A co-worker asked me this question: What is Couch Potato Investing? It may not be obvious what I mean when discussing this investing concept for those starting out. There are great primers on Couch Potato Investing out there. Read them as well.
Do These Potatoes have Eyes?
The Couch Potato Investor label is quite descriptive. These investors do not wish to be bothered by day-to-day investing issues. They simply want to set up their investments and occasionally come back and take simple actions on their portfolio (in military terms, fire and forget).
Most of the time, Couch Potato Investors are typically Index Investors (i.e. they are not investing in individual stocks or investment vehicles, they will invest in an area), thus single day changes in the markets become less of a concern (to quote a well-known investor, “I am an indexer, I don’t care what the Index did today”). I suppose you could be an individual stock investor and be couch potato investing, but you’d have to buy something like Berkshire-Hathaway.
Example Portfolios?
How big or small your portfolio ends up being is up to you. It is possible to have the greatest couch potato portfolio, which is a two Index Fund (yes, that is possible). Others might argue that you are not diversified enough with two funds, and should have more funds, so typically your portfolio ends up being:
- Canadian Index – to invest in your country and such
- US Index – you may as well invest in the economy that is mostly driving the world’s economy
- International Index – this is murkier water, as there is no definitive index, so you will need to do some research in this area
- A GIC-like fund or a Bond Fund – remember, Bonds can go down in value in the short-term
- Maybe a REIT of some kind? Maybe not for a specific city, or you might get burned when the inevitable correction happens?
- Cash? Cash is always nice to have around, but don’t put it in your mattress
How much of each you buy is up to you, but keep track of your initial investment percentages because you will need to re-balance your portfolio (so you take your profits on occasion). What is re-balancing? Every little while (a period you choose typically either every quarter, six months or yearly), you look at your portfolio and either:
- Add funds to the portfolio. Use these funds to get back to your original investment percentages. You do this by buying more of the lower total value indexes.
- Sell off higher valued indexes and buy lower valued indexes to get back to your original investment percentages
It Can’t Be That Simple?
Yes, you re-balance, sit back on your Couch, eat potato chips, and maybe watch Netflix and Relax.
This is meant as a simple primer on Couch Potato Investing. There are many great articles written by other folks outlining good Couch Potato portfolios (using either Index Funds or ETFs) that you can research and choose which one you are comfortable with.
Cannew, one certainly cannot argue with the success of your strategy in that it allowed you to reach your goals, so whether you would have done as well or better with a passive index portfolio doesn’t really matter at this point. But here’s the thing. When advising young investors what strategy they should follow, it’s important to suggest the strategy that has the highest probability of maximizing returns. You ran a concentrated portfolio in Canada’s very small market and it turned out very well over that period of time. Over the next 30 years it may not turn out so well, because it is not well diversified, or it may turn out even better, no one knows. The research shows that it is passive indexing that offers the highest probability of an optimal outcome going forward.