower fees. The main difference is they trade like “stocks” so you pay a brokerage fee every time you buy or sell. This isn’t a big deal when your portfolio is over $50K

  5. Bernie on February 13, 2015 at 10:33 am

    Why bother with indexing when you get better returns year after year with a one mutual fund solution. Mawer Balanced fund is more globally diversified than most common 4 index ETF portfolios (Canada, US, Int’l, Bond), has outstanding management, low fees with no trailer commissions and perpetually beats blended index ETF portfolios in performance.

    • Barry Choi on February 13, 2015 at 10:52 am

      Bernie,

      To each their own, but past performance is not indicative of future results. The fund could continue to beat the index or it could lag it for the next 20 years. There’s no way of knowing.

      • Neil Murphy on February 13, 2015 at 11:15 am

        I’m a pretty ardent indexer, but Mawer is a fund I would definitely recommend as a lazy way to great returns. No asset allocation, re-balancing, index fund selection required. It’s a great solution for many people. I found when setting up index portfolios a lot of people struggle with the decisions that need to be made as markets move over time.

        • Barry Choi on February 13, 2015 at 11:18 am

          Neil,

          You could argue that Tangerine Funds do the same thing and at least you can pick a fund that best suits your risk tolerance.

      • Bernie on February 13, 2015 at 12:17 pm

        Barry,

        You’re absolutely right, each to their own. Personally, I prefer dividend growth investing, which I’ve practiced since mid 2008 when I released my advisor. It’s been good for me, my average annual TR is 11%, which isn’t bad considering my 2008 TR was -22%.

        I don’t follow Tangerine Funds but I know Mawer soundly trounced them the past 3 years at least as I saw the those results in the annual Couch Potato performance articles. I also know the Mawer Balanced Fund has beaten index blended ETF equivalent portfolios annually 14 times out of the past 15 years by an average yearly outperform of 2.5% or 40% overall.

        • Barry Choi on February 13, 2015 at 12:29 pm

          Bernie,

          Dividends were something I wanted to get into but I realized it would take up too much time. I certainly understand why it appeals to people though. 2008 was a rough year, lets all try to forget that one.

          The Mawer fund does have a good track record and is low cost which I can see why it is appealing. The only issue for some would be the $5K minimum to start. For beginners that might be a bit much.

          Justin Bender wrote an interesting piece about the true alpha of Mawer funds which is an interesting read.

          http://www.canadianportfoliomanagerblog.com/active-funds-exposed/

  6. Our Big Fat Wallet on February 15, 2015 at 11:09 pm

    My plan is to keep a small group of blue chip dividend stocks as well as some index ETFs with very low fees, and use the dividend income to reinvest in both ETFs and more dividend stocks. Not a big fan of most big bank offerings because the fees tend to be much higher than a simple index ETF

    • Barry Choi on February 15, 2015 at 11:46 pm

      Our Big Fat Wallet,

      I think the closest I’ll ever get to dividend stocks is possibly a dividend paying ETF. I’m way too lazy to do the research.

      • Bernie on February 16, 2015 at 1:11 am

        There are many dividend paying ETFs and some that have dividend growth in their title but I’ve yet to come across one that passes on the same dividend growth as the stocks held within. One ETF that only came into existence in Sep 2013 is showing a lot of promise. It is “Purpose Core Dividend Fund (PDF.TO)” sold by Purpose Investments. It contains 40 equally weighted high quality North American (20 US & 20 Cdn) dividend-paying stocks broadly diversified by industry. The fund total return in 2014, it’s first full calendar year, was 18.14%. The return from inception up to Jan 31st was 20.97%. http://www.purposeinvest.com/funds/purpose-core-dividend-fund/

        • Barry Choi on February 16, 2015 at 9:19 am

          Bernie,

          Interesting, I’ve actually met with the Purpose Investment team before. Som Seif who is the CEO of Purpose also started up Claymore back in the day.

  7. Bernie on February 16, 2015 at 9:07 am

    For those interested in learning more about dividend growth investing, I suggest reading “The Single Best Investment” by Lowell Miller. I consider it to be the formative book on the strategy.

  8. Francine on June 5, 2015 at 6:28 pm

    With cost averaging (I’m with TD e-series and deposit monthly), I rebalance every month. As I deposit, I consider my asset allocation and deposit accordingly. Very simple (and effective!)

    • Barry Choi on June 5, 2015 at 6:32 pm

      Francine,

      That’s a pretty good strategy. I personally like to only make adjustments once a year (since I use ETFs).

  9. Francine on June 5, 2015 at 6:48 pm

    Hi Barry… I agree with you about yearly adjustments; if you are using ETFs, you should only rebalance once a year (on account of fees). With indexed funds, I can rebalance monthly (no transaction fees)… I am still dealing with small amounts. Do you think it is better to save in daily interest and transfer to ETFs or should one continue with cost averaging?

    • Barry Choi on June 5, 2015 at 7:03 pm

      Francine,

      I think it’s really just preference. Some people I know will continue to dollar cost average and then convert to ETF’s once a year. Some will just keep the money in a high interest savings account and then make a purchase once a year. As long as you’re saving on a regular basis you can’t go wrong. I only recently converted ETFs and I’m super happy with my decision.

  10. Lee on March 9, 2018 at 12:19 pm

    Hi Barry,

    I’ve been focusing on paying mortgage so have under $50,000 of saving now. I will be mortgage free this April so plan to invest in index funds with over $40,000 each year. I am almost 50 years old and would have a good DB pension if I can retire from the current company. I’m a conservative investor and looking forward to long-term investment for myself. I have some questions.

    1. Can you please advise me good index funds with Tangerine, TD-eSeries or others?

    2. I found that there are number of Index funds with TD-eSeries, and each fund has a different MER. If I have a portfolio with TD CDN Bond index (0.5% MER), TD CDN index (0.33%), TD US index (0.35%) and TD International index (0.51%). does that mean that I pay 1.69% of MER in total while I pay 1.07% with Tangerine Balanced index fund portfolio? Please clarify.

    Thanks in advance.

    • Lee on March 9, 2018 at 12:24 pm

      This is for retirement investment.

Leave a Comment